Corporation Code- De Leon

THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Big. 68.)

Introduction Different f o r m s of b u s i n e s s organization.

With the development of business enterprise, there has been a gradual evolution in the form of business organization. Various influences and considerations enter into the selection of the business form for any particular business enterprise. (1) Individual proprietorship. — The primitive form of business is, of course, that of the individual proprietor. The individual, as a rule, operates a small business, usually with the limited capital, and is responsible alone for its success or failure. (2) Partnership. — The partnership is the first step towards a wider field of operation and a more complex organization. Often, it is a family affair. The business of the individual grows too large for his sole management and he takes his son or some other member of the family into partnership. In other cases, two men in the same business unite their capital in order to secure ad equate capital for the conduct of their business. Whatever the motive and the circumstances, the partnership is almost invariably a larger business unit than the proprietorship. It is common in retail trade, in the professions, and to a limited extent, among manufacturing establishments. As a form of business organization, it is losing ground. (3) Joint stock company. — The joint stock company is a form of business organization at one time frequent in connection with l

2

THE CORPORATION CODE OF THE PHILIPPINES

larger enterprises, which, so far as the United States is concerned, is now almost extinct. This form of company was highly popular in England during the seventeenth and early eighteenth centuries. The joint stock company can be best considered as a combination of the partnership in that it is formed under a contract and requires no special sanction from the State. The members are liable, jointly and severally, for all the company's debts. It resembles the corporation in control and management. The members do not control the company but choose a board of directors who were the authorized agents and managers. Thus, while membership in the company might change thru death or transfer of membership interest, the company is not dissolved. (4) Cooperative association. — It represents another form of business organization which proved more popular in Europe than in America. This form of organization is not of sufficient interest or importance to the business world to require consideration in this text. (5) Business trust. — Another form of business organization less widely known is the business trust, sometimes called the "Massachussets trust." The main feature of this form of organization is that it is formed by a contract and that the title to property and the conduct of business is in the hands of trustees who act for a large group of beneficiaries. 1

(6) Corporation. — It is now the dominant form of organization in modern business. The corporation is a creature of law and all its rights, powers, and duties are derived from legislation. In some forms of business of a public or quasi-public nature like that of public utilities, railroads, insurance companies, and banking institutions, it is almost the exclusive form of business organization. In other fields of enterprise, the corporation competes with other forms of business organization. 'Membership depends entirely upon the ownership of shares rather than on the agreement of the associates as in the partnership. The death of a "partner" does not dissolve the firm. The trustees (managers) have a legal title to its property and act as principals for the shareholders who have all the legal status of a cestui que trust (beneficiaries). It bears such a close resemblance to a corporation that it is or has been frequently considered as a corporation. (Chester Rohlich, Organizing Corporate and Other Business Enterprises [1953], p. 155.) But it is not a corporation.

INTRODUCTION

3

(7) Other business forms. — They arise where different enterprises, whether organized in the same form or different forms, unite for a common purpose. The purpose may be temporary in character, giving us the syndicate, or it may contemplate more permanent associations, giving us varying forms of combinations, "the trust," the holding company, and the like. (a) The distinguishing characteristic of the syndicate is that it is a temporary alliance of individuals, firms, or corporations, usually for the purpose of financing an enterprise. After the purpose of organization has been accomplished, the syndicate is dissolved. It is a form of organization used largely by bankers for underwriting purposes. Syndicates reflect the general state of business — when business is at a standstill, there is obviously little need for them and few are formed. (b) Combinations take varying forms. Their primary purpose is to secure the savings and other advantages which result from consolidation and large-scale operation. In the first phase, such combinations were really "trusts" in the sense above described, except that corporations formed the constituent elements and beneficiaries of the trust. This form of association having been in some instances declared to be illegal by the courts, resort has been had to other methods. (c) The practice followed in some cases is to organize a new corporation which buys the individual plants it wishes to bring into the combination and which thus becomes a single owner of all the establishments. In the largest combinations, however, the stock of the constituent companies is all brought by a unifying company called a holding company. The constituent companies retain their organization intact. They are controlled by the central corporation as a stockholder which has power to elect directors and officers at will and thus have complete power over the management. Though trusts as combinations of corporations have long ceased to have any existence, popular phraseology continues to use the word "trust" to designate any large aggregation of capital under unified direction and control, (see C.W. Gestenberg,

4


"Organization and Control," in 3 Modern Business [1919], pp. 3-8.) In the Philippines, the only types of business organization provided by law are the partnership (Arts. 1767-1806, Civil Code.) and the corporation. No prohibition, however, exists for the other forms. As distinguished from corporations, the other types of business organization are unincorporated. Theories as to origin of corporations.

(1) Ethnological theory. — There is authority for the statement that the concept of collective entity antedates that of the individual; that "groups of men united by the reality or fiction of blood relationship" into families, clans or tribes were recognized units of primitive society even before the individual was so regarded. Upon this assumed ethnological predicate has been erected the theory that the basic principle of corporate organization, the embodiment of which is now described as a fictitious, intangible person, created by law and existing only in contemplation thereof, is in reality but a manifestation of the gregarious instinct in man, existing inchoate from earliest times and before law itself became an effective social force. The law, it is argued, has done no more than to recognize the existence of this phase of human activity, guide its development, and define its functions and relations. In short, instead of the role of creator, assumed by the law for its own convenience, the relation would be more aptly described by assigning to the law the part of one who, having discovered a foundling upon his doorstep, clothes and feeds it and thereafter treats it as his own. Under this theory, the corporate idea, therefore, is the product of no one people and no one country, but, on the contrary, developed more or less independently, in varying forms among the several ethnological units. (2) Imitative theory. — The other theory as to the origin of corporations is the imitative theory of jural development. This theory traces the genesis of the modern corporation to the Greece of Solon (638-559 B.C.), citing the writings of Gaius on Roman Law and passages from the Pandects of Justinians, as authority for the assertion that laws fathered by the great Hellenic jurist

INTRODUCTION

5

permitted the formation of private corporations for certain purposes, upon condition that they do not operate in violation of the laws of the state. Blackstone, however, ascribes the birth of the corporation to the political necessities of Numa Pompilius (715-672 B.C.) who, upon his accession to power in Rome, desiring to end the disrupting influence of the private war being waged between the Sabine and the Roman factions, "thought it a prudent and politic measure to subdivide these two into smaller ones by instituting separate societies of every manual trade and profession." (1 Fletcher, Cyclopedia of the Law of Private Corporations, Perm Ed., p. 3, footnote No. 3, quoting Blackstone, 1 BL Comm. 468, 469.) Rise a n d d e v e l o p m e n t o f c o r p o r a t i o n s.

(1) In Roman times. — The corporations, like most other forms of business organization, take their rise in Roman times. Probably the earliest form is that of the Collegium or college of priests. This body had many of the rights and privileges which the law gives to the modem corporation. The Collegium could hold property; it could sue and be sued; the rights of the corporate body were separate from those of individual members; it existed in perpetuity, and it was autonomous. Besides the Collegium, other Roman organizations such as municipalities, official societies engaged in state administration, military groups, and trade and societies took on corporate form. (2) In Medieval times. — In medieval times, something akin to the Roman Collegia appeared in the municipal and guild organizations which were often closely related. Like the nonstock corporations of the present day, they embodied the idea of the group working as a whole thru chosen representatives, and so exhibit one of the chief characteristics of a corporation from the legal standpoint. Though the guilds are spoken of as trade and industrial corporations and were intimately concerned with business affairs, it would be a mistake to assume that they were like the present day corporations — business units operating in any given trade or

6


industry for the joint profit of those who composed them. If you can imagine a voluntary association of retailers or manufacturers in any given line, clothed not only with the desire but full legal authority to regulate the business practices of its members, you have a much closer analogy to the real nature of the guild. It can be understood, too, how, under such circumstances, the guilds became so autocratic in their proceedings that as time went on, they became a hindrance rather than a help to progress. (3) In England. — At a later period, the regulated company, such as The Plymouth Company, the Hudson Bay Company, and the East India Company, became a dominant factor in British trade, particularly in foreign trade. Chartered by the government and granted special privileges by their charters, these organizations were forerunners of modern corporations. In some instances, the trading company was hardly a company at all as we understand it. It consisted of a grant of the right to carry on a certain kind of business in a certain place conferred upon a group of persons. Any member of the group or a number of member jointly might exercise the right, and only those who participated in the particular venture would be entitled to its profits. This was a frequent form of the trading company. Other companies conducted their operations as a unit and all the associates shared in the common profit. They became in effect and often in name joint stock companies and in the early part of the last century, this was the common form of organization for larger business units in Great Britain. (4) In the United States. — In the American colonies before the Revolution, corporations were mostly educational, religious, or military. They had not been introduced into business affairs. The company as it was then known in the mother country smacked of exclusive privilege and carried the idea of a monopoly granted by the Crown. It was not until the beginning of the 19th century, with the growth of manufactures brought about by the Napoleonic wars and a consequent rise of an investing class, that the corporation really began to make strides. In 1800 up to 1815, many manufacturing companies and turnpike companies were incorporated and between the latter year and 1835, a large number of canal and railway companies. Within this period too,

INTRODUCTION

7

banking institutions spread rapidly over the country so that the corporate form of organization became thoroughly established. While New York, in 1811, was the first state to provide for incorporation under general laws for business purposes, it was not until about the middle of the last century that the States in general made provision for it. At the same time, the principle of limited liability was generally recognized. This principle was not adopted in England until 1855 when Parliament passed a statute providing that only such companies which announce that their stockholders' liability is limited shall escape the common-law rule that stockholders shall be liable as partners. This is usually done by the use of the abbreviation "Ltd." after the name of the company. (C.W. Gesternberg, op. cit., pp. 94-97.) (5) In the Philippines. — "During the Spanish regime and prior to the enactment of the former Corporation Law (Act No. 1459.), there existed in the Philippines several forms of commercial companies, associations, and partnerships. The concept of a corporation not having introduced yet, these named associations and partnerships were the most common entities by which business was generally conducted during that time. Among these were the sociedad en comandita (limited partnership) and the sociedad regular colectiva (general partnership), which were governed by Articles 116 to 150 and 160 to 174 of the Code of Commerce which became effective in these Islands on December 1, 1888. Most known among these associations, however, was the sociedad anonima then governed by Article 151 to Article 159 of the Code of Commerce. There was also a sociedad de cuentas en participacion (joint account participation) governed by Articles 239 to 243 of the same Code of Commerce. Of these Spanish commercial entities, the one which could remarkably compare to the present day concept of corporate entity is the sociedad anonima. This is not to say, however, that the sociedad anonima exactly corresponded to the notion of corporation in English and American Law — particularly in matters concerning organization of the enterprise, the distribution of dividends, and those in which equity intervenes for the benefit of the stockholders (Harden vs. Benguet Consolidated Mining Co., 58 Phil. 145 [1933].) but that this, of all the then existing


8

commercial entities, most nearly approached the concept of a corporation. With the passage of the former Corporation Law on March 1, 1906, and the later enactment of the new Civil Code, all these societies and associations were abolished with the sole exception of the sociedad de cuentas en participacion. The sociedad en comandita and sociedad regular colectiva were abolished when Articles 116 to 150 and 160 to 174 of the Code of Commerce were repealed by Article 2270 and superseded by the provisions on Partnership in Title IX, Book IV of the new Civil Code." (C.G. Alvendia, The Law of Private Corporations in the Philippines, 1967 ed., pp. 1-2.) 2

In the Philippine Bill of 1902, which was approved on July 1, 1902 after the Philippine Islands passed to the sovereignty of the United States, the Congress of the United States inserted certain provisions intended to control the law-making power in the Philippine Islands in the matter of granting of franchises, privileges and concessions. These provisions were found in Sections 74 and 75 of the Bill. The provisions of Section 74 were superseded by Section 28 of the Act of Congress of August 29, 1916, but in Section 75, there is a provision referring to mining corporations which then remained the law, as amended. The provision, in its original form, reads as follows: "x x x it shall be unlawful for any member of a corporation engaged in agriculture or mining and for any corporation organized for any purpose except irrigation, to be in any wise interested in any other corporation engaged in agriculture or in mining.'' Under the guidance of the Philippine Bill of 1902 and certain other Acts enacted by the U.S. Congress, including some American state corporation laws, the Philippine Commission, then the law-making body in the Philippines, subsequently approved on March 1, 1906, Act No. 1459, the former Corporation Law, providing for the organization of corporations in the Philippines. The Act took effect on April 1,1906. Before the passage of the present Corporation Code of the Philippines on May 1, 1980, numerous statutes were enact'The partnerships and the sociedades anonimas, the business associations then existing, were created by mere agreements.

INTRODUCTION

9

ed affecting corporations. Among them are laws creating government corporations, and those governing or relating to special types of corporations, such as the General Banking Act (R.A. No. 337. ), Rural Banks Act (R.A. No. 7353.), Investment Company Act (R.A. No. 2629.), Savings and Loans Association Act (R.A. No. 3779.), Private Development Banks Act (R.A. No. 4093.), Financing Company Act (R.A. No. 5980.), the Investment Houses Law (Pres. Decree No. 129.), Pawnshop Regulation Act (Pres. Decree No. 114.), and the Insurance Code of the Philippines. (Pres. Decree No. 1460.) 3

(6) Corporations in modern business. — The merits of the corporation so far overshadow its drawbacks that today it is the representative type of modern business organization. Its growth within the past half century has been by leaps and bounds. In some fields particularly in public utilities, insurance, banking, and manufacturing, it has, practically, exclusive possession. (a) In the first place, its form is flexible. By means of various kinds of stocks and bonds and thru the judicious drafting of charter and by-laws, the control of the corporation can be scientifically determined, the risk equitably apportioned, and the income distributed among the owners and creditors. (b) The corporation assembles huge quantities of capital gathered from many different quarters and then provides the means for efficiently administering it. It secures in this way all the advantages which are a part of large-scale production. (c) Moreover, it possesses a degree of permanence that carries on its business beyond the span of any one generation. It usually outlives the men who make and manage it. (C.W. Gestemberg, op.cit., p. 14.) — oOo —

3

Now General Banking Act of 2000. (R.A. No. 8791.)

Title I GENERAL PROVISIONS

DEFINITIONS AND CLASSIFICATIONS Section 1. Title of the Code. — This Code shall be known as "The Corporation Code of the Philippines." (a)* Historical b a c k g r o u n d of our Corporatio n Code.

(1) Business associations under the Code of Commerce. — Prior to 1906, the business associations existing were the partnerships and the sociedades anonimas which were created by mere agreements. There was no entity in the Spanish Law exactly corresponding to the notion of the corporation in American Law. Its attention drawn to this fact, the Philippine Commission, the legislative body of the Philippines during the American regime, enacted on March 1, 1906, Act No. 1459, a general law authorizing the creation of corporations in the Philippine Islands. With the enactment of Act No. 1459, popularly known as the Corporation Law, which took effect on April 1, 1906, providing for the organization of corporations in the Philippines,it became necessary to make certain adjustments in view of the existence of the Spanish sociedades anonimas previously organized and existing in the Philippines. (2) Business associations under the former Corporation Law. — Accordingly, Section 75 of the Act was inserted under which sociedades anonimas were made subject to the provisions of the Corporation Law "so far as such provisions may be applicable" •Signifies that original provision in Act No. 1459 has been amended. 10

Sec. 1

TITLE I. GENERAL PROVISIONS Definitions and Classifications

11

and were given the "option to either continue business as such corporation or to form and organize under and by virtue of the provisions of this Act." Section 191 of the Act expressly repealed the pertinent provisions of the Code of Commerce (Sees. 151159 thereof.) governing sociedades anonimas with the proviso that "those which elect to continue their business as such sociedades anonimas" instead of reforming and organizing "under the Corporation Law shall continue to be governed by the Code of Commerce" in relation to their organization and method of transacting business and to the rights of members thereof as among themselves." However, "their relations to the public and public officials shall be governed by the provisions of this Act." Thus, the old Corporation Law recognized the difference between sociedades anonimas and corporations. (Phil. Products Co. vs. Primatera [Phils.], Inc., 15 SCRA301 [1965].) The evident purpose of the Philippine Commission in enacting Act No. 1459 was to introduce into the Philippines the American corporation as the standard commercial entity and to hasten the day when the sociedad anonimas of the Spanish Law would become obsolete. This rather elaborate Philippine legislation is a sort of a codification of American corporate laws. (Harden vs. Benguet Consolidated Mining Co., 58 Phil. 141 [1933].) It remained practically intact except for some repeals or amendments until the enactment of Batas Pambansa Big. 68. (3) Business corporations under the Corporation Code. — The law governing private corporations in the Philippines is now embodied in Batas Pambansa Big. 68, the present Corporation Code of the Philippines, which took effect on the date of its approval on May 1,1980. (see Sec. 149.) The new Code supplants Act No. 1459, as amended. It reproduced with amendments many provisions of the old Corporation Law. In its explanatory note, Cabinet Bill No. 3 which became Batas Pambansa Big. 68, states: 1

'A code, in modern times, is a systematic, complete, written collection of laws arranged logically with index and table of contents and covering fully one or more subject of law. It is a written compilation of statutory laws of general and permanent importance, eliminating clerical errors and obsolete provisions, expressly repealing all prior laws inconsistent with the compilation and occasionally including amendments and new provisions, (see Webster's 3rd New International Dictionary, 1976 ed., p. 437; see note 2.)


12

Sec. 1

"This bill is intended to supplant the present Corporation Law, Act No. 1459, as amended, and to be hereafter known as the 'Corporation Code of the Philippines.' 2

The proposed Code seeks to establish a new concept of business corporations so that they are not merely entities established for private gain but effective partners of the National Government in spreading the benefits of capitalism for the social and economic development of the nation. Significant changes have been introduced in the proposed Code in order to update the provisions of our present Corporation Law. Among the significant changes in this Code is the grant of ample powers to the Securities and Exchange Commission to enable it to exercise adequate supervision over the operations and activities of private corporations. The other innovative provisions constitute definite improvements to make the proposed Code more responsive to the plans and policies of the Government." Section 16 of Article XII (National Economy and Patrimony) of the Constitution provides: "The Congress shall not, except by general law, provide for the formation, organization, or regulation of private cor-

(l)The Corporation Code deleted the following sections of the old law: Sees. 8 (fees), 10 (articles of incorporation as prima facie evidence of facts therein stated), 12 (corporate power of eminent domain), 15 (liability of corporation for holding persons in involuntary servitude), 29 (time of holding election of directors except term of office), 32 (who may call meeting for election of directors where no such meeting is held), 48 (posting of notices of call, and delinquency and sale of stock), 53-55 (visitorial powers), 56-61 (forced sale of franchises), 70 (license of foreign corporations organized before Act No. 1459), 7474-1/2 (miscellaneous provisions), 75 (sociedad anonima), 76 (1st sentence: legislative dissolution), 79 (delegated power of eminent domain), 80 (application of provisions), 81-102 (railroad corporations), 165-167,170 (provisions on colleges and institutions of learning), and 161-164 (provisions on corporation sole). (2) It amended the remaining provisions except Section 2. (now also Sec. 2.) In the case of Section 35 (now Sec. 63.), the amendment consists merely in the substitution in the first paragraph of "or clerk" by "or assistant secretary." (3) It introduced title headings and rearranged accordingly the amended provisions. (4) It added new provisions many of which were taken from judicial rulings on the subject including principles in common law jurisdictions, rules and regulations of the S.E.C., and recognized modem corporate practices. The Code is divided into 16 titles and is composed of 149 sections. 2

Sec. 2

TITLE i. GENERAL PROVISIONS Definitions and Classifications

13

porations. Government-owned or -controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of viability." The Corporation Code of the Philippines, the new general law governing private corporations in the Philippines, implements the above provision of the Constitution. 3

S c o p e o f the C o d e .

The Corporation Code of the Philippines law is an act which: (1) provides for the incorporation, organization, and regulation of private corporations, both stock and non-stock, including educational and religious corporations; (2) defines their powers and provides for their dissolution; (3) fixes the duties and liabilities of directors or trustees and other officers thereof; (4) declares the rights and liabilities of stockholders and members; (5) prescribes the conditions under which corporations including foreign corporations may transact business; (6) provides penalties for violations of the Code; and (7) repeals all laws and parts of laws in conflict and inconsistent with the Code. Sec. 2. Corporation defined. — A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. (2)* Statutory definition of corporation.

Section 2 gives a definition of the "corporation." The above T h e Corporation Code was enacted under the 1973 Constitution which provides a similar restriction with respect to private corporations. 'Signifies section number of original provision in Act No. 1459. This is the only provision that has not been amended by the new Code.

14


Sec. 2

statutory definition refers only to private corporations or to corporations organized under the Corporation Code. 4

Judicial definitions of corporation.

A corporation was early defined by the Supreme Court of the United States as "an artificial being, invisible, intangible, and existing only in contemplation of law." (Dartmouth College vs. Woodward, 4 Wheat [U.S.] 518, 4 L. ed. 629.) Other judicial definitions of a corporation aggregate are: (1) An artificial intellectual being, the mere creature of the law, composed generally of natural persons in their natural capacity, but which may also be composed of persons in their political capacity of members of other corporations (Bank of United States vs. Deveaux, 5 Cranch [U.S.] 61, 3 L. ed. 38.); (2) An artificial being created by law, and composed of individuals who subsist as a body politic under a special denomination, with the capacity of perpetual succession, and of acting, within the scope of its charter, as a natural person (Fietsam vs. Hay, 122 111. 293,13 N.E. 501.); (3) A collection of many individuals, united in one body under a special denomination, and vested by the policy of the law with the capacity of acting in several respects as an individual (State vs. Standard Oil Co., 49 Ohio St. 137, 30 N.E. 279.); and (4) A legal institution devised to confer upon the individuals of which it is composed powers, privileges, and immunities which they would not otherwise possess, the most important of which are continuous legal identity and perpetual or indefinite succession under the corporate name, notwithstanding succes-

sor income tax purposes, "the term corporation" includes partnerships, no matter how created or organized, joint stock companies, joint accounts (cuentas en participation), associations or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government. General professional partnerships are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. (Sec. 20[b], National Internal Revenue Code.)

Sec. 2


15

sive changes by death or otherwise in the corporation or members of the corporation. (Coyle vs. Mclntire, 7 Houst [Delll 4 30 A 728.) But though the terminology varies, the elements are usually the same. (18 Am. Jur. 2d 548-549.) Attributes of a c o r p o r a t i o n .

An analysis of the definition in Section 2 reveals the following attributes of a corporation: (1) It is an artificial being; (2) It is created by operation of law; (3) It has the right of succession; and (4) It has only the powers, attributes and properties expressly authorized by law or incident to its existence. C o r p o r a t i o n as an artificial personality.

Doctrinally, a corporation is a legal or juridical person with a personality separate and apart from its individual stockholders or members and from any other legal entity to which it may be connected. It is not in fact and in reality a person but the law treats it as though it were a person by process of fiction. The stockholders or members who, as natural persons, are merged in the corporate body, compose the corporation but they are not the corporation. As a consequence of this legal concept of a corporation: (1) Liability for acts or contracts. — The general rule is that obligations incurred by a corporation, acting through its authorized agents, are its sole liabilities. Similarly, a corporation may not, generally, be made to answer for acts or liabilities of its stockholders (or members) or those of the legal entities to which it may be connected and vice versa. (Creese vs. Court of Appeals, 93 SCRA 483 [1979]; Palay, Inc. vs. Clave, 124 SCRA 638 [1983]; ARB Construction Co., Inc. vs. Court of Appeals, 332 SCRA 427 [2000]; Tupaz IV vs. Court of Appeals, 475 SCRA 398 [2005].) (a) A suit against certain stockholders of a corporation cannot ipso facto be a suit against the unpleaded corporation

16

Sec. 2


itself without violating the fundamental principle that a corporation has a legal personality distinct and separate from its stockholders. The failure to implead the corporations as defendants and merely annexing a list of such corporations to the complaint is a violation of their right to due process for it would in effect be disregarding their separate personality without a hearing. (Presidential Commission on Good Government vs. Sandiganbayan, 290 SCRA 639 [1998]; Booc vs. Bantuas, 354 SCRA 279 [2000]; PCGG vs. Sandiganbayan, 365 SCRA 538 [2001].) (b) A corporate officer is not personally and solidarily liable with the corporation for the money claims of discharged or retrenched employees unless he acted with evident malice or bad faith in terminating their employment. (Business Day vs. National Labor Relations Commission, 221 SCRA 9 [1993]; MAM Realty Development Corp. vs. National Labor Relations Commission, 244 SCRA 797 [1995]; Asionics Phils., Inc. vs. National Labor Relations Commission, 290 SCRA 164 [1998].) The act of the President of a corporation in dismissing an employee, done as such officer in good faith, cannot result in his private liability. (Cebu Filveneer Corp. vs. National Labor Relations Commission, 286 SCRA 556 [1998]; AMA Computer College vs. Ignacio, 590 SCRA 633 [2009].) 5

(c) All contracts entered into in its name by its regular appointed officers and agents are the contracts of the corporation and not those of the stockholders or members. A corporation cannot be held liable for the personal indebtedness of a stockholder even if he should be its president. {Smith & Co., Inc. vs. Ford, 63 Phil. 786 [1936].) The stockholder's debt or credit is not the debt or credit of the corporation, nor is the debt or credit of the latter that of the former. (Good Earth Emporium, Inc. vs. Court of Appeals, supra.; Mendoza vs. Banco Real Development Bank, 470 SCRA 86 [2005].) înce a corporation is an artificial person it must have an officer who can be presumed to be the employer, being the "person acting in the interest of the employer." In other words, the corporation, in the technical sense only, is the employer. The manager of a corporation falls within the meaning of an "employer" as contemplated by the Labor Code, who may be held solidarily liable for the obligations of the corporation to its dismissed employees. (NYK International Knitwear Corporation vs. National Labor Relations Commission, 397 SCRA 607 [2003].)

Sec. 2


17

(d) For the same reason, the President and manager of a corporation who entered into and signed a contract in his official capacity, cannot be made liable thereunder in his individual capacity in the absence of stipulation to that effect. (Rustan Pulp Paper Mills, Inc. vs. Intermediate Appellate Court, 214 SCRA 665 [1992]; see Consolidated Bank and Trust Corporation vs. Court of Appeals, 356 SCRA 671 [2001].) Corporate officers cannot be held personally liable for the consequences of their acts, for as long as they are for and on behalf of the corporation, within the scope of their authority and in good faith. (Solidbank Corporation vs. Mindanao Ferroalloy Corporation, 463 SCRA 409 [2005]; Price v. Innodata Phils., Inc., 567 SCRA 269 [2008]; Dy-Dumalasa vs. Fernandez, 593 SCRA 656 [2009].) (e) A corporation is vested by law with a personality separate and distinct from its stockholders, including its officers as well as from that of any other legal entity to which it may be related. Thus, a company manager acting in good faith within the scope of his authority in terminating the services of certain employees cannot be held liable for damages. (Sunio vs. National Labor Relations Commission, 127 SCRA 390 [1984]; Pabalan vs. National Labor Relations Commission, 184 SCRA 495 [1990]; Malayang Samahan ng Manggagawa vs. Ramos, 326 SCRA 428 [2000].) In cases of illegal dismissal, corporate directors and officers are solidarily liable with the corporation, where terminations of employment are done with malice or bad faith. The fictional veil of separate corporate entity may be pierced. (Acesite Corporation vs. National Labor Relations Commission, 449 SCRA 360 [2004]; Perron Corporation vs. National Labor Relations Commission, 505 SCRA 596 [2006].) (f) The property of the corporation is not the property of the stockholders or members and may not be sold by the stockholders or members without express authorization of its board of directors or trustees. (Woodchild Holdings, Inc. vs. Roxas Election & Construction Company, 436 SCRA 235 [2004]; Sec. 23.) Their interest, if any, is indirect, contingent and inchoate. (Asia's Emerging Dragon Corp. vs. Dept. of Transportation and Communications, 579 SCRA 44 [2008].)

18


Sec. 2

The separate personality of a corporation is a shield against personal liability of its officers. (2) Liability when exceptional circumstances warrant. — Personal or solidary liability may be incurred by corporate agents acting in behalf of the corporation only when exceptional circumstances warrant. Thus, it may validly attach when the director/trustee or officer acted maliciously or in bad faith, or with gross negligence (see Sees. 31, 65.), or agreed to hold himself personally and solidarily liable with the corporation, or made, by specific provision of law, personally liable for corporate action, or it is proven that the officer has used the fiction of separate corporate personality to defraud a third party or for wrongful ends. There is no law that prohibits a corporate officer from binding himself personally to answer for a corporate debt. (Toh vs. Solid Bank Corporation, 408 SCRA 544 [2003].) (3) Right to bring actions. — It may incur obligations and bring civil and criminal actions (Art. 46, Civil Code.) in its own name in the same manner as a natural person, although it may not perform certain actions that can be done only by natural persons, such as the practice of law or medicine. (a) A corporation has no personality to bring an action for and in behalf of its stockholders or members for the purpose of recovering property which belongs to said stockholders or members in their personal capacities. (Sulo ng Bayan, Inc. vs. G. Araneta, Inc., 72 SCRA 347 [1976].) (b) Since it is well-settled that the legality of a seizure can be contested only by the party whose rights had been violated, the right to object to the seizure of papers and documents of the corporation belongs to the corporation as a separate entity and not to its stockholders as such. (Stonehill vs. Diokno, 20 SCRA 383 [1967].) (c) Whatever mental anguish, wounded feelings, etc. (see Art. 2217, Civil Code.) the stockholders and officers of a corporation may suffer cannot be considered to be equally felt by the corporation, for it is elementary that a corporation is a personality separate and distinct from that of its stockholders and officers. Besmirched reputation cannot cause mental

Sec. 2


19

anguish to a corporation unlike in the case of a natural person, for a corporation has no reputation in the sense that an individual has, and besides, it is inherently impossible for a corporation to suffer mental anguish, (see The Insular Life Assurance Co., Ltd. vs. Court of Appeals, 428 SCRA 79 [2004]; Rural Bank of Makati, Inc. vs. Municipality of Makati, 433 SCRA 362 [2004].) (d) A juridical person is not entitled to moral damages because, not being a natural person, it cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish, or moral shock. Mental suffering can be experienced only by one having a nervous system. However, a corporation may have a good reputation which, if debased or besmirched resulting in social humiliation, may be a ground for recovery of moral damages and attorney's fees. (Mambulao Lumber Co. vs. Phil. National Bank, 22 SCRA 359 [1968]; People vs. Manero, Jr., 218 SCRA 85 [1993]; LBC Express, Inc. vs. Court of Appeals, 236 SCRA 602 [1994]; Acme Shoe, Rubber & Plastic Corp. vs. Court of Appeals, 260 SCRA 714 [1996]; Solid Homes vs. Court of Appeals, 275 SCRA 267 [1997].) Moral damages include besmirched reputation which a corporation may possibly suffer. (Art. 2217, Civil Code.) A corporation whose credit reputation is not exactly something to be considered sound and wholesome cannot be entitled to a big amount of moral damages. (Asset Privatization Trust vs. Court of Appeals, 300 SCRA 579 [1998].) While courts may allow the grant of moral damages to corporations, there must be proof of the existence of the factual basis of the damage and its causal relation to the defendant's acts. This is so because moral damages through incapable of pecuniary estimation, are in the category of an award designed to compensate the claimant for "actual injury" suffered and not to impose a penalty on the wrongdoer. (Crystal vs. Bank of the Phil. Islands, 572 SCRA 697 [2008].) (e) For purposes of venue, the place of business of the suing corporation is considered as its residence. The residence of the president is not the residence of the corporation because

20


Sec. 2

a corporation has a personality separate and distinct from that of its officers and stockholders. (Sy vs. Tyson Enterprises, Inc., 119 SCRA 367 [1982].) (4) Right to acquire and possess property. — It may acquire and possess property of all kinds. (Art. 46, Civil Code.) Property conveyed to or acquired by the corporation is in law the property of the corporation itself as a distinct legal entity (Art. 44[3], ibid.) and not that of the stockholders or members as such and viceversa. Where real properties included in the inventory of the estate of a decedent are in the possession of and are registered in the name of the corporation, in the absence of any cogency to shed the veil of corporate fiction (infra.), the presumption of conclusiveness of the titles in favor of the corporation should stand undisturbed. (Lim vs. Court of Appeals, 323 SCRA 102 [2000].) (a) Stockholders or members are in no legal sense the owners of corporate property (or credits) which is owned by the corporation as a distinct person. (Traders Royal Bank vs. Court of Appeals, 177 SCRA 788 [1989]; Magsaysay-Labrador vs. Court of Appeals, 180 SCRA 266 [1989]; Good Earth Emporium, Inc. vs. Court of Appeals, 194 SCRA 544 [1991].), and may not be sold by them without express authorization from the corporation's board of directors or trustees, (see Sec. 24.) (b) While a share of stock represents a proportionate interest in the property of the corporation, it does not vest the owner thereof (even assuming that it / h e is the controlling shareholder) with any legal right or title to any of the properties of the corporation owned by the latter as a distinct juridical person. (Saw vs. Court of Appeals, 195 SCRA 740 [1991]; Silverio, Jr. vs. Filipino Business Consultants, Inc., 466 SCRA 584 [2005].) The ownership of that property is in the corporation and not in the holders of shares of stocks. (Fisher vs. Trinidad, 43 Phil. 973 [1922]; Mobilia Products, Inc. vs. Umezaua, 452 SCRA 736 [2005].) (c) The interest of shareholders in corporate property is purely inchoate and, therefore, does not entitle them to intervene in a litigation involving corporate property. (Ibid.)

Sec. 2


21

(d) The mere fact that one is president of a corporation does not render the property he owns or possesses the property of the corporation, since the president, as an individual, and the corporation, are separate entities. The power to "pierce the veil of corporate entity" belongs to the court and a sheriff usurps this power when he enforces a writ of execution, not against the property of the corporation, the judgment debtor, but against that of its president on the ground that they are one and the same. (Cruz vs. Dalisay, 152 SCRA 482 [1987]; see Rosario vs. Bascar, Jr., 206 SCRA 678 [1992]; Booc vs. Bantuas, 354 SCRA 279 [2001].) (e) A tax exemption granted to a corporation cannot be extended to include the dividends paid by such corporation to its stockholders. (Manila Gas Corporation vs. Collector of Internal Revenue, 71 Phil. 513 [1941].) (f) 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 constitutional provision limiting land ownership to Filipinos and Filipino corporations. If the foreign shareholders of a landholding corporation exceeds 40%, it is not the foreign stockholders' ownership which is adversely affected but the capacity of the corporation to own land, i.e., the corporation becomes disqualified to own land. The corporation and its shareholders being separate juridical entities, 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. vs. Court of Appeals, 450 SCRA 169 [2005].) (4) Acquisition by court ofjurisdiction. — Where the appearance in court of the president of a corporation was in the capacity of counsel of another corporation and not as representative or counsel of the first corporation, such appearance cannot be construed as a voluntary submission of said corporation to the court's jurisdiction. The personality of the president of a corporation is distinct from that of the corporation itself. In the absence of summons on the corporation, a judgment against it is void for lack of jurisdiction and lack of due process. (Trimica, Inc. vs. Polaris Marketing Corp., 60 SCRA 321 [1974].)

22


Sec. 2

The participation by the general manager of a corporation in an action involving the corporation cannot equate to participation by another corporation in the same proceedings, merely because the general manager of the first corporation is also the chairman of the board of the second corporation. (Padilla vs. Court of Appeals, 370 SCRA 208 [2001].) (5) Changes in individual membership. — Likewise, as an entity distinct from its members or stockholders, a corporation remains unchanged and unaffected in its identity by changes in its individual membership. The corporation, as an artificial person, continues to exist as such "in like manner that the River Thames is still the same river though the parts which compose it are changing every instant." (1 Fletcher, pp. 18-19.) The doctrine of "corporate entity" fills a useful purpose in business life, and whether the purpose be to gain an advantage under the law of the state of incorporation or to avoid, or to comply with the demands of creditors or to serve the creator's personal or undisclosed convenience so long as that purpose is the equivalent of business activity or is followed by the carrying on of business of the corporation, the corporation remains a separate entity. But the doctrine is one of substance and validity (9-A Words and Phrases 385 [1960 ed.].), and courts will, in proper cases, disregarding forms and looking to substance, ignore the legal fiction of corporate entity, (infra.) Corporation as a p e r s o n , resident, or citizen.

A corporation is regarded as a "person," "resident," or "citizen" within the purview of those terms as used in constitutional or statutory provisions, whenever this becomes necessary in order to give full effect to the purpose or spirit of the Constitution or statute. The tendency is to regard corporations, as far as their inherent nature will permit, as on the same footing as ordinary individuals. Consequently, whether corporations are included within a statute depends largely upon its object. (1 Fletcher, Sec. 53.) (1) As a person. — Persons are divided into natural and artificial persons. The term "person" prima facie includes both and,

Sec. 2


23

therefore, as a general rule, includes corporations (18 Am. Jur. 2d 568.) but in a figurative sense only. (a) A corporation has been held to be included by the word "person" in statutes concerning attachment, taxation, usury, insolvency and bankruptcy, limitations, prior notice to bring suit, right to appeal, allowing action of trespass, prohibiting the banking business, conferring a cause of action for wrongful death, allowing suit against usurpation of a public office or franchise, allowing a petition to quiet title, and offering public lands for appropriation "by all persons" who enter upon them. (b) The word "person" has also been deemed to apply to a corporation as used in statutes providing for suit because of the wrongful exercise of a franchise by a "person," punishing "any person" employing a minor child, and providing for a civil action against "any person" unlawfully holding a franchise. Where the word "person" is used in a definition of libel, corporations are included. (1 Fletcher, pp. 70-71.) (c) A corporation is a "person" within the meaning of Section 1, Article III (Bill of Rights) of the Constitution that "no person shall be deprived of life, liberty or property without due process of law" and that it is entitled to the equal protection of the laws in like manner as other persons in the same situation, provided the corporation is "within the jurisdiction" of the State the protection of which is demanded. (d) Insofar as liberty is concerned, however, a private corporation is held not to be a person within the language of the constitutional provision; the liberty guaranteed is the liberty of natural, not artificial, persons. Neither is it a person within the protection of Section 17, Article III of the Constitution against self-mcrimination. (18 Am. Jur. 2d 570-571.) Thus, while an individual may lawfully refuse to answer incriminating questions unless protected by an immunity statute, it does not follow that a corporation, vested with special privileges and franchises, may refuse to show its hand when charged with an abuse of such privileges. (Bataan Shipyard & Engineering Co., Inc. vs. PCGG, 150 SCRA 181 [1987].)

24


Sec. 2

(e) But a corporation comes within the protection of Section 3 of the same Article insuring the right of the people to be secured in their persons against unreasonable seizures and searches. A corporation is, after all, but an association of individuals under an assumed name and with a distinct legal entity. In organizing itself as a collective body, it waives no constitutional immunities appropriate to such body. Its property cannot be taken without compensation. It can only be proceeded against by due process of law, and is protected against unlawful discrimination. (Bache & Co. [Phils.], Inc. vs. Ruiz, 37 SCRA 823 [1971].) (2) As a resident or nonresident. — Since a corporation is a person in the law, it is also to be deemed a resident or a nonresident of a particular state or country within the meaning of a statute, if it is within the purpose and intent of the statute, as in the case of statutes defining the jurisdiction of the courts, or relating to venue, taxation, etc. (18 C.J.S. 388.) (a) A corporation formed in one State may be, for certain purposes, domiciled or a resident in another State in which it has its offices and transacts business, notwithstanding the fiction of the law that a corporation dwells only in the State of its creation and cannot migrate therefrom. (18 Am. Jur. 2d 694.) Thus, in a case, it was held that a foreign corporation licensed to do business in the Philippines (see Sec. 123.) is not a nonresident within the meaning of Section 424 (par. 2.) of the Code of Civil Procedure (now Sec. l[f], Rule 57, Rules of Court.) which allows the attachment of the property of the defendant in an action where such defendant "resides out of the Philippines, or on whom summons may be served by publication" as to make its property subject to attachment under said section. (Claude Neon Lights, Inc. vs. Phil. Advertising Corp. and Santamaria, 57 Phil. 607 [1932].) (b) For taxation purposes, a foreign corporation may be either a resident or nonresident, the former referring to a "foreign corporation engaged in trade or business within the Philippines," and the latter, to a "foreign corporation not engaged in trade or business in the Philippines and not hav-

Sec. 2


25

ing any office or place of business therein." (see Sec. 20[h, i], National Internal Revenue Code.) (3) As a citizen. — "Citizenship" is the status of a citizen with its rights and privileges and corresponding duties and obligations. The term "citizen," as it is commonly understood, implies membership in a political body and, therefore, does not ordinarily include a corporation, unless the general purpose and import of the statute in which the term is found seem to require it. (18 Am. Jur. 2d 569.) (a) There is, however, no absolute and inflexible rule that a corporation cannot be deemed a citizen for certain purposes. (Ibid.) A corporation is a citizen within the meaning of a statute conferring rights, defining the jurisdiction of courts, or otherwise relating to citizens/if the purpose and intent of the statute renders it applicable, and for such purpose it is, as a general rule, a citizen of the State or country by or under the laws of which it was created and exists without regard to the citizenship of its stockholders or members. (18 C.J.S. 388.) (b) "Most often when the term 'citizenship' is used in connection with corporations, it is not used in the sense under Political Law, but more in the sense of indicating the country under whose laws the corporations were organized. In this respect, 'citizen,' as used in connection with corporations, is synonymous with domicile or residence. In fact, our Corporation Law requires that the principal office of the corporation must be located in the Philippines. However, when the term 'citizenship' is used synonymously with residence or domicile, said use is for jurisdictional purposes only, for a corporation is subject to the jurisdiction of the country under whose laws it was organized. Therefore, the citizenship of a corporation is not looked into unless citizenship is an important factor in the determination or the enjoyment of a privilege, exercise of a right or even the legality of a contract entered into by the corporation." (C.G. Alvendia, op. cit., pp. 10-11.)

26


Sec. 2

Corporation as a collection of individuals.

(1) True in actual fact. — Although the doctrine that a corporation is an artificial entity and a person in law, distinct from the members who compose it, will always be recognized and given effect, both at law and in equity, in cases which are within its reason and when there is no controlling reason against it, it is clear that a corporation is in fact a collection of individuals. In the case of modern private corporations, it is really the individuals composing it who own its property and carry on the corporate business, through the corporation and its officers and agents, for their own profit or benefit. The idea of the corporation as a legal entity or person apart from its members is a mere fiction of the law introduced for convenience in conducting the business in this privileged way. (14 C.J.S. 59.) Courts, as a general rule, disregard this theory of separate entity under certain circumstances, as when the privilege is misused by the corporation. (infra.) (2) Recognized for many purposes. — This conception of a corporation as a collection of individuals owning the corporate property and doing business through the corporation and in the corporate name has always been recognized for many purposes as between the stockholders or members themselves and as between them and the corporation, in order to enforce and protect their rights. Thus, the stockholders of a corporation are entitled to the profits in the way of dividends and may enforce their rights in this respect. They are entitled to insist that the corporation shall keep within the powers and purposes for which it was formed, and may sue in equity, if necessary, to compel it to do so. It is not only in cases like these that the law recognizes that a corporation is in reality a collection of individuals and the corporate entity a mere fiction, but the fiction also may be and often is disregarded even for the purpose of giving effect to the acts of the stockholders or members individually as the acts of the corporation. (18 C.J.S. 379-380.)

Sec. 2


27

Doctrine of piercing t h e veil of corporate entity.

The doctrine that a corporation is a legal entity or a person in law, distinct from the persons composing it or any other corporation to which it may be related, is merely a legal fiction for purposes of convenience and to subserve the ends of justice. This fiction, therefore, cannot be extended to a point beyond its reason and policy, (see 13 Am. Jur. 2d 559.) Peculiar situations or valid grounds may exist to warrant the disregard of its independent being and the piercing of the corporate veil. (China Banking Corp. vs. Dyne-Semi Electronics Corp., 494 SCRA 493 [2006].) (1) When legal fiction to be disregarded. — Being a mere creature of the law, a corporation may be allowed to exist solely for lawful purposes but where the fiction of corporate entity is being used as a cloak or cover for fraud or illegality, or "to defeat public convenience, justify wrong, protect fraud, or defend crime" (Yutivo Sons Hardware Co. vs. Court of Tax Appeals, 1 SCRA 160 [1961].), or for ends subversive of the policy and purpose behind its creation, especially where the corporation is a closed family corporation (Emiliano Cano Enterprises, Inc. vs. Court of Industrial Relations, 13 SCRA 290 [1965].), on equitable considerations, this fiction will be disregarded and the individuals composing it or two corporations will be treated as identical. (a) In other words, the law will not recognize separate corporate existence with reference to the particular transaction involved. This non-recognition is sometimes referred to as the doctrine of piercing the veil of corporate entity or disregarding the fiction of corporate entity (see Claparols vs. Court of Industrial Relations, 65 SCRA 613 [1965]; Republic vs. Razon, 20 SCRA 234 [1967]; A.D. Santos, Inc. vs. Vasquez, 22 SCRA 1156 [1968]; Liddel & Co., Inc. vs. Collector, 2 SCRA 632 [1961].) or the doctrine of corporate alter ego. (9-A Words and Phrases 377.) The rationale is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities. (Velarde vs. Lopez, Inc., 419 SCRA 422 [2003]; Francisco Motors vs. Court of Appeals, 309 SCRA 72 [1999].)

NNU TA6BILARAN CCLLasE LffHtARY

28


Sec. 2

(b) The doctrine requires the court to see through the protective shroud which exempts its stockholders from liabilities that ordinarily they could be subject to, or distinguishes one corporation from a seemingly separate one, were it not for the existing corporate fiction. (Lim vs. Court of Appeals, 323 SCRA 102 [2000]; Marubeni Corporation vs. Lirag, 362 SCRA 620 [2001].) (c) Moreover, for the corporate legal entity to be disregarded, the wrongdoing must be clearly and convincingly established; it cannot be presumed, (see Del Rosario vs. National Labor Relations Commission, 187 SCRA 777 [1990]; Matuguina Integrated Wood Products, Inc. vs. Court of Appeals, 263 SCRA 490 [1996]; Complex Electronics Employees Assoc. vs. National Labor Relations Commission, 310 SCRA 403 [1999]; Solidbank Corporation vs. Mindanao Ferroalloy Corporation, 464 SCRA 409 [2005]; China Banking Corp. vs. Dyne-Sem Electronics Corp., supra.) The presumption is that the stockholders or officers and the corporation are distinct entities. (d) The burden of proving otherwise is on the party seeking to have the court pierce the veil. (Ramoso vs. Court of Appeals, 347 SCRA 463 [2000]; Land Bank of the Phils, vs. Court of Appeals, 364 SCRA 375 [2001].) (2) Effect as to liability.—In any of the cases where the separate corporate identity is disregarded, the corporation will be treated merely as an association of persons and the stockholders or members will be considered as the corporation, that is, liability will attach personally or directly to the officers and stockholders (Umali vs. Court of Appeals, 189 SCRA 529 [1990].) or, where there are two corporations, they will be merged into one, the one being merely regarded as the instrumentality, agency, conduit or adjunct of the other. (Koppel [Phils.], Inc. vs. Yatco, 77 Phil. 496 [1946]; Cease vs. Court of Appeals, 93 SCRA 483 [1979].) (a) In other words, the transactions or acts of the real parties shall be dealt with as though no corporation had been formed. (Republic vs. Sandiganbayan, 266 SCRA 515 [1997].) The corporate character, however, is not necessarily abrogated. The corporation continues for other legitimate objectives. (Pamplona Plantation Co., Inc. vs. Tingkil,

Sec. 2


29

450 SCRA 421 [2005].) But in the absence of proof that the corporation's separate and distinct personality was used as a protective shield for any wrongdoing, the general rule on corporate liability, not the exception, should be applied. (Soriano vs. Court of Appeals, 174 SCRA 195 [1989]; BayerRoxas vs. Court of Appeals, 211 SCRA 470 [1992].) Any piercing of the corporate veil has to be done with caution. (Reynoso IV vs. Court of Appeals, 345 SCRA 335 [2005]; Jardine Davies, Inc. vs. JRB Realty, Inc., 463 SCRA 555 [2005].) (b) And even if fraud is established, this fact alone is not sufficient to justify the piercing of the corporate fiction where it is not sought to hold the officers and stockholders personally liable for corporate debt. Thus, where the petitioners are merely seeking the declaration of the nullity of a foreclosure sale, piercing the corporate veil is not the proper remedy, for such relief may be obtained without having to disregard the legal corporate entity, and this is true even if grounds exist to pierce it. (Umali vs. Court of Appeals, supra.) (3) Application of doctrine in three areas. — The doctrine applies only in three (3) basic areas, namely: 1) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. In the absence of malice, bad faith, or a specific provision of law making a corporate officer liable, such corporate officer cannot be made personally liable for corporate liabilities. (Pantianco Employees Assoc. vs. National Labor Relations Commission, 581 SCRA 598 [2009].) Instances w h e r e doctrine applied.

The question of piercing the corporate veil is essentially a matter of proof. In the instances given below and in furtherance of the ends of justice to protect the rights of third persons, the courts have

30


Sec. 2

pierced the veil of corporate entity, considering the corporation and the individual or individuals owning all its stock and assets as identical, or, in the case of two corporations, merging them into one. (1) Where a corporation functions for the benefit of a single person who has complete control over the funds and the said person is the sole owner thereof. In such case, the corporate entity is but an alter ego or the business conduit of the owner and the property of the corporation may be considered the property of the controlling individual and may be seized in an action against the latter. (Marvel Bldg. Corp. vs. David, 94 Phil. 376 [1954]; Collector vs. University of Visayas, 12 SCRA 193 [1964]; National Marketing Corporation vs. Associated Finance Company, Inc., 19 SCRA 962 [1967]; Collector vs. Norton & Harrison Co., 11 SCRA 714 [1964]; see Valderrama vs. National Labor Relations Commission, 256 SCRA 466 [1996].) (2) Similarly, where the transaction was entered into by the President who was also the treasurer and general manager of a close family corporation where the incorporators and directors belong to one single family, the corporation is liable for the contract and it cannot claim that it was entered into without the knowledge and consent of the other members of the board. (M.R. Dulay Enterprises, Inc. vs. Court of Appeals, 225 SCRA 678 [1993]; Camelcraft Corp. vs. National Labor Relations Commission, 186 SCRA 393 [1990].) (a) The mere fact, however, that a corporation owns 50% of the capital stock of another corporation (Manila Hotel Corp. vs. National Labor Relations Commission, 343 SCRA 1 [2000].), or the mere majority ownership of the stocks of a corporation is not per se a cause for piercing the corporate veils (Republic vs. Sandiganbayan, 346 SCRA 760 [2000].), nor the mere fact that a corporation owns all of the stocks of another corporation, taken alone, sufficient to justify their being treated as one entity. (MR Holdings, Ltd. vs. Bojar, 380 SCRA 617 [2002]; Borromeo vs. Court of Appeals, 550 SCRA 269 [2008].) (b) Indeed, the mere fact that all or nearly all of the capital stock of one or more corporations are owned and controlled

Sec. 2


31

by the same or single stockholder or by another corporation, or have the same president is not in itself sufficient ground for disregarding separate corporate entities. There are three (3) elements, all of which must be present for the ground (i.e., being a mere instrumentality or alter ego) to stand, (infra.) It is lawful to obtain a corporation charter, even with a single substantial stockholder, to engage in a specific activity, and such activity may co-exist with other private activities of the stockholder. If the corporation is a substantial one, conducted lawfully and without fraud on another, its separate activity or personality is to be respected, (see Liddel & Co., Inc. vs. Coll. of Internal Revenue, 25 SCRA 632 [1961]; Palay, Inc. vs. Clave, 124 SCRA 638 [1983]; Sunio vs. National Labor Relations Commission, 127 SCRA 390 [1984]; EPG Construction Company, Inc. vs. Court of Appeals, 210 SCRA 230 [1992]; Traders Royal Bank vs. Court of Appeals, 269 SCRA 15 [1997]; Asionics Phils., Inc. vs. National Labor Relations Commission, 290 SCRA 164 [1998]; Complex Electronics Employees Assoc. vs. National Labor Relations Commission, 310 SCRA 403 [1999]; Francisco vs. Mejia, 362 SCRA 738 [2001]; Secosa vs. Heirs of E.S. Francisco, 433 SCRA 273 [2004]; Construction & Development Corp. of the Phils, vs. Cuenca, 466 SCRA 714 [2005]; Union Bank of the Phils, vs. Ong, 506 SCRA 256 [2006].) (c) The liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective business. The courts may, in the exercise of judicial discretion, step in to prevent the abuses of separate entity privilege and pierce the veil of corporate entity. (Philippine National Bank vs. Retratto Group, Inc., 362 SCRA 216 [2001].) (d) Likewise, substantial identity of the incorporators of two corporations does not necessarily imply fraud. For the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established. It cannot be presumed. (Del Rosario vs. National Labor Relations Commission, 187 SCRA 777 [1990]; Development Bank of the Phils, vs. Court of Appeals, 363 SCRA 307 [2001]; Construction & Development Corp. of the Phils, vs. Cuenca, supra.) But the shield of corporate fiction will be dis-

32


Sec. 2

regarded if it is shown that it is designed as a means to perpetuate an illegal act or as a vehicle for the evasion of existing obligations. (Pabalan vs. National Labor Relations Commission, 184 SCRA 495 [1970].) (3) Where the corporation is a mere instrumentality of the individual stockholders, the latter must individually answer for corporate obligations. To hold the stockholders liable for the corporate obligations is not really to ignore the corporation's separate entity but merely to apply the established principle that such entity cannot be invoked or used for purposes that could not have been intended by the law that created that separate personality. (McConnel vs. Court of Appeals, 1 SCRA 722 [1961]; also Ramirez Telephone Corp. vs. Bank of America, 29 SCRA 191 [1962] ASJ Corporation vs. Evangelista, 545 SCRA 300 [2008]; Phil. Commercial & International Bank vs. Custodio, 545 SCRA 367 [2008].) (4) Where a corporation is merely instrumentality, an adjunct, business conduit or alter ego of another corporation, the separate personality of the corporation may be disregarded. (Tan Boon Bee & Co. vs. Jarencio, 163 SCRA 153 [1988]; Heirs of Ramon Durano, Sr. vs. Sps. Uy, 344 SCRA 238 [2000]; Lipat vs. Pacific Banking Corporation, 402 SCRA 339 [2003]; Comm. of Internal Revenue vs. Menguito, 565 SCRA 461 [2008].) The corporate mask may be removed and the two seemingly separate entities treated as one entity only. Thus: (a) Where sales of cars are made by corporation X to corporation Y which are later sold to the public at a higher price and it appears that both corporations are owned and controlled by the same taxpayer and corporation Y was the medium created by corporation X to reduce the price and the sales tax liability of corporation X on original sales of cars under the National Internal Revenue Code (see Sec. 195, NIRC), there is sufficient justification to disregard the separate corporate identity of one from the other. (b) Where three (3) security agencies are managed through X Corporation with all their employees drawing their salaries and wages from the latter entity, the agencies have common and interlocking incorporators and officers, and their employees have a single Mutual Benefit System

Sec. 2


33

and followed a single system of compulsory retirement, with security guards of one (1) agency being able easily to transfer to another and then back again by simply filling-up a pro forma slip called "Request for Transfer," the veil of corporate fiction of the three (3) agencies should be lifted for the purpose of allowing their employees to form a single labor union without need of filing three (3) separate petitions for certification election. (Phil. Scout Veterans Security & Investigation Agency vs. Torres, 224 SCRA 682 [1993]; see Guatson International Travel & Tours, Inc. vs. National Labor Relations Commission, 230 SCRA 815 [1994]; see Enriquez Security Services, Inc. vs. Cabotaje, 496 SCRA 169 [2006].) (c) Where it appears that (three) business enterprises engaged in the same line of business (construction of public roads and bridges) and using the same equipment including manpower services are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third persons (illegally dismissed employees), disregard the legal fiction that the (three) corporations are distinct entities and treat them as identical and extend the liability of the corporations to the responsible officers acting in the interest of the corporations for the monetary awards due from the corporations for illegal dismissal. (Tomas Lao Construction vs. National Labor Relations Commission, 278 SCRA 716 [1997].) (d) Where two corporations have identical incorporators and directors and are headed by the same official, only one office and one payroll, and are under one management, a suit by the employees against one corporation should be deemed as a suit against the other. The attempt to make the two corporations appear as two separate entities, insofar as the workers are concerned, should be viewed as a devious but obvious means to defeat the ends of the law. The corporate fiction must yield to truth and justice. (e) The mere fact, however, that: 1) the businesses of two or more corporations are interrelated (Diatagon Labor Federation vs. Ople, 101 SCRA 534 [1980]; China Banking Corporation vs. Dyne-Sem Electronics Corp., 494 SCRA

34


Sec. 2

493 [2006].), or 2) a common director sits on the boards of directors of all three (3) companies organized as separate corporate entities (Sesbreno vs. Court of Appeals, 222 SCRA 466 [1993].), and 3) even where some of the employees of one corporation are the same persons manning and providing for auxiliary services to the units of the other corporation and that the physical plants, offices and facilities are situated in the same compound (Indo-Phil. Textile Mill Workers Union vs. Calica, 205 SCRA 697 [1992].), or 4) two corporations are admittedly sister companies and sharing personnel and resources (Padilla vs. Court of Appeals, 370 SCRA 308 [2001].), or 5) the mere existence of interlocking directors (see Sec. 33.), corporate officers and shareholders (Velarde vs. Lopez, Inc., 419 SCRA 422 [2003]; Jardine Davies, Inc. vs. JRB Realty, Inc., 463 SCRA 555 [2005]; "G" Holdings, Inc. vs. National Mines and Allied Workers Union, Oct. 16, 2009.), absent a sufficient showing that the corporate entity was purposely used as a shield to defraud creditors and third persons of their rights, or perpetrate wrong, is not enough justification for disregarding their separate personalities. (f) Similarly, not because two foreign corporations came from the same country and closely worked together on certain projects (i.e., first corporation as the supplier and contractor of the project hired and subcontracted the project to the second corporation), would the conclusion arise that one was the conduit of the other, thus justifying the piercing of the corporate veil. (Marubeni Corporation vs. Lirag, 362 SCRA 620 [2001]; Martinez vs. Court of Appeals, 438 SCRA 130 [2004].) (g) The fiction of distinct corporate entities cannot be disregarded where there is not the least indication that the second corporation is a dummy or serves as a client of the first corporate entity. (Yu vs. National Labor Relations Commission, 245 SCRA 134 [1995].) The legal corporate entity is disregarded only if it is sought to hold the officers and stockholders directly liable for a corporate debt or obligation. (Umali vs. Court of Appeals, 189 SCRA 529 [1990].) (h) Where a subsidiary company is created by a paren t company merely as an agency of the latter especially if the stockholders or

Sec. 2


35

officers of the two corporations are substantially the same or their system of operations unified (Annotation: 1 A.R.L. 612; also Yutivo Sons Hardware Company vs. Court of Appeals, 1 SCRA 160 [1961].); or where parent company assumes complete control of the operation of its subsidiary's business, the separate corporate existence of the subsidiary must be disregarded. (Phil. Veterans Investment Development Corp. vs. Court of Appeals, 181 SCRA 669 [1990]; see Reynoso vs. Court of Appeals, 345 SCRA 335 [2000].) (i) In workmen's compensation cases, where there is admission that two corporations are sister companies, operating under one single management, and housed in same building, piercing the veil may be considered. (Telephone Engineering & Service Co., Inc. vs. Workmen's Compensation Commission, 104 SCRA 354 [1981]; see Sibagat Timber Corp. vs. Garcia, 216 SCRA 470 [1992].) Where the corporate fiction was used as a means to perpetrate a social injustice or as a vehicle to evade obligations, it would be discarded and the two (2) corporations would be merged as one, the first being merely considered as the instrumentality, agency, conduit or adjunct of the other. (Azcor Manufacturing, Inc. vs. National Labor Relations Commission, 303 SCRA 26 [1999]; Pabalan vs. National Labor Relations Commission, 184 SCRA 495 [1990].) (j) But even when there is dominance over the affairs of the subsidiary, the doctrine applies only when such fiction is used as a subterfuge to commit injustice and circumvent the law. (Union Bank of the Philippines vs. Court of Appeals, 290 SCRA 198 [1998]; Reynoso IV vs. Court of Appeals, supra.) In the absence of circumstances justifying disregard of the corporate entity, a holding or parent corporation has a separate corporate existence and is to be treated as a separate entity, distinct from its subsidiary; hence, any claim or suit against the latter does not bind the former, and vice versa. (Villarde vs. Lopez, 419 SCRA 422 [2004]; Jardine Davies, Inc. vs. JRB Realty, Inc., 463 SCRA 555 [2005].) (k) The subsidiary corporations, too, are ordinarily independent of each other. (18 Am. Jur. 2d 564-565.) Thus, as earlier noted, the mere fact that a corporation owns all the

36


Sec. 2

stocks of another corporation, taken alone is not sufficient to justify their being treated as one entity. If used to perform legitimate functions a subsidiary's separate existence shall be respected and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective business. (MR Holdings, Ltd. vs. Bajar, 380 SCRA 617 [2002].) (5) Where it appears that a corporation is merely a business conduit of its president who entered into a contract of administration and supervision for the painting of the factory of another corporation, and to evade liability, the first corporation claims that the President acted as an agent of the second corporation. It is a legal truism that when the veil of corporate fiction is made as a shield to perpetrate a fraud and /or confuse legitimate issues (here, the facts relating to employer-employee relationship), the same should be pierced. (R.F. Sugay, Inc. vs. Reyes, 12 SCRA 700 [1964]; Jacinto vs. Court of Appeals, 198 SCRA 211 [1991].) Where the petitioner, as president of the corporation, was ordered by the court to pay the amounts adjudged, the fact that the obligation was incurred in the name of the corporation and he had ceased to be corporate president, would not free him from personal liability where the court has pierced the veil of corporate fiction, because in such case, for all legal intents and purposes, he and the corporation are one and the same. (Arcilla vs. Court of Appeals, 215 SCRA 120 [1992].) (6) Where a domestic or Philippine corporation is controlled by aliens, its nationality shall be deemed that of the controlling stockholders thereof during wartime, for reasons of national security. (Filipinas Cia de Seguros vs. Christen Huenefeld & Co., Inc., 89 Phil. 54 [1951]; Davis Winship vs. Philippine Trust Company, 90 Phil. 744 [1952].) This is the control test in determining the nationality of a private corporation. (7) Where a corporation is dissolved and its assets are transferred to another corporation to avoid a financial liability of the first corporation to its employees, both firms being owned and controlled by the same persons with the result that the second corporation should be considered a continuation and successor of the first entity. (Claparols vs. Court of Industrial Relations, supra; see National Federation of Labor Union [NAFLU] vs. Ople, 143 SCRA 124

Sec. 2


37

[1986]; see A.C. Ransom Labor Union CCLU vs. National Labor Relations Commission, 150 SCRA 498 [1987]; Cagayan Valley Enterprises, Inc. vs. Court of Appeals, 179 SCRA 218 [1989]; see Pepsi-Cola Bottling Co. vs. National Labor Relations Commission, 210 SCRA 277 [1992]; Avon Dale Garments, Inc. vs. National Labor Relations Commission, 246 SCRA 733 [1995]; Phil. Bank of Communications vs. Court of Appeals, 195 SCRA 567 [1985]; Concepts Builders, Inc. vs. National Labor Relations Commission, supra; Heirs of P.V. Pajarillo vs. Court of Appeals, 537 SCRA 96 [2007].) Where one corporation sells or otherwise transfers all its assets to another corporation for value, the latter is not, by that fact alone, liable for the debts and liabilities of the transfer. "In sale of assets, the purchaser is only interested in the raw assets of the selling corporation perhaps to be used to establish his own business enterprise or as an addition to his on-going business enterprise." (Allied Banking Corp. vs. DyneSemi Electronics Corp., 494 SCRA 493 [2006], citing Villanueva, Philippine Corporate Law, 1998 Ed., p. 444.) Sale of assets is legally distinct from merger, (see Sec. 80.) (8) Where all the stockholders or members of a corporation, acting as individuals instead of formal corporate action, enter into an illegal act which, if done by formal corporate action, would be a ground for forfeiting the charter of the corporation and dissolving it, the fiction of corporate entity apart from the members will be disregarded, and such action of the stockholders or members will be treated as the action of the corporation in a proceeding by the State to forfeit the charter. (18 C.J.S. 381-382.) (9) Where a corporation is formed by a seller of a certificate of public convenience for the purpose of evading his individual contract that he "shall not for a period of ten (10) years from the date of this sale, apply for any TPU service identical or competing with the buyer." (see Villa Rey Transit, Inc. vs. Ferrer, 25 SCRA 845 [1968].) (10) Where petitioner started his employment with X Corporation and was later transferred to Y Corporation, a sister company, and the separation benefits given to the petitioner by reason of his (illegal) dismissal corresponded only to the period in which he was in the employ of Y Corporation, ignoring the period when he was still in the employ of X Corporation. The

38


Sec. 2

doctrine of corporate entity was envisaged for convenience and to serve justice. Therefore, it should not be used as a subterfuge to commit injustice and circumvent labor laws. (Indino vs. National Labor Relations Commission, 178 SCRA 168 [1989].) (11) Where a corporation is organized by an insolvent debtor to defraud his creditors and he transfers his properties to it in furtherance of such fraudulent purpose. (Kelluz vs. Douglas County Back, 58 Conn. 43; see Palacio vs. Fely Transp. Co., 5 SCRA 1011 [1962].) But the mere amendment of the articles of incorporation changing the name of the corporation is not an indication to evade payment by one corporation of its obligations to another. (Remo, Jr. vs. Intermediate Appellate Court, 172 SCRA 405 [1989].) (12) Where a corporation is organized as a device in order to evade an outstanding legal or equitable obligation, the courts, even without reference to actual fraud, refuse to apply the doctrine of corporate entity. (a) In a California case, a lessee corporation with intent to evade the payment of royalties under a lease, conveyed title to a second corporation. Thereafter, the second corporation conveyed to a third, with the same end in view. It appeared that all of the three corporations had been formed by the same persons, had their offices together in the same room and had practically the same officers. The court did not find that there was any actual fraud. Without regard to this, however, it was held that the transfers were constructively fraudulent as against the lessor and that all three corporations were jointly liable for the payment of the royalties. (b) In an old English case, a German vessel owned by a German corporation, while sailing from Hamburg to London, was sold by telegraph on August 1 to an English corporation, controlled by the German corporation. On August 4, war was declared between Germany and England. Next day, the vessel arrived in England and was seized as a prize. The English corporation claimed that the transfer to it made the seizure illegal. The Prize Court held the seizure proper and that the claim was invalid. It would clearly seem that in such

Sec. 2


39

case the transfer was within the purview of the rule which holds a transfer not valid when made in contemplation of war and to avoid seizure as a prize. In such circumstances, it was held that the application of the doctrine of distinct corporate entity was uncalled for. (1 Fletcher, pp. 62-63.) (13) Where the evidence on record shows that at the time respondent pawned her jewelry, the pawnshop was owned by petitioner (Sicam) himself and all the pawnshop receipts issued to respondent shall all bear the words "Agenda de R.C. Sicam, notwithstanding that the pawnshop was incorporated creating the impression to respondent and the public as well that the pawnshop was owned solely by petitioner and not by a corporation." (Sicam vs. Jorge, 529 SCRA 443 [2007].) (14) The corporate fiction has also been disregarded in other cases as where it was used (a) to shield a violation of the prohibition against forum shopping (First Phil. International Bank vs. Court of Appeals, 252 SCRA 259 [1996].), or (b) to avoid a judgment credit (Sibagat Timber Corp. vs. Garcia, 216 SCRA 470 [1992].), (c) to avoid the payment of higher taxes (Koppel Phils., Inc. vs. Yatco, 77 Phil. 496 [1946]), or (d) to avoid inclusion of corporate assets as part of the estate of a decedent (Cease vs. Court of Appeals, 93 SCRA 483 [1979].), or (e) to promote unfair objectives (Villanueva vs. Adre, 172 SCRA 876 [1989].), or (f) to violate a provision under the Labor Code (see Arts. 288, 289 thereof.) declared to be penal in nature (Reahs Corporation vs. National Labor Relations Commission, 271 SCRA 247 [1997].); or (g) to confuse legitimate issues. (Jacinto vs. Court of Appeals, 198 SCRA 211 [1991].); or (h) to avoid a judgment in favor of an employee where the employer corporation is no longer existing and is unable to satisfy the judgment, the employee's recourse being against the officers of the corporation who were, in effect, acting in behalf of the corporation. (Restaurante Las Conchas vs. Llego, 314 SCRA 24 [1999].) When the veil of corporate fiction is pierced, the corporate character is not necessarily abrogated. The corporation continues for legitimate objectives. However, it is pierced in order to remedy injustice. (Reynoso IV vs. Court of Appeals, 345 SCRA 335 [2000].)

40


Sec. 2

Application of the "instrumentality" or "alter e g o " rule.

The question of whether a corporation is a mere instrumentality or alter ego, a mere sheet or paper corporation, a sham or a subterfuge, is purely one of fact. (Phoenix Safety, Inc. vs. James, 28 Ariz. 514, 237; Heirs of Ramon Durano, Sr. vs. Sps. Uy, supra.) While there exists no definite test of general application in determining when a subsidiary may be treated as a mere instrumentality of the parent corporation, some factors have been identified that will justify the application of the treatment of the doctrine of the piercing of the corporate veil. The case of Garrett vs. Southern Railway Co. (173 F Supp. 915, E.D. Term. [1959].), cited in Philippine National Bank vs. Ritratto Group, Inc. (362 SCRA 216 [2001].), involved a suit against the Southern Railway Co. Plaintiff was employed by Lenoir Works and alleged that he sustained injuries while working for Lenoir. He, however, filed a suit against Southern Railway Company on the ground that Southern had acquired the entire capital stock of Lenoir Car Works, hence, the latter corporation but a mere instrumentality of the former. The Tennessee Supreme Court stated that as a general rule the stock ownership alone by one corporation of the stock of another does not thereby render the dominant corporation liable for the torts of the subsidiary unless the separate existence of the subsidiary is a mere sham, or unless the control of the subsidiary is such that it is but an instrumentality or adjunct of the dominant corporation. Said Court then outlined the circumstances which may be useful in the determination of whether the subsidiary is but a mere instrumentality of the parent-corporation: "The circumstances rendering the subsidiary an instrumentality. It is manifestly impossible to catalogue the infinite variations of fact that can arise but there are certain common circumstances which are important and which, if present in the proper combination, are controlling. These are as follows: (a) The parent corporation owns all or most of the capital stock of the subsidiary.

Sec. 2


41

(b) The parent and subsidiary corporations have common directors or officers. (c) The parent corporation finances the subsidiary. (d) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation. (e) The subsidiary has grossly inadequate capital. (f) The parent corporation pays the salaries and other expenses or losses of the subsidiary. (g) The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation. (h) In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or division of the parent corporation, or its business or financial responsibility is referred to as the parent corporation's own. (i) The parent corporation uses the property of the subsidiary as its own. (j) The directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the parent-corporation. (k) The formal legal requirements of the subsidiary are not observed. The Tennessee Supreme Court ruled: "In the case at bar only two of the eleven listed indicia occur, namely, the ownership of most of the capital stock of Lenoir by Southern, and possibly subscription to the capital stock of Lenoir... The complaint must be dismissed." In Philippine National Bank, the contract questioned was one entered into between respondent and PNB-IFL, not PNB. In their complaint, respondents admit that petitioner PNB was a mere attorney-in-fact for the PNB-IFL with full power and authority to, inter alia, foreclose on the properties mortgaged to secure their loan obligations with PNB-IFL. In other words, petitioner was an agent with limited authority and specific duties under a special power of attorney incorporated in the real estate mortgage. It


42

Sec. 2

was not privy to the loan contracts entered into by respondents and PNB-IFL. Our Supreme Court has laid the test in determining the applicability of the doctrine of piercing the corporate veil or corporate fiction if based on the "instrumentality" or "alter ego" rule. In applying this rule, the courts are concerned with reality and not with form, with how the corporation operated and the individual defendant's relationship to that operation. The absence of any of the three (3) elements below prevents, under said rule, "piercing the corporate veil": (1) Control, not mere majority or complete stock control, but complete dominion, not only of finances but of policy and business in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will, or existence of its own; (2) Such control must have been used by the defendant to commit fraud or wrong, violation of a statutory or other positive duty, or dishonest and unjust act in contravention of plaintiff's legal rights; and (3) The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. (Concept Builders, Inc. vs. National Labor Relations Commission, 257 SCRA 149 [1996]; Lim vs. Court of Appeals, 323 SCRA 102 [2000]; Manila Hotel Corp. vs. National Labor Relations Commission, 343 SCRA 1 [2000]; Heirs of Ramon Durano, Sr. vs. Sps. Uy, supra.; see Ramoso vs. Court of Appeals/ 347 SCRA 463 [2000]; Lipat vs. Pacific Banking Corporation, 402 SCRA 399 [2005]; R & E Transport, Inc. In Reynoso IV vs. Court of Appeals, 345 SCRA 335 (2000), infra., the Supreme Court (First Division) pierced the vei] of corporate entity, holding General Credit Corporation (GCC), formerly Commercial Credit Corporation (CCC), liable for the obligations of CCC-QC basing its ruling (which reversed the decision of the Court of Appeals) "on the records." The issue was whether or not the judgment in favor of petitioner against CCC-QC may be executed against GCC which was not a formal party in the case. The ruling directly conflicts with the above cited Ramoso decision of the Supreme Court [Second Division] affirming that of the Court of Appeals and that of the Securities and Exchange Commission that "the mere control on the part of GCC, one of the respondents, through CCC Equity over the operations and business policies of the franchise companies does not necessarily warrant piercing the corporate fiction without proof of fraud, x x x Whether the existence of the corporation should be pierced depends on questions of facts, appropriately pleaded. Mere allegation that a corporation is the alter ego of the individual stockholders is insufficient." 6

Sec. 2


43

vs. Latag, 422 SCRA 698 [2004]; Martinez vs. Court of Appeals, 438 SCRA 132 [2004]; Child Learning Center, Inc. vs. Tagorio, 476 SCRA 236 [2005]; Nisce vs. Equitable PCI Bank, Inc., 516 SCRA 231 [2007]; Hi-Cement Corp. vs. Bank of Asia and America, 534 SCRA 269 [2007]; Yamamoto vs. Nishiro Leather Industry, Inc., 551 SCRA 447 [2008].) and other cases. With respect to the second element, the fraud or wrongful or dishonest and unjust act must be clearly and convincingly established. In Philippine National Bank, the Supreme Court concluded: "Aside from the fact that PNB-IFL is a wholly owned subsidiary of petitioner PNB, there is no showing of the indicative factors that the former corporation is a mere instrumentality of the latter are present. Neither is there a demonstration that any of the evils sought to be prevented by the doctrine of piercing the corporate veil exists. Inescapably, therefore, the doctrine of piercing the corporate veil based on the alter ego or instrumentality doctrine finds no application in the case at bar. In any case, the parent-subsidiary relationship between PNB and PNB-IFL is not the significant legal relationship involved in this case since the petitioner was not sued because it is the parent company of PNB-IFL. Rather, the petitioner was sued because it acted as an attorney-in-fact of PNB-IFL in initiating the foreclosure proceedings. A suit against an agent cannot without compelling reasons be considered a suit against the principal." Corporation as a creation of law or by operation of law.

It is well-established that no corporation can exist without the consent or grant of the sovereign, and that the power to create corporations is one of the attributes of sovereignty. (18 Am. Jur. 2d 573.) (1) Special authority or grant by the State required. — A corporation is created by law or by operation of law. This means that corporations cannot come into existence by mere agreement of the parties as in the case of business partnerships. They require special authority or grant from the State. This power is exercised

44

Sec. 2


by the State through the legislature, either by a special incorporation law or charter which directly creates the corporation or by means of a general corporation law under which individuals desiring to be and act as a corporation may incorporate. In the Philippines, the general law which governs the creation of private corporations is Batas Pambansa Big. 68. Private corporations owned or controlled by the government can only be created by special laws (Constitution of the Philippines, Art. XII, Sec. 16.), often referred to as "charters." 7

8

An exception to the rule that legislative grant or authority is necessary for the creation of a corporation obtains with respect to corporations by prescription, (infra.) (2) Compliance with conditions prescribed by law required. — Corporations can only come into existence in the manner prescribed by law. General laws authorizing the formation of corporations are, in effect, general offers to any persons who may bring themselves within their provisions; and if condition precedents are prescribed in the statute, or certain acts are required to be done, they are terms of the offer and must be complied with substantially before legal corporate existence can be acquired. (18 C.J.S. 468.) A corporation as a creature of the State is presumed to be incorporated for the benefit of the public. It receives certain special privileges and franchises and holds them subject to the laws of the State and the limitations of its charter. There is a reserved right in the State to inquire how these privileges had been employed, and whether they had been abused. (Bataan Shipyard & Engineering Co., Inc. vs. PCGG, 150 SCRA 181 [1987].) Right of successio n of a c o r p o r a t i o n .

A corporation has a capacity of continuous existence irrespective of the death, withdrawal, insolvency, or incapacity of

'Article 45 of the Civil Code provides, among other things, that: "Private corporations are regulated by laws of general application on the subject. Partnerships and associations for private interest or purpose are governed by the provisions of this Code concerning partnerships." "Before the adoption of the 1935 Constitution, private corporations, whether government-owned or -controlled or not, could be created either by general or special law.

Sec. 2


45

the individual stockholders or members and regardless of the transfer of their interest or shares of stock. Thus, it is frequently said that one of the attributes of a corporation aggregate is immortality or perpetual succession. But the corporation is by no means immortal. (1) Under the Corporation Code, the life of the corporation is limited to the period of time stated in the articles of incorporation not exceeding 50 years from the date of incorporation unless sooner dissolved or unless said period is extended (Sec 11.) 9

(2) Corporations created by special laws have the right of succession for the term provided in the laws creating them. P o w e r s , attributes, a n d properties of a c o r p o r a t i o n .

A corporation, being purely a creation of law, may exercise only such powers as are granted by the law of its creation. An express grant, however, is not necessary. All powers which may be implied from those expressly provided by law and those which are incidental or essential to the corporation's existence may also be exercised, (see Sees. 36[11], 45.) 10

11

The test to be applied is whether the act of the corporation is in direct and immediate furtherance of its business, fairly incidental to the express powers and reasonably necessary to their exer'"Since ownership in the corporation may be transferred by a sale of its stock without the assent of the other owners (see Sec. 63.), the corporation is highly permanent — in some cases almost perpetual. Since the Dartmouth College case, 1918, in which the United States Supreme Court held that a charter granted by a State to a corporation was a binding contract and could not be altered by the State without the consent of the corporation (see Sec. 16.), state laws limit the life of the corporation usually to twenty or fifty years, (see Sec. 11.) New charters, however, are obtained without much difficulty." (C.L. James, Principles of Economics, 9th ed., p. 46; Barnes & Noble College Outline Series.) Strictly speaking, this is true only with respect to corporations created by special acts of the legislature. Those organized under the Corporation Code, a general law, are really the result of the contract of the parties. The State merely gives its approval to their agreement. "The powers that may be exercised by a corporation are not entirely dependent upon the State. The purpose or purposes of the corporation as stated in its articles of incorporation determine to a large extent the powers it may exercise, (see Sees. 10, 36[11].) Subject only to certain restrictions, the incorporators, stockholders, or members are entirely free to decide what the purpose or purposes of the corporation shall be. (see Sees. 14[2], 15[2nd].) 10

46


Sec. 2

rise. If so, the corporation has the power to do it; otherwise, not. (6 Fletcher, pp. 198-199; Montelibano vs. Bacolod-Murcia Milling Co., Inc., 5 SCRA 36 [1962].) (1) Thus, a corporation incorporated as a railroad corporation has the incidental power to build railroads because such power is necessary for the accomplishment of the purpose for which the corporation is created. (2) Similarly, a corporation expressly authorized to engage in agriculture has implied authority to buy agricultural lands because such authority is reasonably appropriate to carry out its express authority. (3) Likewise, a corporation engaged in the manufacture of cement could operate and maintain an electric plant for the purpose exclusively of supplying electricity to its cement factory and to its employees living within its factory compound where it appears that the operation of such plant is necessarily connected with the business of the manufacture of cement. (Teresa Electric and Power Co., Inc. vs. Public Service Commission, 21 SCRA 252 [1967].) (4) But a corporation organized for the purpose of supplying electricity to the public has no power to buy and sell agricultural lands because it is not within the power expressly or impliedly authorized by law or incidental to its existence, (see Sees. 36 and 45.) (5) Neither may a corporation authorized under its articles of incorporation to operate and otherwise deal in automobiles and automobile accessories and to engage in the transportation of persons by water, engage in the business of land transportation (e.g., operation of a taxicab service) because such would have no necessary connection with the corporation's legitimate business. (Luneta Motor Co. vs. A.D. Santos, Inc., 5 SCRA 809 [1969].) (6) Investment by a transportation company in an insurance corporation with transportation operators as stockholders, designed to reduce insurance costs, may be interpreted as an act which is reasonably requisite and necessary to carry out the business of land transportation, for the reason that insurance costs form part of the legitimate expenses of a transportation operator. (SEC Opinion, June 13,1961.)

Sec. 2


47

(7) Also, a corporation which is engaged, among others, in the manufacture of rubber shoes, slippers, sandals, and other allied products may be permitted to buy worn-out or used shoes and slippers to be reprocessed or reclaimed into raw materials which are to be used in the manufacture of its products, and to manufacture rubber cement, it appearing that the main ingredient in the manufacture of the same is rubber and rubber cement is a rubber product. (SEC Opinion, Dec. 15,1967.) (8) But a corporation engaged primarily in fishing, and to pursue this, it is empowered by its articles of incorporation "to operate cold storage plants x x x as may be necessary for the carrying on of the said primary objective of the corporation" cannot operate a cold storage plant or an ice plant as a public service operator since it can operate such plant only insofar as it may serve its primary purpose. (SEC Opinion, Feb. 17,1969.) (9) The power to create or establish branch offices is generally provided for in the articles of incorporation or in the by-laws. In the absence, however, of such a provision, every corporation formed under the law has the implied or incidental power to establish branch offices in the Philippines or elsewhere as the needs and exigencies of the business of the corporation may require. Thus, the board of directors of a corporation may, even in the absence of a provision in its articles of incorporation or by-laws, establish branch offices if it is necessary or convenient for the proper accomplishment of the purpose for which the corporation has been created. (SEC Opinion, March 2,1970.) (10) The Land Bank of the Philippines, being a commercial bank clothed with authority to exercise all the general powers mentioned in the Corporation Code and the General Banking Act, as provided in its charter, among which is the power to write off loans and advances, has been held to have also the lesser power to charge off or condone interests and penalties. (Land Bank of the Phils, vs. Commission on Audit, 190 SCRA 154 [1990].) Distinctions between a partnership a n d a corporation.

The following are the distinctions: (1) Manner of creation. — A partnership is created by mere

48


Sec. 2

agreement of the parties, while a corporation is created by law or by operation of law (Sec. 2.); (2) Number of incorporators. — A partnership may be organized by only two persons, while a corporation (except a corporation sole) requires at least five incorporators (Sec. 10.); (3) Commencement of juridical personality. — A partnership commences to acquire juridical personality from the moment of the execution of the contract of partnership, while a corporation begins to have corporate existence and juridical personality only from the date of the issuance of the certificate of incorporation by the Securities and Exchange Commission under its official seal (Sec. 19.); (4) Powers. — A partnership may exercise any power authorized by the partners provided it is not contrary to law, morals, good customs, public order, or public policy (Art. 1306, Civil Code.), while a corporation can exercise only the powers expressly granted by law or implied from those granted or incident to its existence (Sec. 2.); (5) Management. — In a partnership, when the management is not agreed upon, every partner is an agent of the partnership, while in a corporation, the power to do business is vested in the board of directors or trustees (Sec. 23.); (6) Effect of mismanagement. — In a partnership, a partner as such can sue a co-partner who mismanages, while in a corporation, the suit against a member of the board of directors or trustees who mismanages must be in the name of the corporation; (7) Right of succession. — A partnership has no right of succession, while a corporation has such right (Sec. 2.); (8) Extent of liability to third persons. — In a partnership, the partners (except limited partners) are liable personally and subsidiarily (sometimes solidarily) for partnership debts to third persons, while in a corporation, the stockholders are liable only to the extent of their investment as represented by the shares subscribed by them (see Sees. 66, 67.); (9) Transferability of interest. — In a partnership, a partner cannot transfer his interest in the partnership so as to make the

Sec. 2


49

transferee a partner without the consent of all the other existing partners because the partnership is based on the principle of delectus personarum, while in a stock corporation, a stockholder has the right to transfer his shares without the prior consent of the other stockholders because a corporation is not based on this principle (see Sec. 63.); (10) Term of existence. — A partnership may be established for any period of time stipulated by the partners, while a corporation may not be formed for a term in excess of 50 years extendible to not more than 50 years in any one instance (Sec. 11.); (11) Firm name. — A limited partnership is required by the law to add the word "Ltd." to its name, while a corporation may adopt any firm name provided it is not identical or deceptively similar to any registered firm name or contrary to existing law (see Sec. 18.); (12) Dissolution. — A partnership may be dissolved at any time by the will of any or all of the partners, while a corporation can only be dissolved with the consent of the State, (see Sees. 117122.) (13) Laws which govern. — A partnership is governed by the Civil Code, while a corporation is governed by the Corporation Code. Similarities b e t w e e n a partnership a n d a corporation.

The similarities are as follows: (1) Like a partnership, a corporation has a juridical personality separate and distinct from that of the individuals composing it; (2) Like a partnership, a corporation can act only through agents; (3) Like a partnership, a corporation (except a corporation sole) is an organization composed of an aggregate of individuals; (4) Like a partnership, a (stock) corporation distributes its profits to those who contribute capital to the business (although an industrial partner also shares in partnership profits);

Sec. 2


50

(5) Like a partnership, a corporation can be organized only where there is a law authorizing its organization. To organize a corporation or a partnership that could claim juridical personality of its own and transact business as such is not a matter of absolute right but a privilege which may be enjoyed only under such terms as the State may deem necessary to impose (Ang Pue & Co. vs. Sec. of Commerce and Industry, 5 SCRA 645 [1962].); and (6) A partnership, no matter how created or organized, is taxable as a corporation, subject to income tax. (Sec. 24[a], National Internal Revenue Code.) 12

Corporation as a partner.

(1) General rule. — According to the prevailing view, corporations cannot ordinarily enter into partnership" with other corporations or with individuals. The reasons are as follows: (a) A corporation can only act through its duly authorized officers and agents and is not bound by the acts of anyone else, while in a partnership, each member binds the firm when acting within the scope of the partnership business. In entering into a partnership, the identity of the corporation is lost or merged with that of another and the direction of its affairs is placed in other hands than those provided by the law of its creation (SEC Opinion, Jan. 26, 1961, citing 6 Fletcher, pp. 325-326.); (b) The limitation is based on grounds of public policy, since in a partnership the corporation would be bound by the acts of persons who are not its duly appointed and authorized agents and officers, which would be entirely inconsistent with the policy of the law that the corporation shall manage its own affairs separately and exclusively (13 Am. Jur. 830.) through the directors (or trustees) or officers chosen by the stockholders (or members); and "Except general professional partnerships or "partnerships formed for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business." (Sec. 20[b], NIRC.) A corporation may be a "partner" under the Uniform Partnership Act. (see Sees. 2, 6 thereof.) 13

V

Sec. 2


51

(c) Furthermore, such an arrangement would permit the corporate assets to be subjected to risks and liabilities not contemplated by the stockholders at the time of making their investment. (19 Am. Jur. 2d 505.) (2) Exceptions. — The rule, however, is not absolute. (a) Though a corporation has no power to enter into a partnership, it may, however, enter into a joint venture with another where the nature of that venture is in line with the business authorized by their charters, (see Sec. 36[7].) Thus, a corporation may be represented by another person, natural or juridical, in a suit in court, where there is nothing in the record to indicate that this venture in which the former is represented by the latter as "its managing partner" is not in line with the corporate business of either of them. (J.M. Tuazon & Co., Inc. vs. Bolanos, 95 Phil. 106 [1954].) 14

A joint venture need not be registered with the Securities and Exchange Commission provided it does not result in the formation of a new corporation or partnership, and provided further that existing laws governing joint ventures and implementing rules and regulations are complied with. (SEC Opinions, March 18,1993 and No. 04-42, Sept. 28,2004.) (b) A joint venture partnership between a foreign corporation licensed to do business in the Philippines and a domestic corporation (or an individual) "for the purpose of undertaking certain phases of the construction of the Philippine Sintering Plant in Misamis Oriental, an economic development project registered as a pioneer enterprise with the Board of Investments," with the manager of the "It is an association of two or more persons to carry out a single business enterprise for profit. It relates to a single transaction rather than to a continuous business (L. Teller, Law of Partnership, 1949 ed., p. 20.) and is, thus, temporary. A joint venture falls within the meaning of the term "particular partnership" as defined in Article 1783 of the Civil Code, which provides: "A particular partnership has for its object determinate things, their use or fruits, or a specific undertaking, or the exercise of a profession or vocation," and thus is governed by the Civil Code provisions on partnership. But while a corporation cannot enter into a partnership contract, it may engage, according to the Supreme Court, in a joint venture with others although "a joint venture is a form of partnership and should thus be governed by the law of partnerships." (Aurbach vs. Sanitary Wares Manufacturing Corp., 180 SCRA 130 [1989].)

52


Sec. 2

partnership to be appointed jointly by the partners from among those nominated by the foreign corporation, may be allowed provided that the agreement expressly stipulates that both parties shall be jointly and severally liable for all the obligations of the partners in the Philippines. (SEC Opinion, Dec. 2,1974.) (c) Where the partnership agreement provides that the two partners will manage the partnership so that the management of the corporate interest is not surrendered, the general rule will not apply. The Securities and Exchange Commission, to meet the objection to allowing a corporation to enter into a contract of partnership, may impose proper safeguards and conditions, particularly where the other partner is an entity organized under a foreign law. (SEC Opinions, Dec. 22,1966 and Aug. 31,1971.) (d) While as a rule, only natural persons are considered legally capable of entering into a contract of partnership, there have been cases where the Securities and Exchange Commission has allowed corporations to enter into partnerships with other corporations or with individuals, provided: 1) All the corporation partners must be managing partners and consequently, the articles of partnership must stipulate that all the partners are and shall be solidarily liable (see Arts. 1207,1208, Civil Code.) for all the obligations of the partnership; 15

2) The statute or their respective charters or articles of incorporation must expressly allow the corporations

"Under this condition, a partnership of corporations should be organized as a general partnership wherein all the partners are general partners. In such a situation, all corporate partners shall take part in the management and are solidarily liable with the other partners, (see Arts. 1776,1816,1822-1824, Civil Code.) It may be true that a limited partner is given the option "to take part in the management" of a limited partnership (see Arts. 1843,1848, Ibid.), but if a corporation is allowed to be a limited partner only, there is no assurance that it shall participate in the management of the partnership as required, and this may create a situation wherein the corporations may not be bound by the acts of the partnership in the event that, as a limited partner, it opts not to participate in the management, thereby defeating the policy requiring that all partners of a partnership composed of corporations shall be jointly and severally liable for all the obligations of the partnership. (SEC Opinion, Feb. 23,1994.)

Sec. 2


53

to enter into partnership agreement and the nature of the business venture to be undertaken by the partnership is in line with the business authorized by law or the articles of incorporation of the constituent corporations; and 3) Where one of the partners is a foreign corporation, it must obtain a license to transact business in the country in accordance with the Corporation Code (Sec. 123.) and the Foreign Investments Act. (see SEC Opinion, Dec. 1,1993.) The corporation-partners shall embody the terms and conditions of their relationship in the partnership agreement and upon approval by the Securities and Exchange Commission, the partnership shall attain a juridical personality separate and distinct from the corporation-partners. (Art. 1768, Civil Code.) The liability of the corporation-partners shall not be limited to their contributions (Art. 1816, Ibid.) and even the dissolution of a corporation-partner does not terminate a joint venture to which it is a party so as to relieve the corporation of obligations incurred by reason of its entering into the venture. (SEC Opinion, Aug. 24, 1981.) (3) As a limited partner. — A foreign corporation can be a limited partner in a Philippine limited partnership in view of the following: (a) There is no existing Philippine law expressly prohibiting a foreign corporation from becoming a limited partner in a partnership; (b) Just as a corporate investor has the power to make passive investments in other corporations by purchasing stock, a corporate investor should also be allowed to make passive investments in a partnership as a limited partner. By being a limited partner, the corporation would not be bound beyond the amount of its investment by the acts of the other partners who are not its duly appointed and authorized agents and officers; (c) Section 42 of the Corporation Code which permits a corporation to invest its funds in another corporation or business, does not require that the investing corporation be

54


Sec. 2

involved in the management of the investee corporation with a view to protect its investment. Accordingly, there is no risk that a corporate limited partner would be solidarily liable with the partnership; (d) Jurisprudence and common commercial practice in the United States indicate that corporations are not barred from acting as limited partners; and (e) Such a ruling would be consistent with the policy to encourage and facilitate domestic and foreign investments in Philippine business enterprises. The foreign corporation still has to obtain a license to do business in the Philippines and must be authorized under its articles of incorporation to enter into a partnership agreement. (SEC Opinion Aug. 17, 1995.) It is believed that a license is not required where the participation of the foreign corporation as a limited partner in a partnership is merely for investment purposes and it shall not take part in the management and control of the partnership as it shall not be deemed "doing business" in the Philippines, (see Sees. 123-126.) Advantages of a busines s c o r p o r a t i o n .

The advantages are the following: (1) The corporation has a legal capacity to act and contract as a distinct unit in its own name; (2) It has continuity of existence because of its non-dependence on the lives of those who compose it; (3) Its credit is strengthened by such continuity of existence; (4) Its management is centralized in the board of directors; (5) Its creation, organization, management, and dissolution are standardized as they are governed under one general incorporation law; (6) It makes feasible gigantic financial undertakings since it enables many individuals to invest their separate funds in the enterprise in order to furnish large amounts of capital upon which big business depends; (7) The shareholders have limited liability;

Sec. 3


55

(8) They are not general agents of the business; and (9) The shares of stocks can be transferred without the consent of the other stockholders. D i s a d v a n t a g e s of a b u s i n e s s corporation.

They are as follows: (1) The corporation is relatively complicated in formation and management; (2) It entails relatively high cost of formation and operations; (3) Its credit is weakened by the limited liability of the stockholders; (4) There is ordinarily lack of personal element in view of the transferability of shares; (5) There is a greater degree of governmental control and supervision than in any other forms of business organization; (6) In large corporations, management and control are separated from ownership; (7) The stockholders' voting rights have become theoretical particularly in large corporations because of the use of proxies and widespread ownership; and (8) The stockholders have little voice in the conduct of the business. Sec. 3. Classes of corporations. — Corporations formed or organized under this Code may be stock or non-stock corporations. Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held are stock corporations. All other corporations are non-stock corporations. (3a)*

'Signifies section number of original provision in Act No. 1459 and that the provision has been amended.

56


Sec. 3

Classification of corporations under the Code.

The Corporation Code classifies private corporations into stock and non-stock corporations, according to whether their membership is represented by shares of stock or not. (1) A stock corporation is the ordinary business corporation created and operated for the purpose of making a profit which may be distributed in the form of dividends to stockholders on the basis of their invested capital. The two (2) elements mentioned in Section 3 must be present to make a private corporation fall under the definition of a stock corporation. (2) Unlike stock corporations, non-stock corporations do not issue stock and distribute dividends to their members; they are created not for profit but for the public good and welfare. Of this character are most of the charitable, religious, social, literary, scientific, civic, and political organizations and societies. Nonstock corporations are primarily governed by Title XI (Sees. 8795.) of the Code. The provisions governing stock corporations, when pertinent, are applicable to non-stock corporations except as may be covered by specific provisions of Title XI. (Sec. 87.) Generally, a corporation may be organized either as a stock or non-stock such as educational corporations, (see Sees. 106108.) But some kinds of corporations cannot be organized except in the form of stock corporations, like banks (Sec. 7, R.A. No. 337.) and close corporations, (see Sec. 96.) A religious corporation is always non-stock, (see Sec. 109.) Other classifications of corporations .

There are other classifications of corporations, such as those enumerated below. (1) As to number of persons who compose them: (a) Corporation aggregate or a corporation consisting of more than one member or corporator; or (b) Corporation sole or a special form of corporation usually associated with the clergy. Under the Code, it is a reli-

Sec. 3


57

gious corporation which consists of one member or corporator only and his successors, such as a bishop. (Sec. 110.) All other corporations must be corporation aggregate, that is, they must be formed by "not less than five (5)" persons, (see Sec. 10.) A corporation aggregate does not become a corporation sole by the mere fact that its shares of stock become vested in one person because the shares may again be transferred or sold by the holder to others. In the meantime, however, the holder and the corporation may be treated as the same. (2) As to whether they are for religious purposes or not: (a) Ecclesiastical corporation or one organized for religious purposes. Under the Code, religious corporations are classified into corporations sole and religious societies (Sec. 109, par. 2.); or (b) Lay corporation or one organized for a purpose other than for religion. Lay corporations, in turn, may be either eleemosynary or civil. (3) As to whether they are for charitable purposes or not: (a) Eleemosynary corporation or one established for or devoted to charitable purposes or those supported by charity; or (b) Civil corporation or one established for business or profit, i.e., with a view toward realizing gains to be distributed among its members. (4) As to State under or by whose laws they have been created: (a) Domestic corporation or one incorporated under the laws of the Philippines; or (b) Foreign corporation or one formed, organized, or existing under any laws other than those of the Philippines. It includes multinational corporations created under the laws of another State, (see Sec. 123.) For tax purposes, a foreign corporation is further classified into resident or non-resident. (supra.)


58

Sec. 3

(5) As to their legal right to corporate existence: (a) Dejure corporation or a corporation existing in fact and in law; or (b) De facto corporation or a corporation existing in fact but not in law. (see Sec. 21.) (6) As to whether they are open to the public or not: (a) Close corporation or one which is limited to selected persons or members of a family (see Sees. 96-105.); or (b) Open corporation or one which is open to any person who may wish to become a stockholder or member thereto. (7) As to their relation to another corporation: (a) Parent or holding corporation or one which is so related to another corporation that it has the power, either directly or indirectly, to elect the majority of the directors of such other corporation; 16

(b) Subsidiary corporation or one which is so related to another corporation that the majority of its directors can be elected either directly or indirectly by such other corporation. It is one in which another corporation owns at least a majority of the shares and thus has control; or 17

(c) Affiliated corporation or one related to another by owning or being owned by common management or by a longterm lease of its properties or other control device. An affiliation exists between a holding or parent company and its subsidiary, or between two corporations owned or controlled

It is a corporation organized to hold the stock of another or other corporations enabling it to control or substantially influence the policies and management of such corporation or corporations. It holds stock in other companies for purposes of control rather than for mere investment. Normally, a corporation is considered a wholly-owned subsidiary only if the rest of the stockholders, other than the parent company, own one (1) share in the corporation and only for purposes of qualifying them as incorporators and/or directors. Where the corporation is not such a wholly-owned subsidiary (i.e., some stockholders own more than one share), the SEC ruling that "dividends either in the form of cash or stock should be declared on the basis of the outstanding capital stock held by the stockholders and any transfer thereof must be done only after the amount declared has been proportionately distributed to the stockholders" is applicable. (SEC Opinion, Oct. 17,1994.) 16

17

Sec. 3


59

by a third. (E.L. Kohler, A Dictionary for Accountants, 1975 ed., p. 26.) (8) As to whether they are for public (government) or private purpose: (a) Public corporations or those formed or organized for the government of a portion of the State for the general good and welfare; or (b) Private corporations or those formed for some private purpose, benefit, or end; it may be either a stock or non-stock corporation, government-owned or -controlled corporation or quasi-public corporation. The true test is the purpose of the corporation. If the corporation is created by the State as its own agency or instrumentality for political or public purpose connected with the administration of government, then it is a public corporation. If not, it is a private corporation notwithstanding that it is created to promote public good, interest, or convenience although the whole, or substantially the whole interest in the corporation, belongs to the State. In the Philippines, the public corporations are the provinces, cities, municipalities, and barangays. In addition, the Constitution mandates the creation of autonomous regions in Muslim Mindanao and the Cordilleras, (see Art. X, Sec. 1 thereof.) These local units are also called municipal corporations or local governments. The Code eliminated the classification of corporations into public or private obviously for the reason that it applies only to private corporations. Private corporations include: 1) Government-owned or -controlled corporations or those created or organized by the government or of which the government is the majority stockholder. 18

It may be organized as a stock or non-stock corporation. A government instrumentality (e.g., Manila International Airport Authority), which is neither a stock or non-stock corporation vested with corporate powers to perform efficiently its governmental functions, does not qualify as a government-owned or -controlled corporation. It remains part of the national Government machinery although not integrated with the department framework. (Manila International Airport Authority vs. Court of Appeals, 295 SCRA 591 [2006].) la


60

Sec. 3

These corporations are private and not public corporations because they are not established for the government of a portion of the State. Where the government engages in a particular business thru the instrumentality of a corporation, it divests itself pro hac vice of its sovereign character, so as to subject itself to the rules governing private corporations. (Phil. National Bank vs. Pabalan, 83 SCRA 595 [1978].) Examples are the Government Service Insurance System, National Power Corporation, Philippine National Railways, etc.; ' and 1

2) Quasi-public corporations or private corporations which have accepted from the State the grant of franchise or contract involving the performance of public duties (1 Fletcher, p. 216.) but which are organized for profit. They have been denned also as corporations private in owner-

It has been ruled that employees of government-owned or -controlled corporations, whether formed by special law or under the Corporation Code (except private firms taken over by the government in foreclosure or similar proceedings), are governed by the Civil Service Law (Pres. Decree No. 807, as amended.) and not by the Labor Code (Pres. Decree No. 442, as amended.) in view of Article XII-B, Section 1 of the 1973 Constitution, which provides: "The Civil Service embraces every branch, agency, subdivision and instrumentality of the Government, including every government-owned or -controlled corporation." A dissenting opinion holds that the constitutional provision contemplates only those corporations created by special law. "Whether a corporation is government-owned or -controlled depends upon the purpose of the inquiry. A corporation may be 'government-owned or -controlled' for one purpose but not for another. In other words, it is not possible to broadly categorize a corporation as 'government-owned or -controlled.' Thus, if the National Housing Corporation (which was created pursuant to Act No. 1459, the former Corporation Law) is not covered by the Civil Service, it is not necessarily covered by the Labor Code. For it may well be that the NHC is in limbo." (National Housing Corp. vs. Juco, 134 SCRA 172 [1985].) The ruling in Juco is no longer applicable. Under the present Constitution, only government-owned or -controlled corporations "with original charter" (i.e., created by special law and not under the Corporation Code) are embraced within the Civil Service. (Art. IX, B-Sec. 2[1] thereof.) But a private corporation acquired by the government utilizing public funds, while retaining its corporate existence, becomes a government-owned or -controlled corporation within the constitutional precept of public accountability (see Art. XI, Sec. 1, Ibid.) and its employees are, therefore, public servants, falling within the investigatory and prosecutory power of the Office of the Ombudsman for purposes of the Anti-Graft and Corrupt Practices Act. (Quimpo vs. Tanodbayan, 146 SCRA 137 [1986].) Neither are government-owned or -controlled corporations which are organized as subsidiaries of such corporations under the Corporation Code included in the Civil Service. (Bliss Development Corp. Employees Union vs. Calleja, 237 SCRA 271 [1994].) Their employees are subject to the provisions of the Labor Code. I9

Sec. 3


61

ship but having an appropriate franchise from the State to provide for a necessity or convenience of the general public, incapable of being furnished through the ordinary channels of private competitive business and dependent for its exercise upon eminent domain or some agency of the government. (Ibid., p. 217.) They are private corporations that perform public service. 20

These corporations are also known as "public utilities" or "public service corporations." Examples of these corporations are those organized as electric, water, telephone and transportation companies. Because the business in which they are engaged are impressed with a public interest, they may not engage in that business without authority of the State in the form of franchise. Neither may they cease engaging in that business unless the State permits them to do so. A quasi-public corporation is given certain powers of a public nature — such as the power of eminent domain — in order to enable it to discharge its duties for the public benefit, in which respect it differs from an ordinary private corporation, the powers of which are given and exercised exclusively for the profit and advantage of its stockholders. (18 Am. Jur. 2d 555.) 21

(9) As to whether they are corporations in a true sense or only in a limited sense: ^The fact that a certain juridical entity is impressed with public interest does not, by that circumstance alone, make the entity a public corporation, inasmuch as a corporation may be private although its charter contains provisions of a public character, incorporated solely for the public good. This class of corporations may be considered quasi-public corporations, which are private corporations that render public service, supply public wants, or pursue other eleemosynary objectives. While purposely organized for the gain or benefit of its members, they are required by law to discharge functions for the public benefit. (Phil. Society for the Prevention of Cruelty to Animals vs. Commission on Audit, 534 SCRA 112 [2007].) "The juridical entities known as water districts created by Presidential Decree No. 198 have been held as quasi-public corporations, performing public services and supplying public wants and are entirely distinct from corporations organized under the Corporation Code. The function of supervision or control over them is entrusted to the Local Water Utilities Administration (LWUA), a government corporation established by the decree. (Marilao Water Consumers' Assoc. vs. Intermediate Appellate Court, 201 SCRA 437 [1991].)

62


Sec. 3

(a) True corporation or one which exists by statutory authority; or (b) Quasi-corporation or one which exists without formal legislative grant. It is an exception to the general rule that a corporation can exist only by authority of law. It may be: 1) Corporation by prescription or one which has exercised corporate powers for an indefinite period without interference on the part of the sovereign power and which by fiction of law is given the status of a corporation. (1 Fletcher, p. 415.) The Roman Catholic Church has been recognized as a corporation by prescription, having acted as such and assumed corporate powers for a long period of time. According to the Supreme Court, it "antedates by almost a thousand years any other personality in Europe and existed when the Grecian eloquence still flourished in Antioch and when idols were still worshipped in the temples of Mecca, x x x. Persecuted as an unlawful association since the early days of its existence up to the time of Galieno, who was the first of the Roman emperors to admit it among the the juridical entities protected by the laws of the Empire, it existed until then by mercy and will of the faithful and depended for such existence upon pious gifts and offerings. Since the latter half of the third century, and more particularly since the year 313, when Constantine, by the Edict of Milan, inaugurated an era of protection for the church, the latter gradually entered upon the exercise of such rights as were required for the acquisition, preservation, and transmission of property the same as any other juridical entity under the laws of the Empire, x x x" (Barlin vs. Ramirez, 7 Phil. 41 [1906].); or 2) Corporation by estoppel or one which in reality is not a corporation, either de jure or de facto, because it is so defectively formed, but is considered a corporation in relation to those only who, by reason of their acts or admissions, are precluded from asserting that it is not a corporation. This legal assumption is not good, however,

Sec. 3


63

as against the State but may arise only for purposes of private litigation. Corporation by estoppel is another instance whereby a corporation may exist without formal statutory authority. It has no real existence in law as has a de facto corporation but is a mere fiction. (8 Fletcher, pp. 218-219; see Sec 21.) Important distinctions b e t w e e n public a n d private c o r p o r a t i o n s .

The most important division of corporations is into public and private, for there are many principles of law which apply to the former and not to the latter. (1) The most important distinction is with respect to governmental control. Public corporations, being mere instrumentalities of the State, are subject to governmental visitation and control, whereas the charter of a private corporation is a contract between the State and the corporation or incorporators, which, under the provision of the Constitution prohibiting laws impairing the obligation of contracts, renders such corporations not subject to visitation, control, or change by the State, except in the exercise of the police power. (2) Another distinction is that a public corporation may be created without the consent of the locality to be affected, whereas the consent of the incorporators is necessary to the creation of a private corporation. (3) The distinction is also important with respect to taxation, to the question of liability for the torts or negligence of officers and agents, and to various other questions. (14 C.J. 72-73.) Dual status of public corporations.

A public or municipal corporation possesses two kinds of power, governmental or public and proprietary or private, and in the exercise of the former, it is a "municipal government," while as to the latter, it is a "corporate legal individual." (see 9-A Words and Phrases 391.)

64


Sec. 4

A public corporation engaged in the performance of governmental or public functions {e.g., maintenance of peace and order) as distinguished from corporate or proprietary functions (e.g., operation of a public market), in the absence of statute, is not liable for damages occasioned by the negligent or wrongful actions of its officers, agents, or employees. The test for distinguishing the first kind of power from the second, and consequently, in determining liability or nonliability for torts of its agents, is whether the act performed is for the common good or whether it is for the special benefit or profit of the corporate entity, (see Ibid., p. 390.) Sec. 4. Corporations created by special laws or charters. — Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by the provisions of this Code, insofar as they are applicable, (n)* Incorporation of a private corporatio n by a special act.

Section 4 authorizes the creation of private corporations by special laws or charters. The enactment of special act creating a private corporation is subject to the constitutional limitation that such corporation shall be owned or controlled by the government. (Constitution of the Philippines, Art. XII, Sec. 16.) The reason for the restriction is obvious: (1) It is chiefly to prevent the granting of special privileges to one body of men without giving all others the right to obtain them in the same conditions; and (2) Perhaps, it is partly to prevent bribery and corruption of the legislature. (Clark on Corporations, p. 45.) A special law creating a private corporation which is neither owned nor controlled by the government is void for being violative of the constitutional provision, (see National Development Co. vs. Phil. Veterans Bank, 192 SCRA 257 [1990].) 'ignifies that the provision is new, not found in Act No. 1459.

Sec. 4


65

G o v e r n i n g law.

(1) A corporation created by a special law or charter is primarily governed by such law and suppletorily, by the provisions of the Code "insofar as they are applicable," either because they are not inconsistent with, or are expressly made applicable by, the special law. Thus, it has been held that the Philippine National Bank (PNB), having a charter of its own (R.A. No. 1300, as amended.), was not governed, as a rule, by the Corporation Code. In view of Sections 15, 16, and 30 of its charter, the provision of Section 74 of the Code with respect to the right of a stockholder to demand an inspection or examination of the books of the corporation does not apply even in a supplemental capacity to said bank. (Gonzales vs. Phil. National Bank, 122 SCRA489 [1983].) The Philippine National Red Cross (PNRC) is a government-owned and -controlled corporation with an original charter under R.A. No. 95, as amended. (Baluyot vs. Holganza, 325 SCRA 248 [2000].) 22

23

(2) Under the Constitution (Art. IX, B-Sec. 2[1] thereof.), officers and employees of government-owned or -controlled corporations with original charters, i.e., created by special law, are placed under the Civil Service, and thus, subject to Civil Service Law. Those incorporated under the general incorporation law, the Corporation Code, are governed by the Labor Code. (3) A government-owned or -controlled corporation may be organized under the provisions of the Corporation Code and not by special law. Therefore, it would be proper to increase its capitalization by amending its articles of incorporation (see Sec. 16.) pursuant to the Corporation Code instead of Congress passing legislation to this effect. (SEC Opinion, July 10,1997.)

See Presidential Decree No. 2029 (Feb. 4, 1986) "defining government-owned or -controlled corporations and identifying their role in national development." Section 15 provides that the bank shall be subject to inspection by the Department of Supervision and Examination of the Central Bank; Section 16 declares as confidential the information obtained from such inspection; and Section 30 imposes penalties for violation of the provisions of the Act. R.A. No. 1300 was superseded by Presidential Decree No. 694, the 1975 Revised Charter of the Philippine National Bank. The corresponding provisions are Sections 19, 20, and 34, respectively. The Philippine National Bank is now privately owned. 22

23

66


Sec. 5

Government as a member of a corporation.

(1) Jurisdiction of SEC. — The Securities and Exchange Commission (SEC) has no jurisdiction over corporations with original charter or created by special law. It follows that it has no power to interpret the law creating it. However, the SEC can rule on the status of a corporation as to whether it is a government-owned or -controlled corporation belonging to this type. It has jurisdiction to determine this issue, (see Phil. National Construction Corporation vs. Pabion, 320 SCRA 188 [1999].) (2) Rights, Powers, or privileges. — As a member of a corpo-

ration, the government never exercises its sovereignty; it acts merely as a corporator. (18 Am. Jur. 2d 584.) And the mere fact that the government happens to be a majority stockholder of a corporation does not make it a public corporation. As a private corporation, it has no greater rights, powers, or privileges than any other corporation organized for the same purpose under the Corporation Code. (National Coal Co. vs. Collector of Internal Revenue, 46 Phil. 583 [1924].) Sec. 5. Corporators and incorporators, stockholders and members. — Corporators are those who compose a corporation, whether as stockholders or members. Incorporators are those stockholders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof. Corporators in a stock corporation are called stockholders or shareholders. Corporators in a non-stock corporation are called members. (4a) C o m p o n e n t s of a corporation.

The four classes of persons composing a corporation are the following: (1) Corporators or those who compose the corporation, whether stockholders or members. Hence, the term includes incorporators and stockholders or members who become as such after incorporation of the corporation;

Sec. 5

"TITLE I. GENERAL PROVISIONS Definitions and Classifications

67

(2) Incorporators or those corporators mentioned in the articles of incorporation as originally forming and composing the corporation and who executed and signed the articles of incorporation and acknowledged the same before a notary public, (see Sees. 14,15.) So, all incorporators are corporators but a corporator is not necessarily an incorporator. The principal function of the incorporator is to incorporate the corporation and to enable it to become a body politic and corporate under the law. While the status of a corporator is temporary because one may cease to be a stockholder or member, an incorporator will forever retain his status as such, notwithstanding that he has ceased to be a corporator. The articles of incorporation cannot be amended by deleting his name or substituting it with that of another who is not an incorporator. Only natural persons can be incorporators (Sec. 10.); (3) Stockholders or the owners of shares of stock in a stock corporation. They are the owners of the corporation. They are also called shareholders. They are the corporators in a stock corporation. Stockholders may be natural or juridical persons but only natural persons can be incorporators. (Sec. 10.) Under Section 3, a corporation, to be classified as a stock corporation, (a) must have capital stock divided into shares, and (b) must be "authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held"; and (4) Members or corporators of a corporation which has no capital stocks. All incorporators in a stock corporation must now own or at least be a subscriber to at least one (1) share of the capital stock of such corporation. (Sec. 10.) Under the old rule, members include corporators of a stock corporation who do not own capital stock. In other words, a stock corporation may be composed of stockholders and members, the latter referring to incorporators who do not own shares of stock. It was not required that an incorporator be a subscriber for stock as long as the minimum capital requirements are complied with. The Code eliminated this rule.

68


Sec. 5

Three other classes.

There are three other classes of persons who play important roles in the formation and organization of a corporation, namely: (1) Promoters or persons who bring about or cause to bring about the formation and organization of a corporation by bringing together the incorporators or the persons interested in the enterprise, procuring subscriptions or capital for the corporation and setting in motion the machinery which leads to the incorporation of the corporation itself. Simply signing and verifying the articles of incorporation and subscribing for stock in the proposed company is said, however, not to make one a promoter thereof. (18 Am. Jur. 2d 647.) When used in connection with corporations, the term refers to persons who undertake the formation of a corporation without their being incorporators. They lay the groundwork for corporate existence; (2) Subscribers or "persons who have agreed to take and pay for original, unissued shares of a corporation formed or to be formed." (Ballantine on Corporations, p. 375; see Sees. 60,61.) So, a subscriber may not be a stockholder. He becomes a stockholder only from the time his subscription is accepted by the corporation or the corporation's offer is accepted by him. Technically, a person is not a stockholder (or member) unless he is recorded as such in the books of the corporation, (see Sec. 62.) All incorporators (supra.) are subscribers but a subscriber need not be an incorporator; and (3) Underwriter or "a person, usually an investment banker, who (a) has agreed, alone or with others, to buy at stated terms an entire issue of securities or a substantial part thereof; or (b) has guaranteed the sale of an issue by agreement to buy from the issuing party any unsold portion at a stated price; or (c) has agreed to use his "best efforts" to market all or part of an issue; or (d) has offered for sale stock he has purchased from a controlling stockholder." (E.L. Kohler, op. cit., p. 480; for definition of the term under the Securities Regulation Code [R.A. No. 8799], Appendix "A," see Sec. 3[1.15] thereof, and under the Investment Company Act [R.A. No. 2629], Sec. 3[dd] thereof.)

Sec. 6


69

A g r e e m e n t or contract with a corporation. (1) Between corporators and corporation. — It is essential to the

existence of a private corporation that there shall be an agreement between the corporators and the corporation creating a contractual relation between them. There can be no such thing as a corporation aggregate without members, and a person cannot become a member except by his own agreement or contract. (2) Between each member and corporation. — Some writers and

some cases say that there must be an agreement between the members creating a contractual relation between them, but this is inaccurate. There is ordinarily no contract between individual members in the formation of a corporation. The contract is between each individual member and the whole body of members in their collective capacity, represented by the corporation, that is, between each member and the corporation. A subscription for shares, for instance, in the organization of a corporation is not a contract between the subscriber and the other subscribers individually, but it is a contract between each subscriber and the corporate body. (Clark on Corporations, Sec. 27.) Sec. 6. Classification of shares. — The shares of stock corporations may be divided into classes 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 to the corporation in case of liquidation and in the distri-


Sec.

bution 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 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 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 liable to the corporation or to its creditors in respect thereto: Provided, That shares without par value may not be issued for a consideration less than the value of five pesos (P5.00) 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. A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements. Except as otherwise provided by the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share. Where the articles of incorporation provide for nonvoting 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;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; 4. ness; 5.

Incurring, creating or increasing bonded indebtedIncrease or decrease of capital stock;

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

Sec. 6


71

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

Dissolution of the corporation.

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. (5a) P o w e r to classify s h a r e s .

The shares of stock corporations "may be divided into classes or series of shares, or both, any of which classes or series of shares may have rights, privileges or restrictions as may be stated in the articles of incorporation" (Sec. 6, par. 1.), not merely in the bylaws. (Title V.) Unless restricted by the law or the provision of its articles of incorporation (see Sees. 14, 15.), a corporation has unrestricted freedom to issue such classes or series of shares as the prospects and needs of its business may require to attract investors. A "series" refers to a subdivision of a class of shares. The primary classification of shares is common and preferred, each of which may be divided into other classes, (infra.) Thus, shares of stock may differ with respect to voting rights, dividend rights, and, in case of liquidation, rights to corporate assets. There must be at least one class of stock, and by Section 6 (par. 1.), a corporation must have at least one class of stock with voting rights. 24

A corporation may issue only one class or kind of share. W h e n classification of s h a r e s may be made.

(1) By the incorporators. — The classes and number of shares which a corporation shall issue are first determined by the incorporators as stated in the articles of incorporation filed with the Securities and Exchange Commission. "Where no difference in "rights, privileges or restrictions" is provided for as required by Section 6, as where "the only difference between the series is that only B-l Series shall be initially offered to the public and sold through the exchanges while B-2 Series shall be similarly offered and sold at a later date as the board of directors may determine," the classification should not be allowed. (SEC Opinion, March 15,1989.)


72

Sec. 6

(2) By the board of directors and the stockholders. — After the

corporation comes into existence, they may be altered by the board of directors and the stockholders by amending the articles of incorporation pursuant to Section 16. If the amendment changes or restricts the rights of any class of shares, or authorizes preferences in any respect superior to those of outstanding shares of any class, any stockholder shall have the right to dissent and demand payment of the fair value of his shares. (Sec. 81.) Classification to comply with constitutional or legal requirements.

(1) A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements (Sec. 7, par. 4.), such as those which prescribe the minimum percentage of capital stock ownership of Filipino citizens in corporations engaged in any business or activity reserved for Filipino citizens (see Sec. 15[11].), or set the maximum limits for stockholdings in corporations declared by law to be vested with public interest, (see Sec. 140, par. 2.) Thus, the articles of incorporation may classify shares of stock into Class "A" and Class " B " and provide that Class "A" shares shall be held exclusively by Filipino citizens only, while Class " B " shares, by either Filipino citizens or foreigners. In such case, aliens or foreign corporations cannot own "A" shares; otherwise, it would be tantamount to amending the articles of incorporation contrary to Section 16. The articles, however, may permit aliens to buy "A" shares. 25

^With the general perception that the country is dependent on foreign investments, many local investors invest in "B" shares, thereby creating a bigger demand for said shares which are limited. The lopsided market has developed a psychological advantage and a dual pricing scheme in favor of "B" shares at the expense of "A" shares. The resulting premium for "B" shares has been under attack from foreign fund managers who questioned the wisdom of paying for a higher price than the "A" shares which are, with exemption on foreign ownership, the same security with the same risks and yield. In many cases, the local investors are the ones maintaining the relative strong performance of "B" shares in the absence of foreign investors. Without the classification, local investors will invest more in a particular issue not because foreigners are investing but because of good potentials and foreigners can buy more shares so long as they do not exceed the equity limit prescribed by the Constitution and existing laws. This will require strict monitoring to make sure that the limits on foreign ownership will always be observed. V* ^ r e s o f listed firms t o remain classified a s "A" and "B" shares, while requiring firms still planning to go public to declassify their shares. e p

o

U

c

y o f S

E

C

t o a

l

l

o

w s h a

Sec. 6


73

(2) Corporations classify shares for reasons of expediency, primarily for monitoring purposes. The par value or number of one class of shares may be more than the others. The classification of common shares of stocks into Class "A" and Class " B " shares have never been obligatory. Some corporations which engage in business where there is a cap on foreign ownership classify their shares with the number of B shares corresponding to the maximum percentage of foreign ownership allowed so that they won't have to keep checking on their foreign shareholders. Since the Constitution does not distinguish between common and preferred shares, the latter kind of shares should be included in the computation of the foreign ownership limit for domestic corporations. This gives more room for additional foreign investments. Shares presumed to be equal in all respects.

The law provides that "Except as otherwise provided by the articles of incorporation and stated in the certificate of stock, each share shall be in all respects equal to every other share." (Sec. 6, par. 5.) This is the doctrine of equality of shares. It means that in

the absence of any provision in the articles of incorporation and in the certificate of stock to the contrary, all stocks, regardless of their class nomenclature, enjoy the same rights and privileges and subject to the same liabilities. 26

(1) Authority of the board of directors to classify others. — The

board of directors has no authority to classify shares of stock where the articles of incorporations are silent on the matter. Hence, a corporation cannot, without express authority in the articles of incorporation, and without amendment thereof, issue preferred shares with superior rights and privileges than other

"In the absence of special provisions, the holders of preferred stock in a corporation are in precisely the same position, both with respect to the corporation itself and with respect to the creditors of the corporation, as the holders of the common stock, except only that they are entitled to receive dividends on their shares, to the extent guaranteed or agreed upon, before any dividend can be paid to the holders of common stock. (SEC Opinion, July 16,1996, citing Fletcher Cyc. Corps., Sec. 5290.)

74


Sec. 6

shares. (Sec. 6, pars. 1,2,5.) Subscription contracts covering such shares are void, (see Art. 1409[1, 3].) (2) Consent of stockholders to change of terms and preferences of

shares. — The articles of incorporation or the charter of a corporation being considered as a contract between the corporation and stockholders (see Sec. 16.), the corporation is under obligation to observe the provisions thereof and it cannot without the consent of the stockholders, change the terms and preferences of classes of shares of stocks provided therein. Thus, any special agreement between a particular subscriber and the corporation by which he is allowed to subscribe for shares upon different terms from other subscribers is invalid. (SEC Opinion, April 18,1985, citing Ballantine, Rev. ed., p. 459.) (3) Right to vote of all classes of shares. — If one class of shares

has the right to vote, all other classes are presumed to have the same voting power. Stockholders have one vote for each share held by them, which excludes fractional voting, (see Sec. 52.) Section 6 (par. 5.) is construed to mean that unless denied in the articles of incorporation, all shares regardless of class (e.g., with par value and without par value, common and preferred) enjoy all the rights of a stockholder. Hence, said provision cannot be invoked as a basis for a proposed amendment of the articles of incorporation whereby Class "A" shares shall be entitled to, say, four votes per share, and Class " B " shares, to one vote per share. (SEC Opinion, Aug. 11,1988.) But the right to vote may be denied by implication as where the articles of incorporation provides that "only holders of common stock shall have the right to vote." (4) Authority of board of directors to fix terms and conditions of

preferred shares. — The terms and conditions of preferred shares of stock may be fixed by the board of directors only when authorized in the articles of incorporation. (Ibid., par. 2.) In such case, the preference enjoyed by the preferred stock will not appear in the articles of incorporation. Capital stock a n d capital e x p l a i n e d.

(1) Capital stock is the amount fixed in the articles of incorporation, to be subscribed and paid in or agreed to be paid in by the

Sec. 6


75

stockholders of a corporation, in money, property, services, or other means at the organization of the corporation or afterwards and upon which it is to conduct its business (see 2 Fletcher, p. 12.), such contribution being made either directly through stock subscription (see Sec. 60.) or indirectly through the declaration of stock dividends. (18 Am. Jur. 2d 735.) The capital stock is the money value assigned to a corporation's issued shares, constituting generally the legal capital (infra.) of the corporation. (E.L. Kohler, op. cit., p. 84.) It represents the equity of the stockholders in the corporate assets. It limits the maximum amount or number of each class of shares that may be issued by the corporation without formal amendment of the articles of incorporation, (see Sec. 16.) It remains the same even though the actual value of the shares as determined by the assets of the corporations is diminished or increased, unaffected by profits and losses. (a) Authorized capital stock refers to the amount of capital

stock as specified in the articles of incorporation. It is synonymous with capital stock where the shares of the corporation have par value, (see Sees. 14[8], 15 [seventh].) If the shares of stock have no par value, the corporation has no authorized capital stock, but it has capital stock the amount of which is not specified in the articles of incorporation as it cannot be determined until all the shares have been issued. (Ibid.) In this case, the two terms are not synonymous. Additional shares may not be issued unless the articles of incorporation are amended by vote of the stockholders, (see Sees. 16, 38.) But unissued authorized shares may be issued at a later date without amendment of the articles of incorporation or approval of the stockholders. (b) Subscribed capital stock is the amount of the capital

stock subscribed, whether fully paid or not. It connotes an original subscription contract for the acquisition by a subscriber of unissued shares in a corporation (see Sees. 60, 61.) and would, therefore, preclude the acquisition of shares by reason of subsequent transfer from a stockholder or resale of treasury shares. (Sec. 9.)

76


Sec. 6

(c) Outstanding capital stock is the portion of the capital

stock which is issued and held by persons other than the corporation itself. The Code defines the term as "the total shares of stock issued to subscribers or stockholders, whether or not fully or partially paid (as long as there is a binding subscription agreement), except treasury shares." (Sec. 137.) It is thus broader than "subscribed capital stock." The terms "subscribed capital stock" and "issued" or "outstanding" capital stock are used synonymously since subscribed capital stock, as distinguished from the certificate of stock, can be issued even if not fully paid. But while every subscribed share (assuming there is a binding subscription agreement) is "outstanding," an issued share may not have the status of outstanding shares. This is true in the case of treasury shares. (Sec. 9.) (d) Paid-up capital stock is that portion of the subscribed or

outstanding capital stock that is actually paid. (see Sec. 13.) The term actual capital stock is also used to refer to the amount of the capital stock actually subscribed and paid for. 27

(e) Unissued capital stock is that portion of the capital

stock that is not issued or subscribed. It does not vote and draws no dividends. (f) Legal capital is the amount equal to the aggregate par value and/or issued value of the outstanding capital stock. When par value shares are issued above par, the premium or excess is not to be considered as part of the legal capital, (see Sec. 43.) In the case of no par value shares, the entire consideration received forms part of legal capital and shall not be available for distribution as dividends, (see Sec. 6, par. 3.)

^ r i o r approval of SEC is not necessary in case of increase of paid-up capital thru payment of unpaid subscriptions, provided such payment consists in cash, (see Sec. 62, par. 2.) If the increase is by way of issuance of unissued shares of the authorized capital stock, the corporation, whose shares of stock are not registered under the Securities Regulation Code (Appendix "A."), must secure from SEC prior exemption from registration requirements under said Code, (see Sees. 8-10 thereof.) If it is in connection with an increase of the authorized capital stock, the corporation must comply with the requirements laid down under Section 38. (SEC Opinion, March 18,1993.)

Sec. 6


77

Under varying State laws, the term "stated capital" is used instead of legal capital to refer to "the portion of the amount contributed by purchasers of no par value stock that is credited to the capital account." (E.L. Kohler, op. cit, 446.) ILLUSTRATION: Suppose the articles of incorporation of corporation X provides that the authorized capital stock of said corporation is P1,000,000.00 divided into 10,000 shares of the par value of P100.00 per share. At its incorporation, only P250,000.00 of the authorized capital stock was subscribed. Under Section 13, at least 25% of the subscription is required to be paid; thus, only P62,500.00 was paid to the treasurer of the corporation. Therefore, the authorized capital stock of corporation X is P1,000,000.00, the subscribed, outstanding, or issued capital stock is P250,000.00, the paid-up capital stock is P62,500.00, and the unissued capital stock is P750,000.00. The legal capital is also P250,000.00. (2) Capital is used broadly to indicate the entire property or assets of the corporation. It includes the amount invested by the stockholders plus the undistributed earnings less losses and expenses. In the strict sense, the term refers to that portion of the net assets paid by the stockholders as consideration for the shares issued to them, which is utilized for the prosecution of the business of the corporation. It includes all balances or installments due the corporation for shares of stock sold by it and all unpaid subscription for shares. In the case of stock dividends, it is the amount that the corporation transfers from its surplus profit account to its capital account. It is the same amount that can loosely be termed as the "trust fund" (see Sec. 60.) for the payment of the debts of the corporation, to which the creditors may look for satisfaction. (National Telecommunications Commission vs. Court of Appeals, 311 SCRA 508 [1999]; see Sees. 41, 22.) The term is also used synonymously with the words "capital stock," as meaning the amount subscribed and paid-in and upon

78


Sec. 6

which the corporation is to conduct its operation (11 Fletcher Cyc. Corp., p. 15 [1986 ed.].) and it is immaterial how the stock is classified, whether as common or preferred. 28

Capital stock and capital distinguished.

(1) Capital is the actual corporate property. It is, therefore, a concrete thing. Capital stock is an amount. It is, therefore, something abstract. (2) Capital fluctuates or varies from day to day according as there are profits or losses or appreciation or depreciation of corporate assets. Capital stock is an amount fixed in the articles of incorporation (where shares are with par value) and is unaffected by profits and losses. Thus, capital may be greater or lesser than the amount of the capital stock. (3) It is said that capital belongs to the corporation and capital stock when issued belongs to the stockholders, and that capital may be either real or personal property but capital stock is always personal. (18 Am. Jur. 2d 736.) The term "capital," however, is frequently used loosely in the sense of capital stock. Capital stock a n d legal capital distinguished.

Like capital stock, legal capital is merely an amount and remains unchanged except as outstanding shares are increased or reduced in number or amount. But while capital stock limits the maximum amount or number of shares that may be issued without formal amendment of the articles of incorporation (see Sec. 38.), legal capital sets the nurtimum amount of the corporate assets which for the protection of corporate creditors, may not be lawfully distributed to stockholders.

^The term "capital" denotes the sum total of the shares subscribed and paid by the stockholders or agreed to be paid irrespective of their nomenclature. It would, therefore, be legal for foreigners to own more than 40% of the common shares but not more than the 40% constitutional limit of the outstanding capital stock which would include both common and non-voting preferred shares. (SEC Opinion, Feb. 15,1988.)

Sec. 6


79

ILLUSTRATION: In the previous illustration, the payment of the subscription of 2,500 shares in the amount of P250,000.00 whether in cash or property or any consideration allowed by law (see Sec. 62.) constitutes the original capital of corporation X. If the corporation makes a profit of P50,000.00, the capital would become P300,000.00. On the other hand, the capital would be reduced to P200,000.00 if there is a loss of P50,000.00. Suppose the corporation borrows P150,000.00 from a bank. The capital of the corporation would then be P450,000.00 or P350,000.00, according as there are profits or losses. In any case, the capital stock of P1,000,000.00 and the legal capital of P250,000.00 remain constant unless, of course, the articles of incorporation is amended, either increasing or decreasing the capital stock, or the number or amount of outstanding shares is increased by the issuance of more shares out of the unissued authorized shares or decreased by the acquisition of previously issued shares, (see Sees. 9, 41.) A decrease of the capital stock may also result in the reduction of legal capital, (see Sec. 38.) S t o c k or s h a r e of stock d e f i n e d . Stock or share of stock is one of the units into which the capital stock is divided. It represents the interest or right which the owner has — (1) in the management of the corporation in which he takes part through his right to vote (if voting rights are permitted for that class of stock by the articles of incorporation); 29

(2) in a portion of the corporate earnings, if and when segregated in the form of dividends; and (3) upon its dissolution and winding up, in the property and assets of the corporation remaining after the payment of corporate debts and liabilities to creditors, (see 11 Fletcher, p. 18 [1971 ed.].)

"The stockholders' right of management consists primarily of their privilege in the election and removal of directors. (Sees. 24, 28.)


80

Sec. 6

Capital stock and share of stock distinguished.

As distinguished from capital stock, the term "stock" or "share of stock" is commonly used in a distributive sense to refer to the stock in the hands of the stockholders and, therefore, belongs to them. On the other hand, the former is used in a collective sense to signify the whole body of shares of stock in the corporation. (Ibid.) Nature of share of stock.

(1) The ownership of share of stock confers no immediate legal right or title to any of the property of the corporation. Each share merely represents a distinct undivided share or interest in the

common property of the corporation. (18 Am. Jur. 2d 737.) Such interest has been described as "indirect, contingent, remote, conjectural, consequential, and collateral. It is purely inchoate, or a mere expectancy of a right in the management of the corporation and to share in the profits thereof and in the properties and assets thereof on dissolution, after payment of corporate debts and obligations." Hence, stockholders of such are not entitled to intervene in a litigation involving corporate property under Section 2, Rule 12 of the Rules of Court. (Saw vs. Court of Appeals, 195 SCRA 740 [1991].) (2) Shares of stock constitute property distinct from the capital or

tangible property of the corporation and belong to the different owners. Incorporeal in nature, the shares are personal property (see 10

Sec. 63.) of the stockholder (except treasury stock which belongs to the corporation; see Sec. 9.) and this is true even where the property of the corporation consists wholly or chiefly of real estate. This necessarily follows from the fact that the property of a corporation does not belong, in law, to the stockholders but to the corporation as a distinct legal entity or artificial person. Art. 417. The following are also considered as personal property: x x x (2) Shares of stock of agricultural, commercial, and industrial entities, although they may have real estate. (Civil Code) Art. 2095. Incorporeal rights, evidenced by negotiable instruments, bills of lading, shares of stock, bonds, warehouse receipts and similar documents may also be pledged. The instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed. (Civil Code) 30

Sec. 6


81

(Stockholders of F. Guanzon & Sons, Inc. vs. Register of Deeds 6 SCRA 373 [1962].) (3) They are in the nature of choses in action but are not such

in a strict sense. They do not constitute an indebtedness of the corporation to the shareholder (18 Am. Jur. 2d 738.) and are, therefore, not credits as to make the stockholder a creditor of the corporation. (Garcia vs. Lim Chu Sing, 59 Phil. 562 [1936].) Hence, no action can be maintained against the corporation for the return of the contributions of the shareholders as long as the corporation needs them and is not under dissolution, (see Sec. 64, as to nature of relation of stockholder to the corporation.) (4) A share of stock only typifies a proportionate or aliquot part

of the corporation's property, or the right to share in its proceeds to that extent when distributed according to law. It does not represent property of a corporation. The corporation as a juridical person, distinct from the members composing it, has property of its own which consists chiefly of real estate. As previously noted, a holder of shares is in no legal sense the owner of any part of the capital of the corporation; nor is he entitled to the possession of any definite portion of its property or assets, nor a co-owner of the corporate property (see Stockholders of F. Guanzon & Sons, Inc. vs. Register of Deeds, supra; Boyer-Roxas vs. Court of Appeals, 211 SCRA 470 [1992].), his interest in the corporate property being equitable or beneficial in nature. Certificate of stock d e f i n e d.

Certificate of stock is a written acknowledgment by the corporation of the interest, right, and participation of a person in the management, profits, and assets of a corporation. It is a formal written evidence of the holder's ownership of one or more shares and is a convenient instrument for the transfer of title, (see Sec. 63.) Share of stock a nd certificate of stock distinguished.

(1) Share of stock is incorporeal or intangible property, while certificate of stock is tangible property;

82


Sec. 6

(2) Share of stock represents the right or interest of a person in a corporation, while certificate of stock is the written evidence of that right or interest; (3) Share of stock may be issued even if the subscription is not fully paid (Sec. 137.), except in no par shares. (Sec. 6, par. 3.) As a general rule, a certificate of stock may not be issued unless the subscription is fully paid (Sec. 64.); and (4) The situs of share of stock is deemed to be the State where the corporation has its domicile which is ordinarily the State under whose laws it was created, while a certificate of stock may have a situs at the place where it is located or at the domicile of the owner, even though the corporation is domiciled elsewhere. (2 Fletcher, pp. 62-63, 95.) The situs of share of stock retains that of the issuing corporation, even though the certificate is without the State and is owned by a nonresident. (Ibid., p. 62.) The possession of a certificate of stock is not essential to ownership of stock because the right to stock may exist independently of the certificate. Situs of shares of stock for certain purposes. (1) For purposes of execution, attachment, and garnishment. —

The situs of shares of stock is the domicile or residence of the corporation (Chua Guan vs. Samahang Magsasaka, Inc., 62 Phil. 472 [1935].), which is the place where the principal office of the corporation is located, (see Sec. 14[3].) "Stocks or shares, or an interest in stocks or shares of any corporation or company" shall be attached by the officer executing the order, "by leaving with the president or managing agent thereof, a copy of the order and a notice stating that the stock or interest of the party against whom the attachment is issued, is attached in pursuance of such order." (Rules of Court, Rule 57, Sec. 7[d].) (2) For purposes of registration of chattel mortgages on shares of

stock. — The situs is the province or city in which the corporation has its principal office or place of business. (Chua Guan vs. Samahang Magsasaka, Inc., supra.) (3) For purposes of property taxation. — The general rule is that

Sec. 6


83

the situs of intangible property is at the domicile or residence of the owner. (a) The above principle, however, is not controlling when it is inconsistent with express provisions of statute, or when justice does not demand that it should be, as where the property has in fact a situs elsewhere, (see 15 Am. Jur. 474-475.) Thus, shares of stock in a domestic corporation of a nonresident foreigner are taxable in the Philippines. The reason is that said shares receive the protection and benefit of our law. (Wells Fargo Bank and Union Trust Co. vs. Coll. of Internal Revenue, 70 Phil. 325 [1940].) (b) Under the National Internal Revenue Code (Pres. Decree No. 1158, as amended.), for purposes of the estate tax, the gross estate of a resident decedent, whether citizen or alien, or a citizen decedent, whether resident or nonresident, includes his intangible personal property wherever situated, (see Sees. 78, 81 thereof.) Classes of shares in general. Shares of stock may be: (1) Par value or no par value; (2) Voting or non-voting; (3) Common or preferred, and preferred shares may be voting, convertible, or redeemable, (infra.) They may be: (a) Preferred as to assets in case of liquidation or preferred as to dividends and the latter, in turn, may be either: 1) Cumulative or non-cumulative; or 2) Participating or non-participating; (4) Promotion share; (5) Shares in escrow; (6) Convertible share; (7) Founders' share (see Sec. 7.); (8) Redeemable share (see Sec. 8.); and (9) Treasury share, (see Sec. 9.)

84


Sec. 6

As already mentioned, a corporation may issue such classes or series of shares as the prospects and needs of its business may require. Furthermore, it may classify its shares for the purpose of insuring compliance with constitutional or legal requirements. (Sec. 6, par. 4.) Par value share.

Par value share is one with a specific money value fixed in the articles of incorporation and appearing in the certificate of stock. (1) The primary purpose of par value is to fix the minimum subscription or issue price of the shares, thus assuring creditors that the corporation would receive a minimum amount for its stock, (see Sec. 62.) (2) A corporation may issue shares with different par values. Shares issued less than par value are referred to as watered stock. (see Sec. 65.) (3) The par value of a stock remains the same regardless of market value or book value (infra.) of the stock, except when there is a stock split, (see annotation under Sec. 43.) It is not usually the price at which investors buy or sell the stock. No par value s h a r e.

No par value share is one without any stated value appearing on the face of the certificate of stock. In other words, it is a stock which does not state how much money it represents. (1) A no par value share has, therefore, no par value but it has always an "issued value," i.e., the consideration fixed by the corporation for its issuance, (see Sec. 62, last par.) (2) A no par value share does not purport to represent any stated proportionate interest in the capital stock measured by value, but only an aliquot part of the whole number of such shares of the issuing corporation. (3) A corporation may issue no par value only, or together with par value shares. No par value stockholders have the same rights as holders of par value stock. (4) The capital stock of a corporation issuing only no par shares is not set forth by a stated amount of money, but instead

Sec. 6


85

is expressed to be divided into a stated number of shares, such as 1,000 shares. This indicates that a shareholder of 100 shares is an aliquot sharer in the assets of the corporation, no matter what value they may have, to the extent of 100/1,000 or 1/10. Thus, by removing the par value of shares, the attention of persons interested in the financial condition of the corporation is focused upon the value of assets and the amount of its debts. (Delpher Trades Corp. vs. Intermediate Appellate Court, 157 SCRA 349 [1988], citing Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Phils., Vol. Ill, 1980 ed., p. 107.) Voting s h a r e .

Voting share is share with right to vote. (1) It is generally customary to give the right to vote to the common stock and to withhold it from the preferred. Each common share shall be equal in all respects to every other common share. Corporations are hereby prohibited from issuing multiple voting and non-voting common shares nor can they limit the maximum number of votes per stockholder irrespective of the number of shares he holds. (SEC Memo. Cir. No. 4, series of 2004.) (2) Only shares classified and issued as "preferred" or "redeemable" may be deprived of voting rights. Article 6 (par. 1.) expressly prohibits the depreciation of voting rights except only as to said shares. (Castillo vs. Balinghasay, 440 SCRA 442 [2004].) But founders' shares may be given the exclusive right to vote and be voted for in the election of directors for a limited period (Sec. 7.) in which case voting common stocks will have no right to vote for directors. (3) Under the Code, whenever a vote is necessary to approve a particular corporate act, such vote refers only to stocks with voting

rights except in certain cases when even non-voting shares may also vote. (Sec. 6, par. 6 and last par.) The rule is not "one stockholder, one vote" but "one share, one vote" because representation in a corporation is commensurate to extent of ownership.

66


Sec. 6

Non-voting share.

Non-voting share is share without right to vote. (1) If stock is originally issued as voting stock, it may not thereafter be deprived of the right to vote without the consent of the holder. (2) Under the Code, no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in the Code. (Sec.

6, par. 1.) The proviso refers to fundamental matters enumerated in Section 6 (par. 6[l-8].) on which holders of non-voting shares in stock corporations shall nevertheless be entitled to vote. Note that the enumeration in Section 6 does not include the election of directors or trustees (see Sec. 24.) as one of the matters on which non-voting shares may vote. In non-stock corporations, Section 89 governs the right of the members to vote on corporate matters. (3) Where non-voting shares are provided for, the Code requires that there shall always be a class or series of shares which have complete voting rights. (Sec. 6, par. 1.) (4) Under Section 6 (par. 1.), only preferred or redeemable shares may be denied the right to vote. The issuance of common stock with a feature that voting rights thereof shall be exercised by a trustee violates the rule that common shares cannot be deprived of voting rights. The automatic assignment of voting rights is an indirect violation of Section 6. (SEC Opinion, July 15, 1997.) (5) In case any amendment of the articles of incorporation has the effect of changing or restricting the rights of any stockholder, the latter shall have the right to dissent and demand payment of the fair value of his shares. (Sec. 81[1].) C o m m o n share.

Common share of stock is one which entitles the holder thereof to a pro rata division of the profits, if there are any, and in its assets upon dissolution, without any preference or advantage in that respect over other stockholders or class of stockholders but equally with all other stockholders except preferred stockholders.

Sec. 6


87

(1) It is so-called because it is the basic class of stock which private corporations generally issue (hence, the name) or because its holders stand upon an equal footing, without extraordinary rights or privileges. (2) Common shares have complete voting rights. They cannot be deprived of said rights except as provided by law. (3) Common stockholders are the residual owners of the corporation. They get only the assets left over in case of liquidation after all other securities holders are paid. (4) As a result of restrictions upon other classes of stock with respect to voting rights, the common stock, normally, as to those classes, has preference in the matter of management, (see 18 Am. Jur. 2d 741.) (5) The simplest corporate structure has only one kind of stock — all common. When only a single class of stock is issued, then all shares are alike and all issues are common stock. A corporation may issue more than one class of common stock, being designated "Class A," "Class B , " etc. Preferred s h a r e .

Preferred share of stock is one with a stated par value which entitles the holder thereof to certain preferences over the holders of common stock. 31

32

(1) Under the Code, preferred shares of stock may be issued only with a stated par value. (Sec. 5, par. 2.) More than one class of preferred shares may be issued usually designated "first preferred," "second preferred," etc. (2) The preferences are designed to induce persons to subscribe for shares of a corporation. They may consist in the payment of dividends or the distribution of the assets of 33

In accounting, if there is more than one issue of stock, each class of stock is reported in the balance sheet separately and presented in the order of the priority of their rights in liquidation. Thus, preferred stock is usually stated ahead of common stock. (PICPA Bulletin No. 10[10], November 1975.) "Republic Planters Bank vs. Agana, Jr., 269 SCRA 1 (1997), citing DE LEON, The Corporation Code of the Philippines Annotated, p. 62 (1989 ed.). 31

™lbid.


88

Sec. 6

a corporation in case of its dissolution ahead of the common stockholders, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of the Code. (Sec. 6, par. 2.) But as already stated, each share shall be in all respects equal to every other share except as otherwise provided in the articles of incorporation and stated in the certificate of stock. (Ibid., par. 5.) Thus, unless otherwise so provided, preferred stocks are presumed to be voting although they are rarely given voting privileges. (3) The term guaranteed stock is sometimes used as synonymous with preferred stock on which the payment of dividend is guaranteed and a distinction is sometimes drawn to the effect that guaranteed stock is entitled to arrears in dividends, while ordinary preferred stock is not. (18 C.J.S. 650.) 34

(4) Interest bearing stock on which the corporation agrees

absolutely to pay interest before dividends are paid to common stockholders is legal only when construed as requiring payment of interest as dividends from net earnings or surplus only. (see Sec. 43.) Such stock is, in effect, preferred stock, except perhaps that the discretion of board of directors to use profits for other corporate purposes may be more limited. 35

Common and preferred shares are the two main classes or forms of stock. Holders of preferred shares do not lose the voting rights in all matters affecting the corporation. Section 6 (par. 6) provides for the cases when non-voting shares like preferred shares are granted voting rights. Promotion shares.

Promotion shares are such shares as are issued to promoters, or those in some way interested in the company, for incorporating the company, or for services rendered in launching or promoting the welfare of the company, such as advancing the fees for incorporating, advertising, attorney's fees, surveying, etc. (11 Fletcher, p. 48; Enright vs. Hekscher, 240 F. 863.) The guaranty merely means that the holders are entitled to specified dividends if there are profits out of which dividends may be paid, (see Sec. 43.) "Republic Planters Bank vs. Agana, Sr., supra, citing DE LEON, supra, p. 62, note 9.

Sec. 6


89

They may mean such shares as are issued to those who may originally own the mining or valuable rights connected therewith, in consideration of their deeding the same to the mining company when the company is incorporated. (Ibid.) Share in escrow. Share in escrow is share subject to an agreement by virtue of which the share is deposited by the grantor or his agent with a third person to be kept by the depository until the performance of a certain condition (usually the payment of the full subscription price) or the happening of a certain event contained in the agreement. (Cannon vs. Handley, 12 P. 315.) (1) The escrow deposit makes the depository a trustee under an express trust, (see Arts. 1440,1441, Civil Code.) (2) The legal title to the subject matter to be conveyed remains in the grantor until the condition is fulfilled. The issuance of the shares is thus made subject to a suspensive condition. (Lusk vs. Stevens, 64 Phil. 1054 [1937].) (3) Before the fulfillment of the condition, the grantee or holder is not yet the owner of the shares and consequently, he is not entitled to the rights belonging to a regular stockholder. Convertible share. Convertible share is share which is convertible or changeable by the stockholder from one class to another class (such as from preferred to common) at a certain price and within a certain period. (1) Except as may be restricted by the articles of incorporation, the stockholder may demand conversion at his pleasure. The conversion ratio is the price at which the common is to be valued as against the preferred. (2) Where the corporation has previously issued stock to the entire authorized limit, it cannot, of course, issue additional stocks if the authorized common stock of the corporation is fully subscribed. (a) If it becomes necessary to create additional common stocks into which preferred stocks can be converted, this can

90


Sec. 6

be done simply by reclassifying the preferred shares into common in such amount as would be necessary to cover the conversion through an amendment of the articles of incorporation in accordance with Section 16. (b) Thus, although the preferred shares possess the quality of being convertible into common shares per articles of incorporation, such conversion is not automatic. An amendment of the articles of incorporation is required to formalize the conversion which must not result in watering of stock (see Sec. 65.), or issuance of stocks in excess of the authorized capital stock of the corporation. (SEC Opinion, Sept. 3,1990.) Convertibility of shares. (1) Preferred shares into common. — In the absence of an express

provision in the articles of incorporation as to their convertibility feature, preferred shares cannot be converted into common. The terms of the preferred share contract cannot be changed without the consent of the stockholders. (Sec. 6, par. 1; SEC Opinion, May 19, 1992.) (2) No par value share to par value. — The conversion of no

par value shares to par value is allowed by SEC provided there would be no change in the stockholders' percentage interest in the total assets of the corporation. If the conversion would result in the increase in the number of shares, the same should be allocated to the existing stockholders in proportion to the number of shares held by them without changing the total peso amount of the total outstanding shares. The individual allocation of the shares as converted should be based on the average issue value of the no par value shares and not in the individual actual contribution of the stockholders. (SEC Opinion, July 7,1992.) Nature of par value/book value/ market value.

(1) Par value. — The par value indicated in the certificate of 36

*"'Par" means equal, and "par value" means face value or value equal to the face of the stocks or bonds. The par value of an interest-bearing bond on the day of its issuance is the principal and the accrued interest. (31 Words and Phrases [1957 ed.] 559.) To say that a bond is valued at par means that its value is equal to the face value of the bond. (Ibid., 63.)

Sec. 6


91

stock represents the amount of money or property contributed by the shareholder to the capital stock of the corporation. Patently, the assets of a company cannot always be equal to the par value of the outstanding stock, the assets being constantly in a state of fluctuation as the business prospers or declines. (13 Am. Jur. 302.) (2) Book value. — Hence, the par value does not always reflect its book value or its actual or true value which may be determined by dividing the total stockholders' equity or the net value of the total corporate assets (capital and surplus, if any) by the number of shares issued or outstanding. Since unpaid subscriptions (see Sec. 60.) are considered part of the asset of a corporation which the board of directors (see Sec. 24.) may at any time declare due and payable (see Sec. 67.), they should be included in the computation of book value. But book value does not attach to unissued or reacquired shares, (see Sec. 9.) (3) Market value. — Par value and book value may be more or less than market value which may be defined as the price at which a willing seller would sell and a willing buyer would buy, assuming that both have a reasonable knowledge of the facts, and neither being under abnormal pressure. Market value is affected by the law of supply and demand. 37

ILLUSTRATION: Suppose that X Corporation has an authorized capital stock of P1,000,000.00 divided into 10,000 shares with a par

"In accounting practice, the journal entries for transactions are recorded in historical value or cost. Thus, the purchase of properties or assets is recorded at acquisition cost. The same is true with liabilities and equity transactions where the actual loan and the amount paid for the subscription are recorded at the actual payment, including the premiums paid for the subscription of capital stock. Moreover, it is common practice that the values of the accounts recorded at historical value or cost are not increased or decreased due to market forces. In the case of properties, the appreciation in values is generally not recorded as income nor the increase in the corresponding asset because the increase or decrease is not yet realized until the property is actually sold. The same is true with the capital account. The market value may be much higher than the actual payment of the par value and premium of capital stock. Still, the books of account will not reflect such increase; and vice-versa, any decrease of the value of stocks is likewise not reflected in the books of account." (PLDT vs. National Telecommunications Communications, 539 SCRA 365 [2007].) 37

92


Sec. 6

value of PI00.00 per share. The capital stock is fully subscribed and paid up in cash. At this stage, the par value is the same as its actual or book value. The book value is determined by dividing P1,000,000.00, the net asset, by 10,000, the number of shares issued or outstanding. If the corporation makes a net profit of P100,000.00, the increased book value of each share would be P110.00. On the other hand, if the corporation suffers instead a loss of P100,000.00, its net assets would then be reduced to P900,000.00, thereby making the book value of each share at only P90.00. The market value, however, of each share may not be P100.00 or P110.00 or P90.00. Thus, the market value of each share of X Corporation may be PI50.00 when the book value is P110.00 or it may be P60.00 when the book value is P90.00. The market value of stocks may be influenced by the present and prospective net income of the corporation, attractive dividend payments, and other factors. Presumption as to value of corporate stock. Corporate stock is "at par" when it is worth its face value, and is "above par" or at a "premium" when it is worth more. According to some authority, no presumption exists, in the absence of supporting evidence, that corporate stock is worth its par or face value. There is another authority, however, that in the absence of contrary evidence, there is a presumption that corporate stock is worth its par or face value. (18 Am. Jur. 2d 750-751.) It is difficult to determine the book or market value or price of a corporation's stock when it is not traded publicly. ILLUSTRATION: C, the president, treasurer, and a director of X Corporation, decided to withdraw from the corporation. According to its bylaws, the person withdrawing had to determine the book value of his shares as of the date the person gave notice of withdrawal, which value would then be the purchase price of the stock. The by-laws specified that book value should be determined by sound and accepted accounting rules and practices carried out by a certified public accounting firm. A difference arose as to the

Sec. 6


93

book value, C using the straight line method to determine asset costs rather than the accelerated depreciation method adopted by X Corporation, with the result that his determination of the book value per share was higher. Which method of depreciation is the correct one? The book value of stock is the difference between the assets and liabilities of a corporation. Depreciation covers the original cost of each asset over its established useful life, in proportion to the actual annual decrease in the value of such asset. Factors affecting depreciation adjustments are the asset's original cost, its life in years, salvage value, and the method of depreciation chosen. The straight line method chosen by C permits an equal amount to be charged off as expense during each year of the asset's life. The accelerated method adopted by X Corporation allows a larger portion of depreciation expense to be charged as an expense in the first year and lesser amounts in the following years. Accounting practices permit several methods of depreciation for different purposes. X Corporation used its method for taxation purposes; C, to arrive at the value of the stock. According to the by-laws, the one withdrawing has the right to choose the method to determine book value. (Chadwick vs. Cross, Abbot Co., 205 A. 2d 416 [Sup. Ct. Vt. 1964].) Statutory restrictions regarding the issuance of no par v a l ue s h a r e s .

Any or all of the shares or series of shares issued by a stock corporation may have a par value or have no par value as may be stated in the articles of incorporation. (Sec. 6, par. 1.) The following are the limitations or restrictions imposed by law regarding the issuance of no par value shares: (1) Banks, trust companies, insurance companies, and building and loan associations shall not be permitted to issue no par value shares of stock; (2) Preferred shares of stock of any corporation may be issued only with a stated par value (Ibid.); (3) Shares issued without par value shall be deemed fully paid and non-assessable and the holder of such shares shall not

94


Sec. 6

be liable to the corporation or to its creditors in respect thereto. (Ibid.) This does not mean that the holder is no longer liable for the shares if they are not yet fully paid. It only means that the holder shall not be liable beyond the issued price (see Sec. 62, last par.), notwithstanding a change in their value; 38

(4) Shares without par value may not be issued for a consideration less than the value of five pesos per share (Sec. 5, par. 3.); and (5) The entire consideration received by the corporation for its no par value shares shall be treated as capital, and, therefore, shall not be available for distribution as dividends. (Ibid.) The theory is that the shareholders intended that all the amounts paid for no par value shares shall be employed permanently to the prosecution of the venture. Consideration for no par value s h a r e s .

Since the value of corporate stocks fluctuates and rarely represents the par value, corporations are authorized to issue no par value shares. Such shares may aid the investor to understand the factors which determine stock value. They also make it easier for corporations to sell stock under circumstances which may militate against the interest of the investor. (C.L. James, Principles of Economics, supra, p. 50.)

(1) A no par value share has no "par value" but it has always an "issued value" based on the consideration for which it is issued. Under Section 6, a no par value share may not be issued for less than P5.00 per share. (2) While all the par value stocks must be issued at a uniform value or price, no par value stocks may be issued from time to time at different prices or values although the holders of all these shares are entitled to share equally in the distribution of the profits and assets of the corporation, (see Sec. 62, last par.)

"Issued shares include subscribed shares which are unpaid or partially unpaid, (see Sec. 137.)

Sec. 6


95

A d v a n t a g e s of par v a l u e s h a r e s .

They are as follows: (1) Par value shares are easily sold as the public is more attracted to buy this kind of shares; (2) There is greater protection to creditors; (3) There is unlikelihood of sale of subsequently issued shares at a lower price; and (4) There is unlikelihood of the distribution of dividends that are only ostensible profits, (see Harold, Corporation Finance, p. 35.) D i s a d v a n t a g e s of par v a l u e s h a r e s .

The following may be mentioned: (1) The subscribers are liable to corporate creditors for their unpaid subscription; and (2) The stated face value of the share is not an accurate criterion of its true value. A d v a n t a g e s of no par v a l ue s h a r e s .

They are the following: (1) No par value shares are issued as fully paid and nonassessable; (2) Their price is flexible;

39

(3) Low-priced stocks (most no par shares are low-priced) enjoy wider distribution; (4) They tell no untruth concerning the value of the stockholder's contribution; and (5) Stock dividends are more easily issued, thereby simplifying accounting procedure. (Ibid.)

^They may be issued at their book value (but not less than P5.00) to raise funds without the corporation having to incur or increase any bonded indebtedness, (see Sec. 38.)

96

Sec. 6


Disadvantages of no par value shares.

They are as follows: (1) They legalize large issues of stock for property; (2) They conceal the money or property represented by the shares; (3) They promote issuance of watered stock (19 Mich. L. Rev. 591-595; see Sec. 65.); and (4) There is lesser protection to creditors. Kinds of preferred shares .

They may be: (1) Preferred share as to assets or share which gives the holder thereof preference in the distribution of the assets of the corporation in case of liquidation. (Sec. 6, par. 2.) It has been held that preferred stock, standing alone, creates a preference only to dividends and not to assets in case of liquidation (Hellmen vs. Penn. Electric Vehicle Co., 67 Atl. 834.); or (2) Preferred share as to dividends or share the holder of which is entitled to receive dividends on said share to the extent agreed upon before any dividends at all are paid to the holders of common stock. (2 Fletcher, p. 44.) There is no guaranty, however, that it will receive any dividends. The corporation is not bound to pay dividends unless the board of directors declare them. The preference simply means that holders of common stock may receive dividends only after the satisfaction of the prior claims on dividends of preferred stockholders. 40

Preference a m o n g preferred shares.

A corporation may issue more than one class of preferred stock as to assets or as to dividends. Thus, certain preferred shares may be given first preference or second preference on earnings. Unless a classification is provided in the articles of incorporation, the rule is that preferred shares of stock enjoy the same "Republic Planters Bank vs. Agana, Sr., supra, citing DE LEON, p. 69, note 9.

Sec. 6


97

preferences or privileges. Thus, if the articles do not distinguish between those preferred shares subscribed from the corporation and those acquired by other modes, as far as preferences are concerned, the former cannot be considered to enjoy privileges different from those of the latter. (SEC Opinion, Dec. 4,1981.) Preferred s t o c k h o l d e r s not creditors of c o r p o r a t i o n .

Preferred shares of stock issued by a corporation may be given such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of the Code. (Sec. 6, par. 2.) Like common shares, they are part of the corporation's stock. Both common and preferred stockholders are no different from ordinary investors willing to share in the profits and losses of the enterprise. (1) Lien upon corporate property. — Preferences granted to pre-

ferred stockholders do not give them a lien upon the property of the corporation nor make them creditors of the corporation, the rights of the former being always subordinate to the latter. 41

(2) Stock issued with a fixed interest. — Stock cannot be issued

with a fixed interest instead of dividends inasmuch as this will make the contract of subscription one of loan and make the corporation a debtor of the subscriber. Shareholders, both common and preferred, are risk takers who invest capital in the business and who can look only to what is left after corporate debts and liabilities are fully paid. (SEC Opinion, Feb. 10,1969, citing Ballantine, p. 503.) They sink or swim with the corporation and there is no obligation to return the value of their snares by means of repurchase if the corporation incurs losses and financial reverses, much less guarantee such repurchase through a surety bond. (Lirag Textile Mills, Inc. vs. Social Security System, 153 SCRA 338 [1987].) 42

(3) Stock issued with dividends payable in the nature of interest.

— However, the dividends payable by the corporation may be in the nature of interest as where the parties, under an agreement, "Ibid. lbid. a

98


Sec. 6

intended the repurchase by the corporation of preferred shares with agreed cumulative dividends of a fixed percentage per annum, on their respective scheduled dates to be an absolute or unconditional obligation which does not depend upon the financial ability of the corporation, especially so where the obligation is secured by a surety, notwithstanding that the dividends are supposed to be paid out of net profits and earned surplus. (Ibid.) (4) Stock issued with dividends payable guaranteed. — The fact

that dividends are, in terms, guaranteed, does not make them creditors. They are entitled to dividends only when there are profits out of which dividends may be declared. (SEC Opinion, Nov. 3, 1986.) Such a guarantee may, however, have the possible effect of making the dividends cumulative (infra.), that is, making the profits of one year make up for the deficiencies of the preceding year or years. (SEC Opinion, Aug. 24, 1987, citing 11 Fletcher, Sec. 4294.) (5) Stock issued to creditors. — It is immaterial how or where

the holder obtained his stock since the preference belongs to the stock and not to the stockholder. Hence, the fact that preferred stockholders were formerly corporate creditors gives them no greater right as against creditors. By abandoning their position as creditors, they lose their rights as such. (Ibid.) Limitations regarding issuance of preferred s h a r e s.

There are four (4) legal limitations regarding preferred shares: (1) Preferred shares deprived of voting rights in the articles of incorporation (Sec. 6, par. 1.) shall still be entitled to vote on matters enumerated in Section 6 (par. 6.), although they shall not be entitled to vote on other matters (last par.); (2) The preferences of preferred shares must not be violative of the provisions of the Code; (3) Preferred shares may be issued only with a stated par value; and (4) The board of directors may fix the terms and conditions of preferred shares of stock or any series thereof only when so authorized by the articles of incorporation and such terms and

Sec. 6


99

conditions shall be effective upon filing a certificate thereof with the Securities and Exchange Commission. {Ibid., par. 2.) A u t h o r i t y of b o a r d of directors to fix t e r m s a n d c o n d i t i o ns of preferred s h a r e s .

Section 6 (par. 2.) empowers the board of directors, where authorized in the articles of incorporation, to fix the terms and conditions of preferred shares of stock or any series thereof. The financing of an enterprise goes on year after year, as business expands or the needs of capital arise. (Ballantine, Rev. ed. 1 [1946], p. 471.) (1) Benefits from authority given. — The authority enables the

board, without the delay and expense of amendment of the articles of incorporation, to "tailor its securities to meet changes in market conditions which cannot be foreseen at the time of incorporation or later amendment of the articles of incorporation. Typical of the changes is the variance of the dividend rate to meet the demands of the money market x x x. The resolution of the directors fixing such preferences is generally required to be certified and filed or recorded in the same manner as articles of incorporation, thus, providing certain information as to the terms of the contract." (SEC Opinion, Jan. 11,1982, citing Ballantine, Law of Corp., pp. 502-503, and 2 Fletcher, p. 531.) (2) Concurrence of stockholders not required. — It would not

need the concurrence of two-thirds (2/3) of the outstanding capital under Section 16 for the board to fix the terms and conditions of the preferred shares where authorized by the articles of incorporation; otherwise, it would defeat the very purpose for which the authority was granted, which is to allow the corporation to respond quickly to the fluctuating conditions in the market. Besides, Section 16 admits or recognizes of exceptions thereto which is Section 6. (SEC Opinion, Jan. 11,1982.) (3) Blanket authority not contemplated. — It would be contrary

to Section 6 of the Code to give the board of directors blanket authority to fix the terms and conditions of the preferred shares without stating the privileges, preferences, restrictions, or rights of the preferred shares, (see par. 1, 1st sentence; par. 2, 1st sentence and 2nd proviso.) Unless certain features, guidelines and

100


Sec. 6

standards as to the issue of preferred shares are stated or spelled out in the articles of incorporation, such authorization becomes a dangerous power which may adversely affect the rights of shares already issued. (Ibid.) Thus, as a matter of policy, the Securities and Exchange Commission does not allow a provision giving the board of directors a blanket authority to fix the terms of preferred shares unless such guidelines (e.g., setting a specific range of dividend rate with minimum and maximum limits) are followed in the determination thereof. (SEC Opinion, May 24,1994.) Kinds of preferred shares as to dividends.

They may be cumulative, non-cumulative, participating, non-participating, and cumulative-participating. (1) Cumulative preferred share is share which entitles the holder thereof not only to the payment of current dividends but also to dividends in arrears. In other words, if the stipulated dividend is not paid in a given year, it shall be added to the dividend which shall be due the following year and the accumulated dividends must be paid to the holder of said preferred share before any dividend may be paid to the holders of common stock. ILLUSTRATION: Suppose S owns 10 preferred shares of X Corporation with a par value of P100.00 per share at 5% guaranteed cumulative dividends. If after 4 years the corporation decided to declare the regular annual dividend, S will receive a total of P250.00 for the 10 shares: P50.00 for each year or a total of P200.00 for the 4 years (representing the dividends in arrears) plus the dividend of P50.00 for the current year. All the dividends must be paid to S before any dividends can be paid to the holders of common shares. This kind of share protects preferred stockholders against manipulation of the financial accounts of the corporation to conceal profits. (2) Non-cumulative preferred share is share which entitles

the holder thereof to the payment of current dividends only in preference to common stockholders. In other words, if dividends

Sec. 6


101

are not declared in a given year, the right to the dividends for that particular year is extinguished. ILLUSTRATION: In the preceding illustration, if the dividends of S were non-cumulative, he would be paid only for the current year at P5.00 per share, or a total of P50.00 for the 10 shares. (3) Participating preferred share is share which gives the holder thereof not only the right to receive the stipulated dividends at the preferred rate but also to participate with the holders of common shares in the remaining profits pro rata (or in the proportion stated in the articles of incorporation) after the common shares have been paid the amount of the stipulated dividend at the same preferred rate. (4) Non-participating preferred share is share which entitles the holder thereof to receive the stipulated preferred dividends and no more. The balance, if any, is given entirely to the common stocks. ILLUSTRATION: Suppose the capital stock of X Corporation is P100,000.00 divided into 1,000 shares with a par value of P100.00 per share. Three hundred (300) of the shares are preferred and 700 are common. The preferred shares are entitled to dividends at the preferred rate of 10%. If, at a given year, the corporation declares a dividend of P5,100.00, the 10% preference must first be paid to the owners of preferred shares at P10.00 per share or a total of P3,000.00. The balance of P2,100.00 will be divided among the holders of common shares at P3.00 each share. If the dividends declared amount to Pll,400.00, then the holders of common stock would be receiving P8,400.00 or P12.00 each share. However, if the preferred shares are participating, the owners thereof share also in the remaining profits of Pl,400.00 with the holders of common stock after the latter have been granted a share (P7,000.00) in the balance of P8,400.00 (Pll,400.00 - P3,000.00) at the same rate of 10%. Thus, each share will be entitled to an additional dividend of PI.40 (Pl,400.00 -1,000).

102


Sec. 7

In the absence of an agreement, express or implied, dividends should be deemed noncumulative and non-participating in accordance with the presumption established in Section 6 (par. 5.) that shares are equal in all respects unless otherwise stated in the articles of incorporation and in the certificate of stock. (5) Cumulative-participating preferred share is share which is

a combination of the cumulative share and participating share. This means that the holder is entitled not only to dividends in arrears but also, after receiving his preferred share of dividends, to participation with the holders of common stock in the remaining profits. Sec. 7. Founders'shares. — Founders' shares classified as such in the articles of incorporation may be given certain rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited period not to exceed five (5) years subject to the approval of the Securities and Exchange Commission. Period shall commence from the date of the aforesaid approval by the Securities and Exchange Commission, (n) Founders' shares.

Founders' shares have been defined as "shares issued to the organizers and promoters of a corporation in consideration of some supposed right or property. Such shares usually share in profits only after a certain percentage has been paid upon the common stock, but are often given special privileges over other stock as to voting and as to division of profits in excess of a minimum dividend on the common stock." (Webster's Second Inter43

"They are not to be confused with so-called management shares which are "corporate stocks generally held by officers or directors of a company that receives no dividends until a specified amount has been paid on the common stock but that receives a large share of the residual profits." (Ibid. [Third], p. 1372.) Both shares have their origin in English common law. Founders' shares (also called managers' shares and deferred shares) are issued commonly in Great Britain, rarely in the United States. Their combined voting power is usually equal to the voting power of the common stock, and they generally have a special

Sec. 7

T I T L E I. G E N E R A L P R O V I S I O N S

Definitions and Classifications

103

national Dictionary, p. 997.) (1) Special rights and privileges. — The shares of stock of a cor-

poration, close or non-close (see Title XII.), may include founders' shares classified as such in the articles of incorporation. Such shares may be given special rights and privileges not enjoyed by the owners of other stock including common stocks, such as preference in the payment of dividends and/or distribution of assets in case of liquidation, right to convert the shares into other shares, right to cumulative dividends, etc. to encourage them to make large investments in the proposed corporation. (2) Exclusive right to vote and be voted. — Where, however, the

exclusive right to vote and be voted for in the election of directors is granted, such right must be for a limited period not exceeding five (5) years subject to approval of the Securities and Exchange Commission, the period to commence from the date of said approval, (see Sec. 97[3].) (a) The five-year period limitation and Commission approval requirement are designed to protect the interests of the other stockholders against possible abuse by a minority holding founders' shares granted the exclusive right to vote and be voted for in the election of directors, to hold office for an unlimited term. The limitation is non-extendible. The claim on earnings, either before or after the payment of dividends to other stockholders. Their participation in the assets of the corporation in the event of dissolution is usually limited to the remaining assets after other stockholders have received the amounts to which they are entitled, according to the provisions of the respective issues. ( E . L . Kohler, op. cit., p. 221.) In the deliberation of the Batasang Pambansa on founders' shares, it was the consensus of the lawmakers that the S E C will have to take into account: "x x x whether those persons to whom the prerogative or right is reserved have, shall we say, contributed substantially in the organization of the corporation or whether also the business of the corporation is of a character that is necessary for a period of time that its control must be to a certain group of individuals. Otherwise, it may not be able to obtain certain concessions, certain loans or certain business because these founders' shares may not only serve to remunerate possible promoters x x x because of the existence of a certain group of individuals who have perhaps special qualifications to manage a corporation by reason of which it is in their competence only that certain other groups with which the corporation may be dealing and willing or agreeable to enter into transactions with the corporation but only if the management of that corporation is reserved to that group x x x." (Proceedings of the Batasang Pambansa, Nov. 12,1979, cited in S E C Opinion, April 26,1981.) It is not clear whether founders' shares would retain their character as such in case they are transferred by their original owners.

104


Sec. 8

Commission may approve or reject the grant of the exclusive right having in mind as well the protection of the interests of the corporation itself. (b) Section 7 provides an exception to the rule in Section 6 (par. 1.) 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." (c) The limitation in Section 7 refers only to the exclusive right to vote and be voted for in the election of directors, a right normally enjoyed by holders of common shares, the class of shares which are supposed to have complete voting rights. After the expiration of the limitation period, founders shall have equal rights with the holders of common shares. Preferred shares are not affected by the provisions in Section 7. Their status remains even after the expiration of the fiveyear period. (SEC Opinion, Aug. 8,1995.) Sec. 8. Redeemable shares. — Redeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation. They may be purchased or taken up by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation, and upon such other terms and conditions stated in the articles of incorporation, which terms and conditions must also be stated in the certificate of stock representing said shares, (n) Redeemable s h a r e s . Redeemable or callable shares are shares, usually preferred,

which by their terms are redeemable at a fixed date or at the option of either the issuing corporation or the stockholder or both at a certain redemption price. 44

(1) Meaning of redemption.

— It is the repurchase,

the

reacquisition of stock by a corporation which issued the stock in exchange for cash or property, whether or not the acquired stock is cancelled, retired or held in the treasury. Essentially, "Republic Planters Bank vs. Agana, Sr., 269 SCRA 1 (1997), citing DE LEON, The Corporation Code of the Philippines Annotated, p. 75 (1989 ed.).

Sec. 8


105

the corporation gets back some of its stock, distributes cash or property to the shareholder, and continues in business as before. The redemption of stock dividends previously issued is sometimes used by corporations as a veil for the constructive distributions of cash dividends. (Comm. of Internal Revenue vs. Court of Appeals, 301 SCRA 152 [1999].) 45

(2) When redeemable shares may be issued. — Under Section 8,

they refer to shares issued by a corporation which said corporation may purchase or take up from their holders upon the expiration of a fixed period and upon such terms and conditions expressly provided in its articles of incorporation and certificates of stock representing said shares. They may be issued only when expressly so provided in the articles of incorporation. Common shares are never "redeemed." (3) Redemption regardless of existence of unrestricted retained

earnings. — Upon the expiration of the period fixed, they may be taken up or purchased by the corporation, regardless of the existence of unrestricted retained earnings (see Sec. 43.) in the books of the corporation. (a) The rule in Section 41 is different. The power of the corporation to acquire its own shares for the purposes stated therein is subject to the condition that there be unrestricted retained earnings in its books to cover the shares purchased or acquired. In the case of redeemable shares, the shareholder is conferred the right of a creditor to attract corporate financing. (b) The issuance of the shares may be likened to the issuance of bonds or debt papers. Since the terms and conditions of the purchase are stated in the articles of incorporation, as well as in the corresponding certificates of stock, corporate creditors and other shareholders are supposed to be aware of the same. (c) Strict compliance with statutory or contractual provisions of redemption is essential. The retirement or redemption of stock by a corporation is different from a purchase by "See "Tax treatment of stock dividends," under Section 43.

106


Sec. 8

a corporation of its own stock. It is said that the manner in which a duly authorized plan for retiring stock is to be carried out is part of the corporate business, and in the absence of fraud or bad faith, is not subject to judicial control, (see 11 Fletcher, pp. 381-382 [1971].) (4) Where corporation insolvent. — Redeemable shares may

be redeemed regardless of the existence of unrestricted retained earnings, provided that the corporation has, after such redemption, assets in its books to cover debts and liabilities inclusive of capital stock. (Sec. 5, par. 5, SEC Rules Governing Redeemable and Treasury Shares.) Therefore, redemption may not be made where the corporation is insolvent or if such redemption would cause insolvency or inability of the corporation to meet its debts as they mature. (SEC Opinion, Jan. 23, 1985.) Such a limitation is based on the principle that corporate assets are a trust fund for creditors." (see Sec. 41.) (5) Terms and conditions. — Section 8 requires that all the terms and conditions affecting such shares must be stated not only in the articles of incorporation but also in the certificate of stock representing said shares. Provisions in the articles relating to the redemption of preferred stock are, in effect, a contract between the issuing corporation and the preferred stockholders and strict compliance thereof is essential. Thus, the corporation cannot redeem its preferred shares before the redemption period or at a discount price in contravention of the articles of incorporation to improve its financial position. The remedy is to amend the articles by changing the redemption features of the preferred shares. (SEC Opinion, Jan. 23, 1985.) (6) Redemption optional with corporation. — Except as other-

wise provided therein, the redemption rests entirely with the "Republic Planters Bank vs. Agana, Sr., 269 SCRA 1 (1997), citing DE LEON, p. 76. If the redemption would prejudice the rights of corporate creditors, the latter have the right to question the same. In case of dissolution, holders of redeemable shares are not entitled to any part of the corporate assets until corporate debts and liabilities are fully paid. The rights should be deemed subordinate to the rights of corporate creditors. The rule then is that redeemable shares may be redeemed, regardless of the existence of unrestricted retained earnings, provided that after such redemption, the corporation has sufficient assets in its books to cover its debts and liabilities inclusive of its capital stock.

Sec. 8


107

corporation, and the stockholder is without right to either compel or refuse the redemption of his stock, i.e., the payment of cash in exchange for the stock. The redeemable shares provided in Section 8 are of the optional, not the obligatory type." (7) Maintenance of a sinking fund. — For the protection of

stockholders, all corporations which have issued redeemable shares with mandatory redemption features are required by the SEC to set up and maintain a sinking fund where cash is gradually set aside in order to accumulate the amount necessary to meet the redemption price of redeemable shares at specified dates in the future. The fund shall be deposited with a trustee bank and shall not be invested in risky or speculative ventures, (see SEC Rules Governing Redeemable and Treasury Shares, [CCP] No. 1-1982.) (8) Purpose of redemption. — Redemption is not a preference

for the benefit of the shareholders but a restriction to be exercised in the discretion of the board of directors for the benefit of the owners of the corporation, holders of common shares. It is a safeguard to enable a corporation to retire an obligation or a claim on the earnings, usually at a premium when it becomes advisable for purposes of financing. (Ballantine, p. 509 [1946 ed.].) It is generally held that a corporation may redeem its preferred stock only when it is expressly authorized by law or has contractually reserved the right to do so, and that it has no inherent power in this respect. (Bowman vs. Armour & Co., 17 111. 2d 43.) In the light of the foregoing, unless expressly provided in the articles of incorporation and stated in the certificate of stock, preferred shares shall be deemed irredeemable, (see SEC Opinion, Dec. 4,1968.) (9) Effect of redemption. — A redemption by the corporation

of its stock is, in a sense, a repurchase of it for cancellation.* The 8

"Ibid., citing DE LEON, pp. 76-77, note 1. "Ibid. The redemption price usually includes the capital component, at par or stated value per share, and if dividends are cumulative, any arrearages to the redemption date as the dividend component. Payment of an additional sum is frequently provided for as a "premium component." (William L. Cary, Cases and Materials on Corporations, 1969 ed. [University Case Book Series], p. 1616.)

108


Sec. 9

retirement of a class of stock destroys all rights adhering to the shares of that class. (18 Am. Jur. 2d 805.) (a) In the case of redeemable shares reacquired by the corporation, the same shall be considered retired and no longer issuable, unless otherwise provided in its articles of incorporation, (see SEC Rules [CCP] No. 1-1982, supra.) The rule is different with respect to treasury shares, (infra.) (b) Upon redemption, redeemable shares lose their status as part of the outstanding or unissued authorized capital stock. They are considered treasury shares after redemption if by provision of the articles of incorporation they can be reissued." (c) Where the reissuance of redeemed shares is prohibited, either expressly or impliedly by silence, the number of authorized shares of the capital stock of the corporation is reduced accordingly, and the articles of incorporation must be amended to reflect such reduction, (see Sec. 16.) (10) Voting rights. — Redeemable shares may be deprived of voting rights in the articles of incorporation, unless otherwise provided in the Code, (see Sec. 6, pars. 1, 6[l-8].) Sec. 9. Treasury shares. — Treasury shares are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation, or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of directors, (n) Treasury shares.

Treasury shares are shares which have been lawfully issued by the corporation and fully paid for and later reacquired by it either by purchase, redemption (Sec. 8.), donation, forfeiture or other lawful means. (1) Status. — Section 41 expressly empowers a stock corporation to purchase or acquire its own snares for legitimate corporate "Although they are no longer issuable, they may still be considered treasury shares they continue to be part of the authorized capital stock of the corporation.

Sec. 9


109

purposes. Only surplus earnings may be used for the purchase of treasury shares. Under Section 68 (last par.), the corporation, in the absence of a qualified bidder, may bid at the public sale of delinquent shares and title to the shares purchased shall be vested in the corporation as treasury shares. The purchase by the corporation operates, in effect, as a forfeiture of the shares. (a) Treasury shares are not retired shares. They do not revert to the unissued shares of the corporation but are regarded as property acquired by the corporation which may be reissued or resold by the corporation at a price to be fixed by the board of directors. (SEC Rules Governing Redeemable and Treasury Shares, [CCP] No. 1-1982.) Hence, the price paid out of retained earnings for the value of reacquired shares should be treated in the corporate books as payment for the purchase of the shares (SEC Opinion, Feb. 20, 1991.) and an investment on such property. Retirement of treasury shares can be effected by decreasing the capital stock of the corporation in accordance with Section 38 for the purpose of eliminating the treasury shares. (SEC Rules, CCP No. 1-1982, supra.) (b) Treasury shares are issued shares but being in the treasury (hence, the name), they do not have the status of outstanding shares (Comm. of Internal Revenue vs. Marining, 66 SCRA 14 [1975].), in the sense that they do not constitute a liability of the corporation. They are, therefore, not a part of outstanding capital stock, (see Sec. 137.) A corporation may eliminate the treasury shares by reducing its authorized capital stock, (see Sees. 38, 57.) Since they do not lose their status as issued shares, they cannot be treated as new issues when disposed of or reissued. 50

T h e transaction is subject to the registration requirement of the Revised Securities Act (Part II) considering that the re-issuance thereof may constitute distribution of securities to the public and consequently, new or additional stockholders may come in. However, the same may be exempted by the SEC if the transaction is of limited character where the corporation does not normally acquire its own shares of stock and the number of shares to be disposed of is usually minimal. But exemption is not automatic. The corporation is still required to secure exemption from the SEC prior to such reissuance pursuant to Section 6(b) of the Act. (SEC Opinion, Jan. 14,1993.) 5

110


Sec. 9

(c) A treasury share or stock, which may be common or preferred, may be used for a variety of corporate purposes, such as for a stock bonus plan for management and employees, or for acquiring another company. It may be held indefinitely, resold or retired. While held in the company's treasury, the stock earns no dividends and has no vote in company's affairs. (Philippine Coconut Producers Federation, Inc. vs. Republic, 600 SCRA 102 [2009].) (d) Treasury shares must be distinguished from the authorized but unissued shares in that the acquisition of the former does not reduce the number of issued shares or the amount of stated capital stock and their sale does not increase the number of issued shares or the amount of stated capital. (SEC Opinion, Jan. 14, 1993, citing 11 Fletcher, chap. 58, sec. 5088.) (2) Where acquisition from stockholders. — Shares may be

acquired by the corporation from stockholders by purchase, redemption, or donation, or through some other lawful means. (a) If the corporation acquires the shares by purchase from stockholders, the transaction is, in effect, a return to them of the value of their investments in the company, and a reversion of the shares to the corporation. It is required in such cases, however, that the corporation must have surplus with which to buy the shares so that the transaction will not cause an impairment of its capital, (see Sec. 41.) (b) On the other hand, if the shares are donated to the corporation by the stockholders, their act would simply amount to the surrender of their stock without getting back their investments which are, instead, voluntarily given to the corporation. In both kinds of acquisition of the corporation, therefore, the shares would have value but inasmuch as they have been acquired by the corporation, they would cease to represent any right. (SEC Opinion, Nov. 22,1966.) Treasury shares are recorded at cost. (3) Dividend restriction on retained earnings. — As a general

rule, a corporation can reacquire its own shares provided it has

Sec. 9


111

an adequate amount of unrestricted retained earnings to support the cost of the said shares. Thus, the capital stock is preserved. 51

Accordingly, the amount of such earnings equivalent to the cost of the treasury shares being held, cannot be declared and distributed as dividends. Such restriction shall be lifted only after the treasury shares are reissued or retired in accordance with law. (SEC Rules, CCP No. 1-1982.) (4) Declaration as property dividend. — Treasury shares being

unrealized income, are not considered as part of earned or surplus profits, and, therefore, not distributable as dividends, either in cash or stock. But if there are retained earnings arising from the business of the corporation, treasury shares, being the property of the corporation, may properly be distributed as property dividend. (SEC Opinion, Oct. 1,1985.) The Securities and Exchange Commission requires that an amount of the retained earnings equivalent to the cost of treasury shares be restricted from being declared as dividends, until said shares are reissued or retired. Treasury shares may be declared as property dividend to be issued out of the retained earnings previously used to support their acquisition, provided that the amount of the said retained earnings has not been subsequently impaired by losses. Any declaration and issuance of treasury shares as property dividend shall be disclosed and properly designated as property dividend in the books of the corporation and in its financial statements. (SEC Rules, CCP No. 182, supra.) (5) Voting rights. — Treasury shares have no voting rights as long as they remain in the treasury (Sec. 57.), i.e., uncancelled and subject to reissue. A corporation cannot in any proper sense be a stockholder in itself, and shares of its own stock, therefore, held by it cannot be voted or be entitled to vote, for otherwise, equal distribution of voting powers among stockholders will be effectively lost and the directors will be able to perpetuate their control of the corporation. (Comm. of Internal Revenue vs. Manning, supra; San Miguel Corporation vs. Sandiganbayan, 340 SCRA 289 [2000].)

51

For exceptions to this rule, see note under Section 41.


112

Sec. 9

(6) Right to dividends. — Neither are treasury shares entitled to dividends or assets because dividends cannot be declared by a corporation to itself. (Ibid.) Such distribution of dividends would be like making the corporation debtor and creditor of the same amount at the same time or requiring it to take money or stock from one of its pockets and putting the same in another, which would be pointless. Hence, stock dividend (see Sec. 43.) may not be declared on treasury stock even on the express condition that such dividend shall also be treated as treasury stock. (SEC Opinion, Nov. 2,1966.) "So, what rights, if any, remain? Perhaps the right of the corporation to reissue its treasury shares for a valuable consideration if its charter permits but this is a mere incident of incorporation which is applicable to unissued as well as to issued shares x x x." (Ballantine, p. 615 [1946].) Treasury shares are no longer part of the "outstanding capital stock." (see Sec. 137.) 52

(7) Resale. — They may be sold by the corporation at any price the board of directors sees fit to accept, even at less than par or issued value, the corporation having already received the full value upon their initial issuance, provided such price is reasonable under the circumstances: (see Sec. 65.) (a) Stockholders may rightfully complain if the price is lower than reasonable. (b) In case of sale or reissue, the treasury shares again becomes outstanding stock and regain whatever dividends and voting rights they originally held. (c) Treasury shares differ from retired or cancelled shares in that while the latter has disappeared altogether, the former may be sold. Section 36(6) expressly authorizes stock corporations to sell treasury shares subject to the provisions of Section 9. Their status on resale differs from that of newly M

Art. 1275. The obligation is extinguished from the time the characters of creditor and debtor are merged in the same person. (Civil Code) "There has been considerable discussion among accountants, and some shifting of opinions, as to the proper accounting treatment of purchases of shares for the treasury. Such shares are not, in fact, a corporate asset. Where they are acquired out of surplus, it seems clear, particularly in states in which their acquisition out of capital is illegal, that 52

Sec. 9


113

created shares which cannot be issued for less than the legal minimum consideration, (see Sec. 62.) (d) The sale of treasury shares should be treated as a sale of ordinary property of the corporation; hence, the gain therefrom is subject to tax. The purpose of the sale is to recover the amount paid by the corporation for said shares. — oOo —

the surplus should be reduced or earmarked as restricted to the extent of the amount paid for the shares. But the restriction may be lifted and the surplus restored, even as earned surplus, if thereafter the treasury shares are resold (to the extent the amount received covers what has been paid to reacquire them), or if the shares are retired. (William L. Cary, op. cit., p. 1615.)

Title II INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS Sec. 10. Number and qualifications of incorporators. — Any number of natural persons not less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents of the Philippines, may form a private corporation for any lawful purpose or purposes. Each of the incorporators of a stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation. (6a) Incorporation of a private corporation a mere privilege.

Generally, incorporation is generated by agreements of a group of persons, and may, therefore, be likened to other contracts which individuals may enter into. But such agreements alone are not sufficient for a corporation to exist. It is necessary that legislative authority be obtained to put a stamp of state intervention in the creation of corporations, such power being one of the attributes of sovereignty. (18 C.J.S. 404.) In our jurisdiction, the right to be and act as a corporation does not belong to any person as a natural and civil right, but as a special privilege conferred upon a group of persons by the sovereign power of the State. Until there is a grant of such right, therefore, whether by special act of the legislature or under general law, there can be no corporation. Under Section 10, the formation of a corporation "for any lawful purpose or purposes," provided it is in accordance with the Code, is a matter of right and cannot be restrained, (see Sec. 17.) 114

Sec. 10

TITLE n. INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS

115

Since a corporation is merely a creation of law, it can be dissolved at any time by legislative enactment subject to certain limitations, (see Title XIV.) Advantages of the corporate form.

The advantages of incorporation are so well understood that it seems almost superfluous to enumerate them, (see Sec. 2.) Nevertheless, it may be useful to mention here only its chief advantages as stated by a well-known authority. First, through the process of incorporation, any number of persons may unite in a single enterprise without using their own names, without difficulty or inconvenience, and with the valuable right to contract, to sue and be sued, to hold or convey property in the corporate name, and to act as a legal unit. Second, an individual stockholder may invest in the corporate enterprise as much or as little as he sees fit, without risking more, and, in the absence of statutes to the contrary, this is the limit of his liability, since stockholders are not personally liable for the debts of the corporation. They can transfer their shares without the consent of the other stockholders. Third, the rights and obligations of a corporation are not affected by the death or change of the individual members, but the corporate business continues uninterrupted and unaffected so long as the corporate entity continues. Its credit is strengthened by such continuity of existence. Fourth, the modern corporation makes great undertakings feasible since it enables many individuals to cooperate in order to furnish the large amounts of capital necessary to finance the gigantic enterprises of modern times, (see 1 Fletcher, p. 42.) The resulting large-scale enterprise may be more efficient, thus lowering the costs of production. (C.L. James, Principles of Economics, supra, p. 46.) Corporations a n d associations distinguished.

(1) Concept of association. — A corporation is defined by Section 2 of the Code. The word "association" is one of vague mean-

116


Sec. 10

ing, used to indicate a collection of persons who have joined together for a certain object. The term is properly applied to an unincorporated society or body of individuals, formed for moral, benevolent, social, patriotic, or political purposes. (5 Am. Jur. 2d 430-431.) (2) Possession of juridical personality. — While an association

may, in its broadest sense, include a corporation, the two terms ordinarily are used to denote different conceptions. The principal distinction lies in the fact that a corporation is a legal entity deriving its existence from franchise, whereas an association, in the narrower sense of the term, is a creature of contract without a legal entity separate from the individuals composing it. (7 C.J.S. 21.) It is clear from the foregoing that the two terms, "corporation" and "association," denote two different significations in the strict legal sense. (3) Governing law. — Moreover, private corporations are governed by the Corporation Code, while associations are generally governed by the provisions of the Civil Code or some other laws. (SEC Opinion, July 27, 1962.) Article 45 of the Civil Code provides, among other things, that "private corporations are regulated by laws of general application on the subject; while partnerships and associations for private purposes are governed by the provisions of this Code concerning partnerships." (4) Capacity to act in its name. — Article 46 of the Civil Code also provides: "Juridical persons may acquire and possess property of all kinds as well as incur obligations and bring civil or criminal actions in conformity with the laws and regulations of their organization." Thus, an association cannot sue or be sued, it cannot enter into contracts in the name of the association, and neither can it acquire properties under its common name. Contracts entered into in its behalf make the person signing or executing them liable to the other contracting party. (SEC Opinion, July 23,1990.) An association is not competent to act as agent or create agents or confer upon another authority to act on its behalf, and those who act or purport to act as its representatives or agents do so at their own risk. (Vda. de Salvatierra vs. Garlitos, 103 Phil. 757 [1958].)

Sec. 10


117

(5) Validity and enforcement of acts. — The fact, however, that

a group of persons adopt a name and operate without first being organized as a legal entity, does not make their acts necessarily void. Their acts may be valid, although unenforceable under the name they have adopted. If a suit is to be brought to enforce their rights, they have to sue as individuals and not in the name of the group or association, it not being a legal unit, (see Rules of Court, Rule 3, Sec. 15.) It follows that although an association has no juridical personality, its subscription to the capital stock of a corporation is not necessarily invalid. Of course, the subscription should not be taken and accepted under such name, in the first place. (SEC Opinion, March 11,1969.) (6) Powers, rights, and privileges. — A society or association

not engaged in business and not desirous of acquiring juridical personality need not be registered with the Securities and Exchange Commission. (SEC Opinion, Aug. 22, 1989.) An unregistered organization, however, cannot exercise the powers, rights and privileges incident to incorporation and expressly granted to registered corporations under Section 36 of the Corporation Code. (7) Policy of judicial non-interference. — The general rule is that

courts will not interfere with the internal affairs of an unincorporated association so as to settle disputes between the members on questions of policy, discipline, or internal government. (Lions Clubs International vs. Amores, 121 SCRA 621 [1983].) Concept of franchise.

In common usage, the term "franchise" includes any special privilege or right affected with public interest, conferred by the State on corporations or persons and which does not belong to the citizens of the country, generally as a matter of common right, (see J.R.S. Business Corp. vs. Imperial Insurance, Inc., 11 SCRA 634 [1964]; National Power Corporation vs. City of Cabanatuan, 401 SCRA 259 [2003].) To illustrate: No persons can make themselves a body corporate without legislative authority. The right to exist, therefore, as a corpora-

118


Sec. 10

tion is a (primary or corporate) franchise. No person can take another's property even for public use, without such authority, which is the same as to say that the right of eminent domain can only be exercised by virtue of a legislative grant. This right of eminent domain is a (secondary or special) franchise. As a privilege, a franchise is not exercised by private individuals at their mere will and pleasure only but under such conditions, regulations, and restrictions as the government may deem necessary to impose in the public interest, security and safety. Primary franchise a n d s e c o n d a ry franchise defined an d distinguished.

For practical purposes, franchises, so far as relating to corporations, have been divided into two kinds: (1) Primary or corporate franchise is the right or privilege

granted to individuals by the State to be and act as a corporation after its incorporation. This privilege, which is granted to the incorporators, enables them to act for certain designated purposes as a single individual and exempts them, unless otherwise especially provided, from individual liability for corporate debts. (18 Am. Jur. 2d 608-609.) The primary franchise (also called "general franchise") is granted to and vests in the individuals who compose the corporation and not in the corporation itself. (2) The right to exist as a corporation is thus distinguished from the franchise to exercise powers and privileges granted to such corporation to the business for which it was created, including those conferred for purposes of public benefit such as the power of eminent domain and other powers and privileges enjoyed by public utilities, which is called secondary or special franchise. Only quasi-public corporations or those affected with public interest are given the power to institute condemnation proceedings against owners of private property. It is unlawful to grant the right of eminent domain to purely private entities, exercising functions which are not public in nature. For in such cases, they would be using the right to take property for private use. (SEC Opinion, Oct. 28,1968.)

Sec. 10

TITLE II. INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS

119

The secondary franchise is conferred upon the corporation after its incorporation and not upon the individuals who compose the corporation. It has been held by the Supreme Court that the term "franchise" used in the 1935 Constitution of the Philippines, that "no franchise, certificate or any other form of authorization for the operation of a public utility shall be granted except to corporations or other entities organized under the laws of the Philippines sixty per centum of the capital of which is owned by citizens of the Philippines x x x." (Article XIV, Sec. 5 thereof.'), refers to secondary franchise or the privilege to operate as a public utility after the corporation has already come into being. The Constitution does not prohibit the mere formation of a public utility corporation without the required proportion of capital. What it does prohibit is the granting of a franchise or other form of authorization for the operation of a public utility to a corporation already in existence but without the requisite proportion of Filipino capital. (People vs. Quasha, 93 Phil. 333 [1935].) This ruling must be qualified in view of Section 17(4). (infra.) Transferability of f r a n c h i s e .

The term "franchise" is generic, covering all the rights granted by the State. It may mean either the corporate or primary franchise which is the right granted to a group of individuals to exist and act as a corporation, or the secondary or special franchise which is the right granted to a corporation to exercise certain powers and privileges, (supra.)

(1) The primary franchise is in its nature inalienable. It is part of the corporation and cannot be sold or assigned; otherwise, a corporation would be created without the consent of the legislature. (Memphis, etc., RRC vs. Railroad Comrs., 112 U.S. 609, 28 L. ed. 837.) It may be conveyed provided there is express legislative authority to do so. (J.R.S. vs. Imperial Insurance Co., Inc., 11 SCRA 634 [1964].) (2) The secondary franchise, which is vested in the corporation itself, may ordinarily be conveyed or mortgaged under a general •Now Article XII, Section 11.

THE COPvPORATION CODE OF THE PHILIPPINES

120

Sec. 10

power granted to a corporation to dispose of its property, except such franchises as are charged with a public use. (Ibid.) Thus, if the corporation is a public utility, its franchise can only be sold subject to the prior approval and authorization of the (now defunct) Public Service Commission. (Act No. 156, Sec. 20[g], as amended.) It has been held that even if the franchise is sold under execution, such approval of the Public Service Commission is still necessary. (Raymundo vs. Luneta Motor Co., 58 Phil. 880 [1933].) In the absence of such approval in the transfer of the property covered by the franchise, the transferor or grantee continues to be responsible under the franchise in relation to the Commission and to the public. The transferee holds the property as agent for the registered owner as far as the law is concerned. ("Y" Transit Co., Inc. vs. National Labor Relations Commission, 229 SCRA 508 [1994].) A secondary franchise is subject to levy and sale on execution, together with all the property necessary for the enjoyment thereof. However, where the judgment does not contain any special decree making the franchise of a private corporation answerable for its judgment debt, the inclusion of said corporation's franchise (e.g., to operate a messenger as delivery service), trade name and capital stocks in the execution sale of its properties has no justification and such sale should be set aside insofar as it authorizes such levy and sale. (J.R.S. Business Corp. vs. Imperial 2

Insurance, Inc., supra.) Steps in the creation of a c o r p o r a t i o n .

There are three (3) steps in the creation and organization of a corporation, namely: (1) Promotion; (2) Incorporation (Sec. 10.); and

Under the former Corporation Law (Act No. 1459, as amended.), voluntary transfer of franchise is not permitted. Sections 51 to 61 of the law refer to forced or involuntary transfer or sale of secondary franchise under execution. But the sale must be "especially decreed and ordered in the judgment" of the court and "confirmed by the court after due notice." (Sec. 56 thereof.) 2

Sec. 10


121

(3) Formal organization and commencement of business operations, (see Sec. 22.) P r o m o t i o n of c o r p o r a t i o n s.

The term "promotion" is said to be not a legal but a business term, usefully summing up in a single word, a number of business operations peculiar to the commercial world by which a company is generally brought into existence. (18 Am. Jur. 2d 647.) The formation and organization of a corporation are brought about generally at the instance and under the supervision of one or more so called "promoters." (see Sec. 4.) The activity on the part of such persons is not, strictly speaking, a formal part of the organization of a corporation, inasmuch as it occurs outside the corporate form and theoretically, at least, independent thereof. (Ibid.) Upon incorporation, the practice is for the board of directors to pass a resolution ratifying the contracts entered into by the incorporators with the promoters. A corporation, however, may be formed and organized by the incorporators themselves without getting the services of socalled promoters. P r o m o t e r s of c o r p o r a t i o n.

A promoter of a corporation is one who, alone or with others, takes it upon himself to organize a corporation: to procure the necessary legislation, where that is necessary; to procure the necessary subscribers to the articles of incorporation, where the corporation is organized under general laws; to see that the necessary document is presented to the proper office to be recorded and the certificate of incorporation issued; and generally, to "float the company." Promoters are often referred to, especially in the English cases, as "projectors," "agents," "stewards," or "trustees," but whatever term is applied, it means "one who acts in the formation, establishment, and control of a company prior to the incorporation and the assumption of control by the board of directors." (18 C.J.S. 521-522.) They are the agents of the incorporators.

122


Sec. 10

Stages in corporate promotion.

A corporate promotion is said to include three (3) stages, to wit: (1) Discovery. — This stage may represent a new product or service, or the promoter may simply organize another company in an existing line of business; (2) Investigation. — This second phase involves an analysis of needs — financial, management, plant, material and labor — and a decision whether the estimated earnings justify the effort; and (3) Assembly. — This last stage consists of bringing together the property, money, and personnel into an organization. At this stage, the promoter must have some assurance of control lest third parties deprive him of the fruits of his efforts. Control may cover such items, for example, as patents, leases, options on property, and contracts for services. The above is a description of the promoter in the economic sense. At law, promoter problems arise in several contexts. For example, the extent of his rewards and the manner of obtaining them may sometimes be subject to question. (W.L. Cary, Cases and Materials on Corporations, 1969 ed. [University Case Book Series], p. 86.) Nature of relations of p r o m o t e r s .

(1) To corporation. — A promoter has a unique relation to a corporation representing its interest when it does not legally exist or has just been created. (a) The promoters of a corporation are not in any sense the agents of the corporation before it comes into existence, for there cannot be an agency unless there is a principal. But they may, of course, become the agents of the corporation after it has been formed provided there is assent, express or implied, on the part of the corporation. (18 C.J.S. 522.) (b) Although promoters cannot occupy the relation of agent of the corporation before its formation, and although they are not trustees in the proper sense, it is well-settled that they occupy a fiduciary or quasi-trust relation toward the corporation when it comes into existence and towards

Sec. 10


123

the subscribers prior to its organization, as long as they are acting as promoters. (Ibid.) This fiduciary relation imposes upon the promoter to act in good faith in all dealings in behalf of the corporation to protect the corporation from dishonest promoters. A promoter violates this duty if, for example, he secretly acquires property which he knows the corporation will acquire and then sells it to the corporation at a secret profit. (2) To subscribers or corporators. — Although promoters of

a corporation cannot be agents of the corporation before it is formed, they may be agents of the subscribers or corporators. (a) Since agency is a contract, it is essential that there is an agreement to this effect. (b) Even when there is no agency, the relation between the promoters and the persons who have become, or who are expected to become, subscribers for its capital stock, or corporators, or purchasers of stock from the corporation, is one of trust and confidence, so as to impose upon the former the duty to act in perfect good faith and in the interest of all the subscribers and corporators. (c) Subscribers for stock in a proposed corporation do not, without agreement to such effect, become partners with the promoters of it. (14 C.J. 254.) (d) Stockholders of a corporation cannot be held personally liable for the compensation claimed by promoters for services performed by them in the organization of the corporation in the absence of any showing that said stockholders contracted such services. The fact that they benefited from such services is no justification to hold them personally liable therefor. The corporation should alone be liable for its corporate acts as duly authorized by its officers and directors. (Caram, Jr. vs. Court of Appeals, 151 SCRA 372 [1987].) (3) Inter se. — A partnership can be created, as between the parties themselves, only by mutual agreement, and, therefore, promoters do not become partners as between themselves, in the absence of such agreement, by merely joining in an attempt to create a corporation, by uniting in subscriptions for stock, or by

124


Sec. 10

otherwise promoting the creation of the corporation. But such a relation may, of course, be created by agreement of the parties, in which case it is governed by the general principles of the law of partnership. (14 C.J. 254.) It is, however, unimportant to determine whether the relationship is a partnership or a mere joint venture since in both cases, the legal rules which apply and the principles which govern the parties are the same. Each member is bound to the same scrupulous good faith toward his fellow members as though all were partners, and each has the right to demand from the others the utmost good faith in everything concerning the common interest. (18 Am. Jur. 2d 676.) Liability of corporation for p r o m o t i o n fees.

(1) General rule. — In the absence of character or statutory provisions, a corporation is not liable to its promoters in respect for any payment in services rendered or expenses incurred before its incorporation in promoting it, unless after its incorporation it expressly agrees to make such payment or from the other facts the court can infer a new contract to reimburse. (a) It is more reasonable to hold services performed or expenses incurred prior to organization of a corporation to have been gratuitous in view of the general good or private benefit expected to result from the object of the corporation, and because it is unjust to stockholders who subscribe and pay for stock, that their property be subject to claims to which they have no voice in creating. (b) It is a fraud for promoters to undertake to decide for the future stockholders in the corporation to be organized that a large part of the capital stock is a fair remuneration for their services, to issue that amount to themselves as such remuneration, and then to invite the public to subscribe to stock without disclosing that fact and getting the subscribers consent to the payment of that remuneration. (18 Am. Jur. 2d 649.) (2) Authorization by stockholders. — After due organization of

the corporation, it may, with the consent of all its stockholders

Sec. 10


125

and where there is no question as to the rights of subsequent stockholders, authorize the payment of compensation to promoters and the issuance to them of stock unless prohibited by statute. (Ibid.) (3) Under the Revised Securities Act. — The Code contains

no provision regarding the payment of promotion fees for the promotion of corporations. The Revised Securities Act, however, authorizes the payment of such fees if the same is provided for in the registration statement of securities filed with the Securities and Exchange Commission under Section 8(34) of said Act. It follows that if the securities of the company are not registered under the Securities Act, the prevailing rule of proper corporate practice on the payment of such fee should be the one observed, but if the securities are registered under the said Act, the provisions of the registration statement on the matter should be followed. (4) Amount. — The amount of promotion fees that the Securities and Exchange Commission allows depends principally upon the effort exerted, the difficulties encountered, and the expenses incurred in promoting and organizing the corporation. There is no hard and fast rule in this regard. However, in certain cases in which the Commission had authorized the payment of promotion fees as in the case of mining companies, the maximum fee that had been allowed did not exceed 5% of the amount paid and received on the subscriptions. As a rule, this promotion fee is not given in lump sum but in stages as the company proceeds in its operations. (SEC Opinions, July 10,1963 and July 22,1970.) Liability of corporation on promoter's contracts. (1) Before incorporation and organization. — Until the certificate

of incorporation has been issued by the Securities and Exchange Commission (see Sec. 19.), a corporation has no being, franchise or faculties. Its promoters or those engaged in bringing it into existence are in no sense identical with the corporation; nor do they represent it in any relation of agency or have any authority to enter into preliminary contracts binding upon the corporation.

126


Sec. 10

Therefore, since a corporation cannot, before its organization, have agents contract for itself, or be contracted with, it is not liable upon any contract which a promoter attempts to make for it prior to its organization unless the contract is expressly or impliedly adopted or ratified by it after organization is completed or liability is imposed by statute. In other words, a promoter's contract does not, by the incorporation of a contemplated company, ipso facto become the contract of the corporation. (2) After incorporation and organization. — Under the gene-

ral rule permitting a corporation to assume liability on a promoter's contract, the contract must, of course, be one such as the corporation can itself make. A corporation as a legal entity cannot assume the obligations of an ultra vires contract (see Sec. 45.) made by its promoters anymore than it can legally initiate such contract. (18 Am. Jur. 2d 600-601; see Cagayan Fishing Dev. Co., Inc. vs. Sandiko, 65 Phil. 223 [1937].) Until such assumption of liability is made, the better rule seems to be that contracts entered into by promoters "should at most be deemed suspended, and enforceable only after the incorporation and organization" of the corporation, (see C.G. Alvendia, op. cit., p. 135.) Liability of promoter s for failure to organize corporation.

(1) To subscribers. — If money is paid to promoters or provisional directors by a subscriber for shares in a projected corporation preliminary to organization, and the promoters or provisional directors fail to organize the corporation according to the prospectus or other agreement or abandon the enterprise before it has been carried into execution, it is a case of money paid on a consideration which has failed. The subscriber may, therefore, recover it back from the promoters or directors in an action at law although the money has been applied in payment of preliminary expenses or otherwise. (18 C.J.S. 537.) Where, however, the subscriber agrees that the amount paid on his subscription may be applied on certain promotional or development expenses and it is so applied, the promoters are not personally liable for the

Sec. 10


127

amount paid on the subscription where the project to organize the corporation is abandoned. (18 Am. Jur. 2d 660.) It must be shown by the subscriber that the person receiving the money sought to be recovered was authorized to receive it for the promoters or provisional directors or for the abortive corporation, and that he in fact did so receive it. (14 C.J. 276.) (2) To each other. — While it has been held that as between themselves the rights of the stockholders in a defectively incorporated association should be governed by the laws of the State relating thereto and not by the rules governing partners, it is ordinarily held that persons who attempt, but fail, to form a corporation and who carry on business under the corporate name, occupy the position of partners inter se. (see Sees. 22-23.) But such a relation should be implied only to do justice between the parties. So, one who takes no part except to subscribe for stock in a proposed corporation which is never legally formed does not become a partner with the other subscribers. (Pioneer Insurance & Surety Corp. vs. Court of Appeals, 175 SCRA 668 [1989].) Underwriting agreements. Underwriting agreements are now resorted to very generally in order to float stock issues of large corporations. There are four general types of underwriting contract. First, the syndicate may make a firm commitment under which the members severally but not jointly agree to purchase the whole issue outright at a particular price for resale at a price differential to the public, or to dealers who sell at another differential to the public. 3

Second, the underwriters may make an all-or-nothing commitment under which they agree to accept liability for the purchase

'Underwriting syndicate is the term used to refer to a group of investment bankers who have pooled their resources to share in the profits of an underwriting on a pro rata basis according to the amount of underwriting risk assumed. (Ibid., p. 64.) The contract may be entered into by the underwriter or underwriters with the corporation or with the promoter before incorporation.

128


Sec. 10

of an issue at a given price only if the entire issue is not sold — usually within a 30-day period. Third, the syndicate may make a standby commitment or rights

offering under which it will purchase and distribute at predetermined prices to the public any amount of the issue not taken by stockholders in exercising their pre-emptive rights. Fourth, the underwriters may decide to make only a best efforts commitment. This merely means that the syndicate will use its best efforts to distribute the issue to the public. Under such commitment, the syndicate does not agree to purchase the issue at predetermined prices. The security is sold for whatever price it will bring, the underwriters take a predetermined spread, and the issuers take the residual. Under a variation of this arrangement, there may be a fixed price but no guarantee on the quantity sold, (see J. Zwick & N. Norton, "Investment Banking and Underwriting," in The Stock Market Handbook, edited by F. Zarb & G. Kerekes, Vol. 1,1970 ed., p. 65.) The term "underwriting" is defined under the Investment Houses Law (Pres. Decree No. 129.) as "the act or process of guaranteeing the distribution and sale of securities of any kind issued by another corporation." (Sec. 3[a] thereof.) Incorporation distinguished f r o m creation.

The term "incorporation" is narrower in scope than the term "creation." The first "refers to the performance of conditions, acts, deeds, and writings by incorporators, and the official acts, certifications or records, which give the corporation its existence." On the other hand, the second, "understood in its broadest sense, includes all of the acts and doings from the enactment of the general incorporation law by the legislature through the promotion, underwriting, preparation and execution and filing of the incorporation papers and obtaining the certificate or charter, to the organization and first meeting and election which set the corporation in motion full-pledged." (C.G. Alvendia, op. cit., p. 73.)

Sec. 10


129

Incorporation distinguished f r o m corporation.

A corporation is a civil institution established by a law of the State from considerations of public policy. Its existence, its capacities, and its powers are all conferred by law from some real or supposed public benefit to result from it. It is a political institution of the State. The words "corporation" and "incorporation" are frequently confounded, particularly in the old books. The distinction between them is, however, obvious: one is a legal or juridical institution; the other, only the act by which that institution is created. When a corporation is said to be a person, it is understood to be so only in certain respects and for certain purposes, for it is strictly a legal institution, (see 9-A Words and Phrases 453.) S t e p s in incorporation.

Incorporation includes the following: (1) Drafting and execution of the articles of incorporation by the incorporators and other documents required for registration of the corporation. In this connection, the person chosen as temporary treasurer pending incorporation must also execute: (a) An affidavit certifying compliance with subscription and paid-up requirements as to capital stock (see Sec. 14, last par.); (2) Filing with the Securities and Exchange Commission of the articles of incorporation together with the following: 4

The Securities and Exchange Commission also requires the following documents to be submitted with the articles of incorporation: (1) Verification Slip, a certification to be attached to the articles of incorporation/ partnership and executed by the chief of the Records Section that the proposed name of the corporation /partnership has been verified and found to be distinct from the names of already existing corporations/partnerships or those pending registration; (2) Sworn Statement of Assets and Liabilities, duly executed under oath by the corporate treasurer together with the amount of P50.00 to defray publication expenses; (3) Bank Certificate of Deposit, issued under oath either by the Bank Manager or any authorized Bank Officer that there is, as deposited, a stated amount representing the paid-up capital of the corporation either in the name of the Treasurer in trust for the corporation or in the name of the corporation itself, likewise to be attached to the articles of incorporation; 4

130


Sec. 10

(a) Treasurer's affidavit in the form prescribed in Section 15 showing at least 25% of the entire authorized shares has been subscribed and at least 25% of the subscription has been paid in cash and/or property to the corporation (Ibid.); and (b) In case the corporation is governed by a special law (e.g., educational institution), a favorable recommendation of the appropriate government agency (i.e., Department of Education, Culture and Sports) that such articles of incorporation is in accordance with law (see Sec. 17, last par.); (3) Payment of the filing and publication fees (see Sec. 139.); and (4) The issuance by the Securities and Exchange Commission of the certificate of incorporation if all the papers filed after verification and examination are found in order, (see Sec. 19.) There are rules or requirements under special laws to be complied with in organizing specific business and to endow the corporation with the capacity to transact the business for which it was created. 5

Substantial c o m p l i a n c e w i t h r e q u i r e m e n t s.

Where the formation or organization of corporations is not governed by special laws (e.g., those engaged in real estate development), the Securities and Exchange Commission may accept and approve the articles of incorporation or amendments therein upon mere showing of a substantial compliance with the Corporation Code (SEC Opinion, Oct. 12, 1988.) and that it meets the guidelines established by the Commission. (SEC Opinion, June 19,1989.) (4) Written Authority to Verify Bank Deposits, signed by the corporate treasurer empowering the SEC and / or the Central Bank to check and inspect the existence of the bank deposit of the corporate paid-up capital; (5) Taxpayer Account Number (TAN), now Taxpayer Identification Number (TIN) of the Incorporators, pursuant to Executive Order No. 213; and (6) Registration Data Sheet, a statement in statistical data form signed by an authorized representative of the corporation regarding important information about the corporation seal, corporate name, principal office, capital structure, incorporators, their subscriptions, and TAN (SEC Bulletin, Oct. 1982, p. 6 ) , now TIN. sSee Guidelines in the Formation and Organization of a Private Stock Corporation. (Appendix "D.")

Sec. 10


131

It is a general principle that substantial compliance with the requirements of the statute authorizing the formation of corporations is all that is necessary to legal incorporation and to the existence of a corporation. Thus, Section 14 requires that articles of incorporation shall contain "substantially" the matters enumerated, "except as otherwise provided by this Code or by special law," while Section 15 provides that the articles of incorporation shall comply "substantially" with the form prescribed therein. Section 17(1) likewise requires a mere substantial compliance with the form prescribed in the Code relative to the approval of articles of incorporation and any amendment thereto. (Ibid.) Where there is substantial compliance with the legal requirements, the registration of the proposed corporation becomes a matter of right, (see Sec. 17.) The Securities and Exchange Commission has adopted an express lane service whereby the required forms for incorporation of corporations, whether stock or non-stock, are made available to the public for nominal fees. Incorporators: n u m b e r a n d qualifications.

Section 10 provides that the incorporators must be not less than five but not more than fifteen, all of legal age, a majority of whom are residents of the Philippines, and each of whom must own or be a subscriber to at least one share of the capital stock of the corporation. If the number of incorporators is more than fifteen, the excess will not be considered as incorporators. Unless otherwise expressly provided in the articles of incorporation, a corporation cannot impose other qualifications. The same rule applies as to stockholders. The general practice is for the incorporators to serve as the first directors of the corporation. (1) These five or more persons must be natural persons. Consequently, a corporation cannot be an incorporator of another corporation. (El Hogar Filipino vs. Government, 50 Phil. 399 [1927].) The rule is premised on the nature of corporations as follows: "Artificial persons, without brain or body, existing only on paper through legislative command and incapable of thought or

132


Sec. 10

action except through natural persons, cannot create other artificial persons, and those others still, until the line is so extended and the capital stock so duplicated and reduplicated as to result in confusion and fraud." (Schwab vs. Poeter Co., 194 N.Y. 409.) As an example of an exception to the rule, Section 4 of R.A. No. 7353 (Rural Banks Act of 1992.) provides that duly established cooperatives and corporations primarily organized to hold equities in rural banks may organize rural banks and/or subscribe to shares of stock of any rural bank. Accordingly, if the corporation is a cooperative, it may become an incorporator of a rural banking corporation. In any case, a corporation may become a stockholder in another corporation by subscribing to or purchasing the latter's stock (see Sec. 36[7].), for the power of one corporation to own stock in another corporation is entirely different from its power to create or itself become one of the incorporators of another corporation, (see 18 C.J.S. 414.) However, as a practical matter, a corporation could have its stockholders, directors, or officers, acting as individuals, organize a new corporation and thereafter the first corporation could acquire the stock of the new corporation. (18 Am. Jur. 2d 584.) (2) The incorporators must have the capacity to enter into a

valid contract, the act of forming a corporation as between the parties being contractual. Furthermore, the articles of incorporation, under Section 15, must be acknowledged by the incorporators before a notary public. There is thereby the requirement that the incorporators must be qualified to enter into a contract. The purpose of requiring the acknowledgment is to secure the State and all concerned against the possibility of any fictitious name being subscribed to the articles and to furnish proof of the genuineness of the signatures. (1 Fletcher, p. 414.) A married woman may be an incorporator without the need of obtaining the consent of her husband since under the law, "either spouse may exercise any legitimate profession, occupation, business or activity without the consent of the other" subject to the right of the husband to "object only on valid, serious and moral grounds." (Art. 73, Family Code.) A minor who is

Sec. 10


133

emancipated either by marriage or by voluntary concession of the parents is not qualified to be an incorporator because Section 10 requires that the incorporators must be "all of legal age." 6

The Code does not prohibit the formation or organization of corporations with same stockholders/incorporators, subject to the provisions of Section 140. (SEC Opinion, July 28,1978.) (3) A majority of the incorporators must be residents of the Philippines, the rest may be persons who are neither residents nor citizens of the Philippines. Hence, a corporation composed entirely of aliens may be incorporated as long as the majority of the incorporators are residents of the Philippines except in the case of nationalized corporations, (see Sees. 12,14 [eleventh].) 7

The Code does not define the word "residents" but the term must be construed to mean domiciled residents, as distinguished from temporary residents with a domicile in another country. The term "resident" or "residence," as used in corporate statutes requiring one or certain number of directors to be residents of the State, is equivalent to domicile, the pertinent elements of which are physical presence in the State and an intention to remain therein. (SEC Opinion, Jan. 17, 1985, citing 2 Fletcher, 1969 ed., Sec. 307, p. 97.) The domicile of natural persons is the place of their habitual residence (Art. 50, Civil Code.); it is the place where one has his true, fixed, permanent home and to which he, whenever he is absent, has the intention of returning. (25 Am. Jur. 2d 5.) The residence requirement is likewise mandatory. Section 10, however, does not require that majority of the members must 'Article 236 of the Family Code (Exec. Order No. 209, July 6, 1987.), however, provides: "Emancipation for any cause shall terminate parental authority over the person and property of the child who shall then be qualified and responsible for all acts of civil life." The Corporation Code is a special law. The Family Code, however, has reduced the majority age to 18 years. (Art. 234.) If the parents of minor children are still living and exercising parental authority over them, other nominees cannot act as their legal guardians or trustees to hold the minors' shares in trust. (SEC Opinion, Aug. 10,1987; see Arts. 220, 225, 226, Family Code.) 'Alien residents are required to submit the original as well as the photostat of their Alien Certificate of Registration (ACR), Immigrant Certificate of Registration (ICR), and the latest renewal of their ACR. In lieu of these certificates, a certification by the municipal or city treasurer of the municipality where the alien resides as to the number, place and date of the ARC and IRC may be submitted. (SEC Bulletin, October 1982, p. 5.)

134


Sec. 10

also be residents. Accordingly, a situation wherein majority of the members of a corporation are nonresidents is allowable. (SEC Opinion, July 22,1994.) But a majority of the directors or trustees of all corporations must be residents of the Philippines, (see Sec. 23, last sentence.) (4) By specific constitutional and legal provisions, citizenship is a necessary qualification for incorporators in corporations in which a certain percentage of the capital stock is required to be owned by Filipino citizens, (infra., under Sec. 15[llth].) Foreign shareholders may be debarred from certain nationalized activities which are exclusively reserved for Filipino citizens. The rule applies to directors or trustees, (see Sees. 12, 23.) Enemy aliens cannot become incorporators, for subjects of one country cannot lawfully contract with the subjects of the country with which it is at war. (White vs. Burneley, 20 How. 235.) (5) The Code now expressly requires that "each of the incorporators of a stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation." (Sec. 10.) The presumption is that where an incorporator has a pecuniary interest in the corporation, he will be concerned with the management of its affairs. Requirement regarding m i n i m u m n u m b e r of incorporators mandatory.

The requirement of the law regarding the minimum number of incorporators is mandatory and a dejure corporation (Sec. 20.) cannot be legally formed by less than the prescribed number except in the case of a corporation sole, (see Sec. 110.) In case of educational corporations, their incorporation "shall be governed by special laws and by the general provisions of [the] Code." (Sec. 106.) (1) Reduction of stockholders or members to less than minimum.

— The number of stockholders (or members) after the corporation is organized may become less than the minimum number required for incorporation without affecting corporate existence unless valid grounds exist for piercing or lifting the corporate veil, (see Sec. 2.)

Sec. 11


135

(2) Beneficial ownership in one individual. — The requirement

of minimum number of incorporators is one of those provisions, however, which are formal rather than substantial and which are regularly evaded in practice. Since the law permits a scheme by which all the shares are owned by a single individual, the latter may incorporate provided he associates with him, at least nominally, the number of persons required by the law. (Louiseville Banking Co. vs. Eisenmen, 21 S.W. 531.) The validity of the incorporation is not affected by the fact that it is formed in the interest of a single individual, and that the other persons under his control, without any substantial interest, or without individual responsibility who may only be called "qualifying stockholders," or who are popularly known as dummies or "men of straw." Beneficial ownership is not necessary, and a person who holds the legal title to stock is qualified to become an incorporator. 8

(3) Subsequent accumulation of shares in one individual. —

Nor is the existence of the corporation originally formed by the required number of incorporators affected by the subsequent accumulation of all the shares in the hands of one individual (18 C.J.S. 415-416.), unless, as previously said, circumstances exist to justify the piercing of the veil of corporate entity, (see Sec. 2.) Sec. 11. Corporate term. — A corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation unless sooner dissolved or unless said period is extended. That corporate term as originally stated in the articles of incorporation may be extended for periods not exceeding fifty (50) years in any single instance by an amendment of the articles of incorporation, in accordance with this Code: Provided, That no extension "In jurisdictions where the incorporators elect the directors, the custom is that the dummy incorporators should terminate their duties with the meeting of the incorporators, and at that time elect those who are to be actual directors of the company. If, under the statute, the incorporators are also directors, they may present to the first meeting their resignation as directors and, as incorporators, proceed to fill the vacancies. If the incorporators are dummies and also subscribers to shares, they would execute the assignments of their subscriptions to the real parties in interest, which assignments would be approved at the meeting and annexed to the minutes. This would, of course, be the last item of the business done at the meeting." (W.L. Cary, op. cit., p. 43.) 8

136


Sec. 11

can be made earlier than five (5) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Securities and Exchange Commission. (6a) Term of corporate existence.

The corporation shall exist for the term specified in the articles of incorporation' not exceeding fifty years, unless sooner legally dissolved (Sees. 19, 22, 117-122, 144, 145.) or unless its registration is revoked upon any of the grounds provided by law. (see Sec. 6, Pres. Decree No. 902-A; see also Sec. 22.) The corporate life may be reduced (see Sec. 120.) or extended by amendment of the articles of incorporation by complying with the procedural requirements laid down in Section 37. Extension of corporate t e r m .

(1) Limitations. — The extension of corporate term is subject to the following limitations: (a) The term shall not exceed fifty years in any one instance; 10

(b) The amendment is effected" before the expiration 'In line with the policy of the government encouraging deregulation in economic activities and eliminating the requirement of unnecessary licenses and permits to such legal extent as possible and taking into consideration the huge number of existing corporations and partnerships registered, the Securities and Exchange Commission does not require a mandatory annual renewal of the Certificate of Registration of any corporation, partnership, or association under its jurisdiction. (SEC Opinion, July 29,1994.) "The suspension of the activities and operations of a corporation during the period of enemy occupation may not be considered as having automatically operated to deprive it of a corresponding part of its juridical life as fixed in its articles of incorporation. Consequently, the original term of existence cannot be extended without violating the law. (SEC Opinion, Nov. 21,1962.) Under Article 605 of the Civil Code, "usufruct cannot be constituted in favor of a town, corporation or association for more than fifty years x x x." The law clearly limits any usufruct in favor of a corporation to 50 years. A usufruct is meant only as a lifetime grant. The period cannot be extended in case the corporation's lifetime is extended. (National Housing Authority vs. Court of Appeals, 456 SCRA 17 [2005].) ' "Under the doctrine of relation which has been applied in American decisions, where the delay in effecting the amendment is due to the neglect of the officer with whom the application is required to be filed or to a wrongful refusal on his part to receive it, the same will be treated as having been filed before the expiry date. The doctrine does not apply where the delay is attributable to the corporation. (SEC Opinion, May 14,1987.)

Sec. 11


137

of the corporate term of existence, for after dissolution by expiration of the corporate term there is no more corporate life to extend. Hence, the extension cannot be done during the three-year period of liquidation (Alhambra Cigar vs SEC 24 SCRA 269 [1968]; see Sec. 122.); and 12

(c) The extension cannot be made earlier than five (5) years prior to the expiration date unless there are justifiable reasons therefor as may be determined by the Securities and Exchange Commission. (2) Effect of extension!expiration of term. — The mere extension

of the corporate term of existence made before the expiration of the original term constitutes a continuation of the old, and not the creation of a new, corporation. Upon the expiration of the period fixed in the articles of incorporation, in the absence of compliance with the legal requisites for the extension of the period, the corporation ceases to exist and is dissolved ipso facto. (Phil. National Bank vs. CFI of Rizal, 209 SCRA 294 [1992].) The expiration of the term for which the corporation was created does not, however, produce its immediate dissolution for all purposes. (Sec. 122.) The occurrence of a fortuitous event (Act of God) or force majeure (Act of Man) is considered a meritorious reason by the SEC to justify the doctrine. The test applied by the SEC is whether under the particular circumstances there was such an insuperable interference occurring without the corporation's intervention as could not have been prevented by prudence, diligence, and care. However, since the privilege of extension is purely statutory, all of the statutory conditions precedent for extension of corporate life are not to be given a liberal interpretation. (SEC Opinion, July 7,1987.) "However, if it is desired to continue the business for which the corporation was originally organized, the following steps leading to its reincorporation may be taken: (1) A meeting of the stockholders should be called for the purpose of discussing and deciding the question of reincorporation. Stockholders who do not consent to the reincorporation should be given their corresponding participations in the remaining assets of the company after providing for its outstanding liabilities; (2) A copy of the resolution signed by all the stockholders voting for the reincorporation of the company and duly countersigned by the president and secretary of the meeting should be submitted to the Securities and Exchange Commission, together with the new articles of incorporation duly executed in accordance with law; and (3) A proper deed of assignment of the assets and liabilities of the defunct corporation being conveyed to the new one may include, among other things, the use of the corporate name of the former in case the latter desires to do business under the old name, and should be attached to the articles of reincorporation. The deed of assignment should include or be accompanied by a detailed inventory of the said assets and liabilities. (SEC Opinion, Nov. 21,1962.)

138


Sec. 11

A corporation whose corporate life has expired may be reincorporated only by complying with the registration requirements under the Corporation Code, viz., filing of new articles of incorporation and by-laws accompanied by supporting documents required for registration. A corporation that has been reincorporated after its original terms of existence has expired does not automatically succeed to the assets of the original corporation which is deemed dissolved in the absence of a corporate liquidation under Section 222. (SEC Opinion No. 0633, Oct. 3, 2006.) (3) Automatic extension of term. — Section 11 allows the

automatic extension of the corporate existence by amendment of the articles of incorporation within the five (5)-year period before the expiration date of the existing term, during which the Securities and Exchange Commission may look, if necessary, into the financial structure of the corporation and its past operations or actuations. (SEC Opinion, Dec. 18,1963.) The Code places no limit to the number of extensions that may be made. Period of corporate existence a matter of public interest.

The State has an obvious interest in the term of life of corporations, since the conferment of juridical capacity upon them during such period is a privilege that is derived from statute. It is obvious that no agreement between the stockholders or members can result in giving rise to a new and distinct personality, possessing independent rights and obligations, unless the law itself shall decree such result. And the State is naturally interested that this privilege be enjoyed only under the conditions and not beyond the period that it sees fit to grant; and, particularly, that it be not abused in fraud and to the detriment of other parties; for this reason, it has been ruled that the limitation (of corporate existence) to a definite period is an exercise of control in the interest of the public. (Benguet Consolidated Mining Co. vs. Pineda, 98 Phil. 711 [1956], citing Smith vs. Eastwood Wire Manufacturing; Co., 43 Atl. 568.)

Sec. 12


139

Sec. 12. Minimum capital stock required of stock corporations. — Stock corporations incorporated under this Code shall not be required to have any minimum authorized capital stock except as otherwise specifically provided for by special law, and subject to the provisions of the following section, (n) Capital stock r e q u i r e m e n t .

The Code does not set a minimum authorized capital stock except as otherwise provided by special law as long as the paidup capital as required by Section 13 is not less than P5,000.00. The old law has also no capital stock requirement. It merely requires that the articles of incorporation state the amount of the corporation's capital stock. 13

A minimum capital stock requirement is considered arbitrary and does not assure any practical protection to corporate creditors. Special laws may, however, require a higher paid-up capital, as in the case of commercial banks, insurance companies, and investment houses. Filipino p e r c e n t a g e o w n e r s h i p requirement regarding corporate capital.

By specific constitutional and legal provisions, Filipino ownership of a certain percentage of the capital stock or capital is required in certain cases, such as: (1) Corporations for exploration, development, and utilization of

natural resources. — at least 60% of the capital of which is owned by citizens of the Philippines. (Constitution of the Philippines, Art. XII, Sec. 2.) The word "capital" in the above constitutional provision should be understood to mean "outstanding capital stock" in case of stock corporation; (2) Public service corporations. — at least 60% of the capital of

which is owned by citizens of the Philippines. The participation of foreign investors in the governing body of any public utility The Securities and Exchange Commission does not entertain any application for incorporation or increase of capital stock where the par value per share is less than P0.01. (SEC Bulletin, October 1982, p. 5.) l3


140

Sec. 12

enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation must be Filipino citizens (Ibid., Art. XII, Sec. 11.); (3) Educational corporations. — other than those established by religious orders and mission boards, at least 60% of the capital of which is owned by citizens of the Philippines. The control and administration of educational institutions shall be vested in Filipino citizens (Ibid., Art. XIV, Sec. 4[1].); (4) Corporations engaged in mass media and advertising industry.

— the first must be wholly (i.e., 100%) owned and managed by Filipino citizens, while at least 70% of the capital stock of the second must be owned by citizens of the Philippines. The participation of foreign investors in the governing body of a corporation engaged in the advertising industry shall be limited to their proportionate share in the capital thereof, and all the executive and managing officer of such corporation must be Filipino citizens (Ibid., Art. XVI, Sec. 11.); 14

(5) Banking corporations. — at least 60% of the capital stock of any bank or banking institution which may be established after the approval of the General Banking Act (July 24, 1948) shall be owned by citizens of the Philippines (Rep. Act No. 377, Sec. 2.); (6) Corporations engaged in retail trade. — the capital of which

must be wholly owned by citizens of the Philippines (R.A. No. 1180, Sec. 1.); (7) Rural banks. — the capital stock of which must be fully owned and held directly or indirectly by Filipino citizens or corporations, associations, or cooperatives qualified under Philippine laws to own or hold such capital stock (R.A. No. 7353, Sec. 4.); (8) Corporations engaged in coastwise shipping. — at least 60%

of the capital stock of which or of any interest in said capital is totally owned by citizens of the Philippines (Pres. Decree No. 1464 [Tariff and Customs Code], Sec. 806.); While a 60% Filipino/40% foreign-owned corporation may be considered a "Philippine National" (see Sec. 123.) for purposes of investment in another corporation, it is not qualified to invest in business activities the ownership of which under the Constitution or other special laws is limited to Filipino citizens only. (SEC Opinion, June 18,1998.) 4

Sec. 13


141

(9) Financing companies. — at least 60% of the capital stock

shall be owned by citizens of the Philippines (R.A. No. 5980, as amended, Sec. 16.); (10) Corporations engaged in the pawnshop business. — at least

70% of the voting capital stock shall be owned by citizens of the Philippines (Pres. Decree No. 114, Sec. 8.); (11) Corporations engaged in the recruitment and placement of workers, locally or overseas. — at least 75% of the authorized and

voting capital stock is owned and controlled by Filipino citizens (Pres. Decree No. 442 [Labor Code], as amended, Sec. 27.); (12) Corporations engaged in the operation of a private detective, watchman or security guard agencies. — Must be 100% Filipino

owned (R.A. No. 5487, Sec. 4.); and (13)

Under the Flag Law. — In the purchase of articles for

the Government, preference shall be given to materials and supplies produced, made, or manufactured in the Philippines, and to domestic entities. The term "domestic entities" means any citizen of the Philippines or any corporate body or commercial company at least 75% of the capital of which is owned by citizens of the Philippines. (C.A. No. 138, Sec. 1.) Sec. 13. Amount of capital stock to be subscribed and paid for purposes of incorporation. — At least twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of incorporation, and at least twenty-five percent (25%) of the total subscription must be paid upon subscription, the balance to be payable on a date or dates fixed in the contract of subscription without need of call, or in the absence of a fixed date or dates, upon call for payment by the board of directors: Provided, however, That in no case shall the paid-up capital be less than five thousand pesos (P5.000.00). (n) M i n i m u m subscription and paid-up capital.

(1) Pre-incorporation. — Section 13 requires that at least 25% of the amount of the authorized capital stocks has been actually


142

Sec. 13

subscribed and that at least 25% of such subscription paid. In no case shall the paid-up capital be less than P5,000.00. Violation of the provision may subject the erring incorporators and/or directors for prosecution as provided under Section 144. (a) The Commission, however, has the power to require that the authorized capital stock to be not less than a certain amount (e.g., P100,000.00) such that the 25% paidup capital will be more than P5,000.00. These requirements are mandatory. Accordingly, if they are not complied with, no stock corporation can be lawfully incorporated even if a certificate of incorporation has been issued by the Securities and Exchange Commission in good faith. 15

(b) The policy of the Commission is to require full payment of subscription by foreigners as it will be difficult to compel them to pay their unpaid subscriptions when they are outside the country unless they can give sufficient security to guarantee full payment. (SEC Opinion, Aug. 28,1989.) (c) The number of shares subscribed, the amount subscribed, and the amount paid by each stockholder must be stated in the articles of incorporation. (Sees. 14[8], 14[8th, 9th].) (d) Special laws may require a higher paid-up capital. For example, the minimum paid-up capital of insurance corporation is P5 million. (Pres. Decree No. 1460 [Insurance Code],

"If a corporation is organized and carries on business without substantial capital in such a way that the corporation is likely to have no sufficient assets available to meet its debts, it is inequitable that shareholders should set up such a flimsy organization to escape personal liability. The attempt to do corporate business without providing any sufficient basis of financial responsibility to creditors is an abuse of the separate entity and will be ineffectual to exempt the shareholders from corporate debts. It is coming to be recognized as the policy of the law that shareholders should in good faith put at the risk of the business unencumbered capital reasonably adequate for its prospective liabilities. If capital is illusory or trifling compared with the business to be done and the risks of loss, this is a ground for denying the separate entity privilege." (Keating, Judge [dissenting], citing Ballantine, pp. 302-303, in Walkovszky vs. Carlton, 18 N.Y. 2d 414, 223 N.E. 2d 6.) 15

"An obvious inadequacy of capital, measured by the nature and magnitude of the corporate undertaking, has frequently been an important factor in cases denying stockholders their defense of limited liability . . . that rule has been invoked even in absence of a legislative policy which undercapitalization would defeat." (Anderson vs. Abbot, 321 U.S. 349, 362-363.)

Sec. 13


143

Sec. 188.) A pawnshop established as a corporation must have a paid-up capital of at least P100,000.00. (Pres. Decree No. 114, Sec. 7.) A minimum paid-up capital of P50 million is required for a financial intermediary applying (beginning Aug. 22,1980.) for authority to perform quasi-banking functions. (Central Bank Cir. No. 757, dated Aug. 22,1980.) (2) Post incorporation. — The minimum 25% subscription and

25% paid-up capital is required not only during the incorporation period but also in case of increase of the authorized capital stock. - (Sec. 38, par. 4.) 1

(a) The requirement is designed to give assurance to the investing public dealing with the corporation that it is financially and actually able to operate and undertake to do business and meet its obligations as they arise from the start of its operations. Accordingly, the 25% minimum paid-up capital requirement would not apply to subsequent subscriptions to the unsubscribed shares of the corporation since the evils or risks of insolvency against which the law intends to safeguard the public no longer exist. (SEC Opinion, June 29, 1976.) (b) The call by the board of directors for the payment of the balance of subscriptions (see Sec. 67.) is required only when there is no fixed date for payment in the contract of subscription. (c) It is not required for purposes of incorporation that each and every subscriber shall pay 25% of his subscription. The paid-up requirement is met as long as "25% of the total subscription" is paid although some subscribers have paid less than 25%, or even have not paid any amount. It is the policy of the Securities and Exchange Commission to require full payment of the subscription where the subscriber is a nonresident foreign individual. If full payment thereof cannot be made, any of the resident subscribers may, alone or jointly and severally with other subscribers, undertake to pay the unpaid balance of the subscription if the same is not paid upon call. (SEC Opinion, Nov. 14,1973.) If female subscribers are married and the payments on their subscription consist of conjugal funds, they must submit the written consent of their respective husbands. If the subscription to the authorized capital stock exceeds 25% and the subscribers are more than 15 persons, a request must be filed for exemption from registration under the Securities Act of the total issuance of shares. (SEC Bulletin, October 1982, p. 6.) 16

144


Sec. 13

(d) It would seem that the minimum 25% paid-up requirement applies only to par value shares because a subscriber to no par value shares must pay in full his subscription since under Section 6 (par. 2.), "shares of capital stock issued without par value shall be deemed fully paid and nonassessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto." ILLUSTRATION: Suppose it be desired that Corporation X be incorporated with a capital stock of P100,000.00 divided into 1,000 shares with a par value of P100.00 per share. In such case, there must be subscribed 250 shares of the par value of P25,000.00 which "shares represent twenty-five percent (25%) of the authorized capital stock" and of the subscription, there must be paid to the corporation "at least twenty-five percent (25%)" thereof or P6,250.00 (paid-up capital), in actual cash and/or property the fair valuation of which equals P6,250.00. (see Sec. 14, last par.) If the amount of the authorized capital stock is only P75,000.00, the 25% subscription would be P18,750.00 and if 25% of the latter amount is paid, the paid-up capital would only be P4,687.50. Section 13 requires that the paid-up capital be not less than P5,000.00. It is not required for purposes of incorporation that each and every subscriber shall pay 25% of his subscription. The paid-up requirement is met as long as "25% of the total subscription" is paid although some subscribers have paid less than 25%, or even have not paid any amount. Computation of the 2 5 % subscription requirement. (1) Where the capital stock consists only of par value shares, the minimum subscription should be 25% of the a m o u nt of the authorized capital stock or 25% of the aggregate value of all the shares of stock the corporation is authorized to issue. In par value stock corporations, the percentage subscription requirement shall always be based on the a m o u n t of the author-

Sec. 14


145

ized capital stock irrespective of the class, number, and par value of the shares. (2) Where the capital stock consists only of no par value shares,

the 25% requirement shall be computed on the basis of the entire number of authorized shares. Corporations whose shares have no par value have no authorized capital stock, (see Sec. ^ [ s e v enth].) The issued price of no par value shares need not be fixed in the articles of incorporation, (see Sec. 62, last par.) (3) Where the capital stock is divided into par value shares and

no par value shares, the requirement as to par value shares is as indicated above and for the no par value shares, the 25% is based on the number of said no par value shares. Subscription of corporations.

(1) Domestic corporations. — They may subscribe initially to the capital stock of another proposed corporation but their subscriptions cannot be taken into consideration in the computation of the 25% subscription and 25% paid-up capital requirement of the law. The reason is because a corporation cannot become incorporators under Section 10. (SEC Opinion, May 23,1967.) (2) Foreign corporations. — Such corporations, whether resident (i.e., engaged in business in the Philippines) and nonresident, may subscribe to the stocks of domestic corporations as long as they are authorized by their charters to hold shares in other corporations. Their subscriptions shall not also be counted in the computation of the minimum subscription and payment requirements. (SEC Opinion, Nov. 14,1973.) It is the policy of the Securities and Exchange Commission to require corporations to pay their subscriptions in full. This is based upon the fact that while a corporation has an unlimited capacity to contract obligations, it has only a limited capacity to pay. (SEC Opinion, May 23,1967.) Sec. 14. Contents of articles of incorporation. — All corporations organized under this Code shall file with the Securities and Exchange Commission articles of incorporation In any of the official languages duly signed and acknowledged by all of the incorporators, containing

146


Sec. 14

substantially the following matters, except as otherwise prescribed by this Code or by special law: (1) The name of the corporation; (2) The specific purpose or purposes for which the corporation is being incorporated. Where a corporation has more than one stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are the secondary purpose or purposes; Provided, That a nonstock corporation may not include a purpose which would change or contradict its nature as such; (3) The place where the principal office of the corporation is to be located, which must be within the Philippines; (4) The term for which the corporation is to exist; (5) The names, nationalities and residences of the incorporators; (6) The number of directors or trustees, which shall not be less than five (5) nor more than fifteen (15); (7) The names, nationalities and residences of the persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with this Code; (8) If it be a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the number of shares into which it is divided, and in case the shares are par value shares, the par value of each, the names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated; (9) If it be a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each; and (10) Such other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient. The Securities and Exchange Commission shall not accept the articles of incorporation of any stock corporation unless accompanied by a sworn statement of the Treasurer

. 15


elected by the subscribers showing that at least twentyfive percent (25%) of the authorized capital stock of the corporation has been subscribed, and at least twenty-five percent (25%) of the total subscription has been fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least twenty-five percent (25%) of the said subscription, such paid-up capital being not less than five thousand pesos (P5,000.00). (6a, 9a) Sec. 15. Form of Articles of Incorporation. — Unless otherwise prescribed by special law, articles of incorporation of all domestic corporations shall comply substantially with the following form: ARTICLES OF INCORPORATION OF (Name of Corporation)

KNOW ALL MEN BY THESE PRESENTS: The undersigned incorporators, all of legal age and a majority of whom are residents of the Philippines, have this day voluntarily agreed to form a (stock) (non-stock) corporation under the laws of the Republic of the Philippines. And we hereby certify: FIRST: That the name of said corporation shall be «• Inc. or Corporation"; SECOND: That the purpose or purposes for which such corporation is incorporated are (If there is more than one purpose, indicate primary and secondary purposes); THIRD: That the principal office of the corporation is located in the City/Municipality of Province of Philippines; FOURTH: That the term for which the said corporation is to exist is years from and after the date of issuance of the certificate of incorporation;

148


Sec. 15

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

Nationality

Residence

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

Nationality

Residence

SEVENTH: That the authorized capital stock of the corporation is (P. ) pesos in lawful money of the Philippines, divided into shares with the par value of (P. ) pesos per share. (In case all the shares are without par value): That the capital stock of the corporation is shares without par value. (In case some shares have par value and some are without par value): That the capital stock of said corporation consists of shares of which shares are of the par value of (P) pesos each, and of which shares are without par value. EIGHTH: That at least twenty-five percent (25%) of the authorized capital stock above stated has been subscribed as follows:

15


Name of Subscriber

Nationality

No. of Shares Subscribed

Amount Subscribed

NINTH: That the above-named subscribers have paid at least twenty-five percent (25%) of the total subscription as follows: Name of Subscriber

Amount Subscribed

Total Paid-in

(Modify Nos. 8 and 9 if shares are with no par value. In case the corporation is non-stock, Nos. 7, 8 and 9 of the above articles may be modified accordingly, and it is sufficient if the articles state the amount of capital or money contributed or donated by specified persons, stating the names, nationalities and residences of the contributors or donors and the respective amount given by each.) TENTH: That has been elected by the subscribers as Treasurer of the Corporation to act as such until his successor is duly elected and qualified in accordance with the by-laws, and that as such Treasurer, he has been authorized to receive for and in the name and for the benefit of the corporation, all subscriptions (or fees) or contributions or donations paid or given by the subscribers or members. ELEVENTH: Corporations which will engage in any business or activity reserved for Filipino citizens shall provide the following: "No transfer of stock or interest which will reduce the ownership of Filipino citizens to less than the required

150

Sec. 15


percentage of the capital stock as provided by existing laws shall be allowed or permitted to be recorded in the proper books of the corporation and this restriction shall be indicated in all the stock certificates issued by the corporation." IN WITNESS WHEREOF, we have hereunto signed these Articles of Incorporation, this day of 19 in the City/Municipality of Province of Republic of the Philippines.

(Names and signatures of the incorporators) Signed in the presence of:

(Notarial Acknowledgment) TREASURER'S AFFIDAVIT

REPUBLIC OF THE PHILIPPINES) CITY/MUNICIPALITY OF

)S.S.

PROVINCE OF I, duly sworn, depose and say:

, being

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

Sees. 14-15


151

Subscribed and sworn to before me, a Notary Public, for and in the City/Municipality of Province of this day of "!"l9"!"!!j by with Res. Cert. No issued at on 19 NOTARY PUBLIC My commission expires on 19 Doc. No Page No Book No Series of 19. (7a)

Meaning of articles of incorporation. The articles of incorporation is the document prepared by the persons establishing a corporation and filed with the Securities and Exchange Commission containing the matters required by the Code. It has been described as one that defines the charter of the corporation and the contractual relationships between the State and the corporation, the stockholders and the State, and between the corporation and the stockholders. (Government of the Phil. Islands vs. Manila Railroad Co., 52 Phil. 699 [1929].) A copy of the articles filed which is returned with the certificate of incorporation issued by the Commission under its official seal becomes its corporate charter enabling the corporation to exist and function as such, (see Sec. 19.) 7

A corporation created by special law (see Sec. 4.) has no articles of incorporation. "The special law creating a government-owned or -controlled corporation (see Sec. 4.) is often referred to as "charter." The older word, charter, at one time referred to an individual statute that through the first quarter of the 19th century was the only device employed by American State Legislatures for permitting the establishment of a private corporation. The corporation laws of the United States and foreign countries alike now provide for the creation and licensing of a business corporation by action of administrative authorities. (E.L. Kohler, op. cit., p. 36.)

152


Sees. 14-15

Contents and form of articles of incorporation.

(1) Section 14 enumerates the matters (mandatory provisions) that must be stated in the articles of incorporation of domestic corporations, except as otherwise prescribed by the Code or by special law. (a) The incorporators may include such other matters as are not inconsistent with law and which they may deem necessary and convenient (No. 10.), such as the classes of shares which the corporation may issue (Sec. 6.), provisions on preemptive right (Sec. 39.), etc. (b) The contents of the articles of incorporation may be held valid as an agreement between the parties thereto, even though the validity of such may be subject to question. (18 Am. Jur. 2d 585.) (c) Under the last paragraph, the Securities and Exchange Commission shall not accept the articles of incorporation of any stock corporation unless accompanied by a sworn statement of the treasurer elected by the subscribers showing compliance with the requirement as to the niinimum amount of the subscribed and paid-up capital stock. (d) The articles of incorporations may provide other matters or items (optional provisions) as long as they are not contrary to any provision of the Code or special law. (2) On the other hand, Section 15 provides the form of the articles of incorporation of all domestic corporations, unless otherwise prescribed by special law. (a) It must include the affidavit of the treasurer of the corporation concerning the amount of capital stock subscribed and paid. The matter required to be stated by Section 14(8) is the actual "amount subscribed and paid" by each subscriber on his subscription. It is not to be confused with the matter required to be certified in the affidavit of the treasurer, i.e., that at least 25% of the authorized capital stock has been subscribed and at least 25% of the total subscription has been paid. The Securities and Exchange Commission may reject the articles of incorporation or any amendment thereto if

Sees. 14-15


153

the same is not substantially in accordance with the forms prescribed above (see Sec. 17[1].), or the treasurer's affidavit is false, (see Sec. 17[3].) (b) The articles of incorporation must be written in any of the official languages, i.e., English or Filipino duly signed and acknowledged by all of the incorporators. It is, therefore, a public instrument. 18

(c) While under the Corporation Code, there is no general requirement of Philippine citizenship, there are some areas of business and industry where ownership is reserved, wholly or partially, in favor of Filipino citizens by virtue of the Constitution and special laws. In order to safeguard the interest of transferees of stock who may not be aware of the citizenship requirement and in order to secure compliance with the limitation on alien ownership, Section 15(11) requires the articles of incorporation to provide the restriction stated. Such restriction serves as notice to all persons who may be dealing with the stock of the corporation, and is intended to deter the issue or transfer of shares in favor of aliens in violation thereof. (SEC Opinion, Aug. 14,1990.) An incorporator may delegate to an attorney-in-fact the signing of the articles of incorporation in a special power of attorney to such effect. However, the acknowledgment (see Sec. 15.) must reflect this fact so that the same must be prepared in the following tenor: "x x x, that Mr. A (agent) is signing for and in behalf of B (incorporator) as his attorney-in-fact after due presentation of his power of attorney." (SEC Opinion, Dec. 26, 1972.)

The Constitution provides that "the official languages of the Philippines are Filipino and until otherwise provided by law, English." (Art. XIV, Sec. 7 thereof.) Under Presidential Decree No. 155 (issued March 15, 1973), however, it is provided that "the Spanish language shall continue to be recognized as an official language in the Philippines while important documents in government files are in the Spanish language and not translated either in English or Filipino." This will make Spanish an official language for an indefinite length of time, for nobody can know when these "important documents" will be translated in English or Filipino. It is clear from the Constitution that Spanish is no longer an official language. 18

154


Sees. 14-15

Filing of the articles of incorporation. (1) Actual filing or registration with SEC required. — The mere

recording of the articles of incorporation without the intention or the fact of allowing the same to remain in the office of the Securities and Exchange Commission is not a sufficient filing to complete the organization of the corporation or vest it with corporate powers. Literal filing of the papers is necessary because it is so written in the law. The term "filing" and the verb "to file," as related to this subject, include the idea that the papers are to remain in their proper order on file in said office. (18 Am. Jur. 2d 586.) (2) Rule where corporation created by special law. — A corpora-

tion created by special law or charter does not have to file with the Securities and Exchange Commission its articles of incorporation and by-laws since the grantee of such a special charter draws its life not from compliance with a general law, but from a direct act of Congress. (SEC Opinion, May 28,1970.) (3) Rule with respect to a joint venture. — The Commission has

ruled that two or more corporations may enter into a joint venture through a contract if the nature of the venture is in line with the business authorized by their charters, which contract need not be registered with it, provided that the joint venture will not result in the formation of a new partnership or corporation. However, if the parties to the agreement want the joint venture to be treated as a separate entity or have a separate personality because they intend to secure for the joint venture project a TIN (Taxpayer's Identification Number) of its own from the BIR, registration with the SEC is necessary in order to have a legal personality to obtain a separate TIN. (SEC Opinion, March 30,1995.) Power of Securities a n d E x c h a n g e C o m m i s s i o n to reject articles of incorporation. (1) Compliance with statute. — The duty of the Securities and

Exchange Commission, on presentation of articles of incorporation and tender of proper fees, to file the articles, and to issue a certificate of incorporation, is controlled by the provisions of the statute. If the articles of incorporation substantially comply with the statute, the Commission has no discretion, but may be com-

Sees. 14-15


155

pelled by mandamus to file them. The discretion to be exercised by the Commission does not extend to the merits of an application for incorporation, although it may be exercised as to matters of form. On the other hand, it is under no duty to file articles of incorporation not entitled to be filed for any reason, and hence, it will not be compelled by mandamus to act in such a case. Stated in another way, the duty of the Securities and Exchange Commission to file and record incorporation papers exists only when they are in the form in compliance with the statute. Furthermore, it should refuse to file for record incorporation papers not complying with the statute. (2) Truthfulness of matters stated. — Generally, the officer

concerned has no discretionary power to look beyond the face of the incorporation papers and to determine from matters outside of such papers whether or not to file the papers. He cannot consider extraneous matters. Thus, he is not required to make inquiry outside the articles of incorporation filed with him, to determine whether the matters stated therein are in fact true, or whether all conditions precedent have in fact been performed. Ordinarily, if the association has complied with all the pre-requisite requirements, and its purpose is a lawful and authorized one, conditions cannot be imposed on granting the certificate, (see 1 Fletcher, pp. 511-515; see also 14 C.J. 147-148.) 19

In fine, although the Securities and Exchange Commission must exercise some judgment in the performance of its duty to determine whether articles of incorporation are in the proper form and entitled to be filed, it is not clothed with judicial discretion or arbitrary power. (18 Am. Jur. 2d 587.) (3) Lawfulness of object or purpose. — But simply because the

duties of the Commission happen to be ministerial, it does not "Exception: In order to effectively exercise its jurisdiction over all corporations, partnerships, and other forms of associations, the Securities and Exchange Commission is given the power "to pass upon, refuse or deny after consultation with the Board of Investments, Department of Industry (now Department of Trade and Industry), National Economic and Development Authority or any other appropriate government agency, the application for registration of any corporation, partnership or association or any form of organization falling within its jurisdiction, if their establishment, organization or operation will not be consistent with the declared national policies." (Pres. Decree No. 902-A, Sec. 6[k].)


156

Sees. 14-15

necessarily follow that it has no authority to pass upon the lawfulness of the object or purpose of the corporation as expressed in the articles of incorporation. (Asuncion vs. De Yriarte, 28 Phil. 67 [1914].) Its duties are ministerial and it has no authority to exercise discretion in receiving and registering articles of incorporation, but it may exercise judgment, that is, the judicial function, in the determination of the question of law whether or not the objects of a proposed corporation are lawful. If it errs in the determination of the question and refuses to file the articles of incorporation, its decision is subject to review and correction by the court. (Asuncion vs. De Yriarte, supra.) Name of the corporation.

(1) Importance. — The corporation acquires juridical personality under the name stated in the certificate of incorporation. (Sec. 18.) A corporation has the power of succession by its corporate name. (Sec. 36[2].) It is the name of the corporation which identifies and distinguishes it from other corporations, firms or entities in the same manner as the name of an individual designates the person and distinguishes him from other persons. By its name, a corporation is authorized to transact business. 20

The name of a corporation is, therefore, peculiarly essential to its existence and to its identity. (2) Nature. — A corporate name is regarded as of the nature of a trademark even though composed of individual names, and its simulation may be restrained. After adoption, it follows the corporation. (9-A Words and Phrases 391-392; see Sec. 18.) A corporation's right to use its corporate and trade name is a property right, a right in rem which it may assert and protect against the whole world in the same manner as it may protect its tangible property against trespass or conversion. It cannot be impaired or defeated by subsequent appropriation by another corporation in the same field. (Philips Export B.V. vs. Court of Appeals, 206 SCRA 457 [1992].) A corporation need not register with the Department of Trade and Industry (DTI) if it does not have the intention to use another business name other than the corporate name registered with the Securities and Exchange Commission. (SEC Opinion No. 04-21, April 2, 2004.) 20

Sees. 14-15


157

(3) Part of name. — It is customary to use as part of the name the word "corporation" or "incorporated" or an abbreviation of either of them to distinguish it from a partnership and other business organizations. But the character of a corporation is not necessarily controlled by its name. 11

22

P u r p o s e or p u r p o s e s of t h e corporation .

The clause in the articles of incorporation which states the specific purpose or purposes for which the corporation is being incorporated is called the purpose clause. The Code allows corporations to have more than one stated purpose. (1) The statement of the purpose or purposes operates as an authorization to the management to enter into contracts and transactions which may be considered as included within or incidental to the attainment of said purposes. It also imposes implied limitations on the powers of the corporation by the exclusion of lines of activity which are not covered. 23

(2) Where the purpose clause of the articles of incorporation embodies a variety of different purposes, the corporation may be allowed to have separate "modus operandi" for each of the stated corporate purposes. (SEC Opinion, Sept. 9,1993.) (3) There is no legal need to repeat in the articles of incorporation the powers granted by the law upon the corporation. (Ballantine, p. 55 [1946 ed.].) (4) A non-stock corporation may not include a purpose which would change or contradict its nature as such. Section 88 enumerates the allowable purposes for which a non-stock corporation may be organized.

A person doing business in his personal capacity cannot use the word "corporation"; otherwise, he may be held criminally liable under Article 315(2, a) of the Revised Penal Code if another person was deceived and defrauded. (SEC Opinion, Jan. 5, 1976.) ^"If the proposed name contains a word similar to a word already used as part of the firm name of a registered company, the proposed name must contain two other words different from the name of the company already registered." (see Letter [c], SEC Guidelines in the Approval of Corporate and Partnership Names.) "DE LEON, The Corporation Code of the Philippines Annotated, 1989 ed., p. 120, cited by the Supreme Court in Philippines Statehood U.S.A., Inc. vs. Securities and Exchange Commission, L-82493, Jan. 24, 1990. 21

158


Sees. 14-15

Purpose or purposes must be lawful. (1) Effect in case unlawful. — A corporation may be organized

only for "any lawful purpose or purposes." (see Sec. 10.) A corporation the primary object of which is without statutory authority can have no lawful existence, even though some of its declared purposes may be lawful. (13 Am. Jur. 2d 580.) "That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations" is one of the grounds for the rejection or disapproval by the Securities and Exchange Commission of the articles of incorporation. (Sec. 17[2].) (a) A corporation was held incorporated for an illegal purpose, where the object of the incorporators is to organize a pueblo or barrio in a municipality into a separate corporation

because it seeks to deprive the municipality in which the pueblo or barrio is situated of its property and its citizens of the right of enjoying the same and would, if permitted, disrupt and destroy the government of municipalities of the country and abrogate the laws relating to the formation and government of municipalities. (Asuncion vs. De Yriarte, 28 Phil. 67 [1914].) (b) Where the number one purpose of the proposed corporation as contained in its articles of incorporation is "to study the possibility of the Philippines becoming a member. . . of the American Union and, for this purpose, to undertake surveys, polls, researches and hold seminars, and publish and disseminate the results of these undertakings by way of helping promote and enhance the incorporation of the Philip-

pines as an American State...," this portion of the purpose for registration was held objectionable because the intention to promote the statehood of the Philippines "shall adversely affect the independence and sovereignty of the country." The denial of registration is not violative of the freedom of association and expression guaranteed under the Constitution which freedom can be exercised without a group of individuals incorporating themselves to acquire juridical personality. But the purpose to conduct a study, survey, research and subsequently publish or disseminate the results there-

Sees. 14-15


159

of as a corporation is not objectionable. (Philippines Statehood U.S.A., Inc. vs. Securities and Exchange Commission, L-82493, Jan. 24,1990.) (2) Where powers merely unauthorized by law. — In authoriz-

ing the formation of corporations for "any lawful purpose," the word "unlawful," as applied in this connection, is not used by the Code exclusively in the sense of malum in se or malum prohi-

bitum. It is also used to designate powers which corporations are not authorized to exercise, or contracts which they are not authorized to make, or acts which they are not authorized to do — in other words, such acts, powers, and contracts as are ultra vires. (18 Am. Jur. 2d 582; see Sec. 45.) Thus, a corporation cannot be formed for the practice of law, medicine, or other learned professions in the absence of express

authority in the corporation law. (1 Fletcher, p. 339.) In the Philippines, there is no legislation authorizing the formation of professional corporations. The practice of a profession is not a business and is open only to persons with the necessary qualifications. In corporations, the profit motive is the principal factor. Human personal qualifications for such learned professions cannot be possessed by a corporation which has a distinct and separate personality from the individual stockholders or members. Thus, it cannot have the power to obtain a license which only the individual stockholders or members can obtain. As a corporation cannot carry on the work of learned professionals, it cannot indirectly do so, by employing, say, lawyers to practice for it. 24

25

To accommodate professionals, most States in the United States have enacted professional incorporation laws that give lawyers, accountants, doctors, and other professionals the right to practice their profession through a corporation. Under the proposed American Bar Association Model Professional Corporation Act (MPCA), the professional corporation may practice only one profession and may not mix professional services with non-professional services and only licensed professionals may perform the services of the corporation. Non-licensed employees of the corporation may not assume a position of control over the acts of licensed professionals when they perform their services to clients. " x x x Congress has not adopted a unanimous position on the matter of prohibition on indirect practice of optometry by corporations, specifically on the hiring and employment of licensed optometrists by optical corporations. It is clear that Congress left the resolution of such issue for judicial determination, and it is therefore proper for this Court to resolve the issue, x x x In analogy, it is noteworthy that private hospitals are maintained by corporations incorporated for the purpose of furnishing medical and surgical treatment. In the course of providing such treatments, these corporations employ physicians, 24

B

160


Sees. 14-15

The law, however, permits the formation of a partnership for the exercise of a profession (Arts. 1767, 1783, Civil Code.) for in such case, it is the individual partner and not the partnership firm who exercises the profession and is responsible for his acts as such. (3) Determination of question of lawfulness. — As a general rule,

the question as to whether the purposes for which a given corporation has been formed are lawful is to be determined by the description of those purposes as stated in the articles of incorporation. (a) A corporation is not illegal unless it is shown that the end it has in view is illegal, or the means by which it proposes to attain that end are illegal. (b) If, as expressed on the face of the instrument of incorporation, the purpose for which the corporation is formed is not necessarily unlawful, it will be presumed that it was for a purpose for which a corporation might lawfully be formed; and this presumption holds in case of a foreign corporation. (c) Where the object of a corporation as expressed in the articles of incorporation is not illegal, the fact that such corporation afterwards entered upon illegal projects does not make it an illegal corporation and such illegal acts cannot be urged as a defense, in an action to recover unpaid subscription to the capital stock. (14 C.J.S. 427-428.) (4) Inquiry into purposes other than those stated. — The

best proof of the purpose of a corporation is its articles of incorporation (supra.) and by-laws, (see Sec. 46.) The articles of incorporation must state the primary and secondary purposes of the corporation, while the by-laws outline the administrative organization of the corporation which, in turn, is supposed to insure or facilitate the accomplishment of said purposes. If the

surgeons and medical practitioners, in the same way that in the course of manufacturing and selling eyeglasses, eye frames and optical lenses, optical shops hire licensed optometrists to examine, prescribe and dispense ophthalmic lenses. No one has ever charged that these corporations are engaged in the practice of medicine. There is indeed no valid basis for treating corporations engaged in the business of running optical shops differently." (Acebedo Optical Company vs. Court of Appeals, 329 SCRA 314 [2000].)

Sees. 14-15


161

corporate purpose as stated in the articles of incorporation is lawful, then the SEC has no authority to inquire whether the corporation has purposes other than those stated, and mandamus will lie to compel it to issue the certificate of incorporation. (Gala vs. Ellice Agro-Industrial Corp., 418 SCRA 431 [2003].) Purpose or purposes must be stated with sufficient clarity. (1) May be stated in broad terms. — The purpose or purposes stated in the articles of incorporation need not set out with particularity the multitude of activities in which the corporation may engage. The effect of broad purposes or objects is to confer wide discretionary authority upon the directors and management of the corporation as to the kinds of business in which it may engage. Dealings which are entirely irrelevant to the purposes are unauthorized and called ultra vires, (see Sec. 45.) It is, therefore, important that the corporation's purposes be specified in the articles of incorporation with sufficient clarity to define with certainty the scope of its business. However, the articles of incorporation of a manufacturing corporation need not state the particular kind of manufacturing in which it is proposed to engage, unless it is required by statute. And in forming a charitable corporation, it is not necessary to specify with exactness who are to be the ultimate recipients of the charity, (see 1 Fletcher, pp. 372-386, 400-406; 14 C.J.S. 435436.) (2) May not be indefinitely stated. — While the purposes may be stated in broad and general terms, they should not be so stated ^definitely; otherwise, the articles of incorporation may be rejected. Thus, an articles of incorporation authorizing the corporation "to carry on any lawful business or purpose" (1 Fletcher, p. 367.) or one, after stating certain distinct purposes, adding "and for such other purposes as may be agreed upon by the corporation in the future," will be rejected because the purpose or purposes are not definitely stated. (In re Chapter of Journalists Fund of Philadelphia, 8 Pa. 272.) It is not also sufficient to state that the purpose is to carry on any business which may be deemed profitable. Such all-

Sees. 14-15


162

embracing proviso cannot be stretched to include purposes not incidental, implied or necessary for the furtherance of the purposes stated in the articles of incorporation. Primary purpose must be stated.

The purposes for which a corporation is organized, where it has more than one stated purpose, shall state which is the primary or main purpose and which is/are the secondary or subsidiary purpose or purposes. (Sec. 14[2].) The main purpose must be specified. The law allows a corporation to have secondary purposes because the primary purpose may not turn out to be profitable, and in such case, all it has to do is invest its funds in any such purposes instead of organizing a new corporation. Evidently, a corporation may have only one primary purpose. Under Section 42, a corporation is prohibited from investing its funds "for any purpose other than the primary purpose for which it was organized" unless it is approved by both its board of directors or trustees and its stockholders or members. No such disclosure is required in the case of a partnership. (SEC Opinion, March 28,1985.) Purposes m u s t be c a p a b l e of being lawfully c o m b i n e d .

Although Section 10 allows the formation of corporations "for any lawful purpose or purposes," the purposes, where there are more than one, must be capable of being lawfully combined. Thus, banks which are governed by the General Banking Law (R.A. No. 8791.) are prohibited from directly engaging in insurance business as the insurer. (Sec. 54 thereof.) Similarly, 26

The Act prohibits banks from engaging as principals in the insurance business or through fully-owned subsidiaries but not investing in insurance companies themselves. The Monetary Board of the BSP has classified investments in insurance companies as investments in allied undertakings, allowing universal banks to increase their equity participation in these firms up to 51%. Through "bancassurance," an insurer utilizes bank branches to distribute insurance policies. Presently, the BSP allows banks to sell insurance product at their branches. To comply with the ownership rules, a major insurance company may set-up a subsidiary and sells 5% equity to a bank. Under present rules, only commercial and universal banks are authorized to enter into a bank assurance tie-up with insurers. 2<

Sees. 14-15


163

insurance companies which are governed by the Insurance Code (Pres. Decree No. 1460.) are not allowed to engage in banking operations. The business of banking or insurance or other forms of business affected with a public interest must be had pursuant to the general laws applicable to those particular classes of business. The manifest purpose of excepting such corporations from the general incorporation law is that they should be restrained by strict requirements securing the safe conduct and correct administration of their affairs. (18 Am. Jur. 2d 580.) Subject to the limitation mentioned, the secondary purposes need not be allied to each other or to the primary purpose provided they are not contrary to law. But a non-stock corporation, including educational and religious corporations, may not include a purpose which would change or contradict its nature as such (Sec. 14[2]; see Titles XI, XIII.), although it may be organized for any combination of purposes mentioned in Section 88. The Securities and Exchange Commission may reject the articles of incorporation of a non-stock corporation if its purpose is to engage in election campaign or partisan political activity. (SEC Opinion, April 10,1983.) R e a s o n s for s t a t e m e n t of p u r p o s e or p u r p o s e s .

"The law requires the statement of the purpose or the purposes for which a corporation is formed in order that: (1) A person who intends to invest his money in the business corporation will know where and in what kind of business or activity his money will be invested; (2) The directors and the officers of the corporation will know within what scope of business they are authorized to act; and lastly; (3) A third person who has dealings with the corporation may know by perusal of the articles whether the transaction or dealing he has with the corporation is within the authority of the corporation or not. In other words, the main reason for stating the purpose of the corporation is to deteirnine whether the acts performed by

164


Sees. 14-15

the corporation are authorized or beyond its powers. In the latter case, they will be known as ultra vires acts." (C.G. Alvendia, op. cit., p. 80.) Thus, the purpose clause of the articles of incorporation indicates the extent as well as the limitations of the powers which a corporation may exercise, (see Sees. 2, 36[11], 45.) Effect where primary purpose/secondary purposes unauthorized.

(1) If the primary purpose of the corporation as stated in the articles of incorporation is an unauthorized one, the corporation has no legal existence even though other secondary lawful purposes are included. (2) If, on the other hand, a principal lawful purpose is specified, but the articles or certificate assumes for the corporation the existence of powers which it is not permitted to exercise, then this additional and unauthorized assumption may be treated as surplusage and the corporation regarded as entitled to exercise the lawful powers only. (18 Am. Jur. 2d 585.) Effect w h e r e corporation e n g a g e s in its s e c o n d a r y instead of its primary p u r p o s e .

Generally, the primary purpose of a corporation as indicated in the articles of incorporation determines its classification. However, where the corporation actually engages in one of its secondary purposes instead of its primary purpose, the same may be classified in accordance with said secondary purpose. Thus, a corporation organized for the primary purpose of engaging in mining and whose secondary purpose is agriculture is a mining corporation. In case such corporation engages in agriculture instead of mining, the same may be classified as organized for the purpose of engaging in agriculture. (SEC Opinions, Nov. 8,1972 and March 22,1974.) Place w h e re principal office of corporation located. (1) City or municipality within the Philippines. — The articles

of incorporation must state the "place where the principal office

Sees. 14-15


165

of the corporation is to be established or located, which place must be within the Philippines." (Sec. 14[3].) The purpose of the requirement is to fix the residence of a corporation in a definite place, instead of allowing it to be ambulatory (Young Auto Supply Co. vs. Court of Appeals, 223 SCRA 670 [1993].) for effective regulation and supervision of the corporation. The place to be designated is the city or municipality (not merely the province) where the principal office is to be located. It is now required by the Securities and Exchange Commission that all corporations and partnerships applying for registration should state in their Articles of Incorporation or Articles of Partnership the "(i) specific address of their principal office, which shall include, if feasible, the strict number, street name, barangay, city or municipality; and (ii) specific residence address of each incorporator, stockholder, director, trustee, or partner," in line with the "full disclosure" requirement of existing laws. "Metro Manila" is no longer allowed as address of the principal office. (SEC Circ. No. 3, Series of 2006.) (2) Place where its books and records are ordinarily kept and meet-

ings held. — The "place of the principal office" does not necessarily mean the place where the business of the corporation is transacted but the place where its books and records are ordinarily kept and its officers usually meet for the purpose of managing the affairs and transacting the business of the corporation. (1 Fletcher, p. 478, citing Harris vs. McGregor, 20 Cal. 124; Sec. 74.) Therefore, the principal office may be located at one place and the place of business at another. (3) Residence at place where its principal office is located. — A

corporation has no residence in the same sense in which this term is applied to a natural person. But for practical purposes, a corporation is in a metaphysical sense a resident of the place where its principal office is located as stated in its articles of incorporation (Ibid.; Cohen vs. Benguet Commercial Co., Ltd., 34 Phil. 526 [1916]; Clavecilla Radio System vs. Antillon, 19 SCRA 379 [1967].) filed with the Securities and Exchange Commission. The place where the principal office of the corporation is located determines its residence and the venue in an action by or against it.

166


Sees. 14-15

A corporation has only one residence at a time. The fact that it maintains branch offices in some parts of the country does not mean it can be sued in any of these places, for to allow such action to be instituted would create confusion and work untold inconvenience to the corporation. (Clavecilla Radio System vs. Antillon, supra.) By the same token, a corporation cannot be allowed to file personal actions in a place other than its principal place of business unless such place is also the residence of a coplaintiff or a defendant. (Young Auto Supply Co. vs. Court of Appeals, supra.)

(4) Change of address. — In case of change of address involving a change of city or municipality, an amended articles of incorporation stating the new address must be filed with the Securities and Exchange Commission. (Sec. 16.) If the new address is located within the same city or municipality, no corporate document is required to be filed with the Securities and Exchange Commission except a notice regarding the change of address. (SEC Opinion, Feb. 16,1973.) Incorporating directors or t r u s t e e s .

The incorporating directors or trustees are those chosen by the incorporators (Sec. 5.) and named in the articles of incorporation. The term "trustees" is used to refer to members of the board of a non-stock corporation. (1) Matters to be specified in articles of incorporation. — The

articles of incorporation must specify the names, nationalities, and residences of the incorporators and must show that at least a majority of the incorporators are residents of the Philippines. (Sees. 14[15], 10, 23, par. 2.) The statement of the nationalities of the incorporators will enable the Securities and Exchange Commission to determine prima facie compliance with constitutional or legal requirements regarding ownership by Filipino citizens of certain percentage of the capital stock of certain corporations. It is also necessary that the articles of incorporation specify the names, nationalities, and residences of the persons who will be the first directors or trustees of the corporation, (see Sec. 6, par. 4; Sec. 14[5, 7]; Sec. 15[4th, 5th, 11th]; Sec. 17[4].)

Sees. 14-15


167

(2) Number. — Under Section 14(6), the number of the incorporating directors or trustees is determined by the incorporators but such number "shall not be less than five (5) nor more than the fifteen (15)." (see Sec. 10.) Section 92, however, provides that the board of trustees of a non-stock corporation "may be more than fifteen (15) in number as may be fixed in their articles of incorporation or by-laws." There is an irreconcilable conflict between the two (2) provisions. Being the subsequent provision, Section 92 must prevail on the theory that it is the latest expression of the legislative will. (3) Term of office. — The incorporating directors or trustees shall hold office until their successors are duly elected and qualified. (Ibid., [7].) They are intended to be replaced by the regularly elected directors or trustees (see Sec. 24.) who shall hold office for one (1) year (Sees. 23,24.), when the corporation is organized by the adoption of by-laws (see Sec. 46.) at the first meeting of stockholders or members, (see Sec. 50.) (4) Subscribers to stock. — Under Section 23 (par. 2.), "every director must own at least one (1) share of the capital stock of the corporation of which he is director." This requirement applies to the directors elected after incorporation, as well as to incorporating directors who must "be a subscriber to at least one (1) share of the capital stock of the corporation." (see Sec. 10.) It follows that in a stock corporation, there must be at least five (5) stockholders. Capital stock/capital an d subscribers/ contributors. (1) Stock corporations. — The articles of incorporation of a

stock corporation under Section 14(8) must state the following: (a) The amount of its authorized capital stock in pesos;

27

(b) The number of shares into which it is divided; ^ . S . dollars representing the payment on subscription of a proposed corporation should be duly converted in Philippine peso so that the same may be treated as "cash;" otherwise, the U.S. dollars shall be considered payment by way of property, in which event the payment shall be subject to the requirements of Section 62. (SEC Opinion, July 28,1986.)

168


Sees. 14-15

(c) The par value in pesos of each share; (d) The names, nationalities, and residences of the original subscribers; (e) The amount of capital stock subscribed and paid by each on his subscription; and (f) If some or all of the shares are without par value, such fact. (2) Non-stock corporations. — If the corporation is a non-stock

corporation, the articles of incorporation must state: (a) The amount of its capital or money contributed or donated by specified persons; (b) The names, nationalities, and residences of the donors or contributors; and (c) The respective amount contributed by each. (Sec. 14[9].) W h e r e shares with par value.

Where the shares issued by a corporation have only one par value, the authorized capital stock would be the number of shares multiplied by the par value. If a corporation is authorized to issue different classes of shares with different par values, the authorized capital stock would be the total of the products of the number of shares in each class multiplied by the par value of such class of shares. Thus, where the number of shares authorized to be issued is 1,000,000 with a par value of PI .00 per share, the authorized capital stock is P1,000,000.00. If, for example, 600,000 of the shares are classified into Class "A" with a par value of PI.00 and 400,000 of the shares, into Class " B " with a par value of PI.50, the authorized capital stock is Pl,200,000.00, the total of the products of 600,000 multiplied by PI.00, or P600,000.00, and of 400,000 multiplied by PI.50, or P600,000.00. W h e r e shares without par value.

In case the capital stock consists of shares without par value, the articles of incorporation need only state such fact, together

Sees. 14-15


169

with the number of shares into which said capital stock is divided. If the shares have par value, the amount of the authorized capital stock in pesos is specified in the articles, but if they have no par value, no amount of capital stock is specified in the articles which need only state the number of shares into which said capital stock is divided, (see Sec. 14[seventh].) The reason is that the price of no par value shares vary from time to time (see Sec. 62, last par.) and, therefore, the total amount of the capital stock cannot be known until all the shares are issued. W h e r e s h a r e s with par v a l u e a n d w i t h o u t par v a l u e .

In case some of the shares of the capital stock have par value and some are without par value, the articles of incorporation must state such fact, the number of shares into which the capital stock is divided, the number of shares with par value and their par value, and the number of shares without par value. (Sec. 15[seventh].) W h e r e b u s i n e s s o f corporation reserved for Filipino citizens.

Corporations which will engage in any business or activity reserved for Filipino citizens shall provide in their articles of incorporation the restriction against the "transfer of stock or interest which will reduce the ownership of Filipino citizens to less than the required percentage of the capital stock as provided by existing laws" x x x. (Ibid, [eleventh].) If the required percentage of ownership has not been complied with, the articles of incorporation will not be accepted by the Securities and Exchange Commission. (Sec. 17[3].) In determining the nationality of corporations with foreign equity, the Commission has adopted the "control test" rule, (see Sec. 123.) A c k n o w l e d g m e n t , signature, and verification.

In order to become a corporation de jure (see Sec. 20.), the provisions requiring the incorporation papers to be acknowledged

170


Sec. 16

as well as signed must be complied with. Each of the signatories must acknowledge his signature to the articles and there is no corporation de jure unless acknowledged by the minimum number required by law. However, unless otherwise provided by the statute, the acknowledgment of the signatures of the incorporators is not a part of the articles of incorporation. The purpose of the law in requiring acknowledgment under oath is to secure the State and all concerned against the possibility of any fictitious names being subscribed to the articles, and to furnish proof of the genuineness of the signatures, (see 1 Fletcher, p. 506; 18 C.J.S. 440.) Sec. 16. Amendment of Articles of Incorporation. — Unless otherwise prescribed by this Code or by special law, and for legitimate purposes, any provision or matter stated in the articles of incorporation may be amended by a majority vote of the board of directors or trustees and the vote or written assent of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code, or the vote or written assent of two-thirds (2/3) of the members if it be a non-stock corporation. The original and amended articles together shall contain all provisions required by law to be set out in the articles of incorporation. Such articles, as amended, shall be indicated by underscoring the change or changes made, and a copy thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that said amendment or amendments have been duly approved by the required vote of the stockholders or members, shall be submitted to the Securities and Exchange Commission. The amendment shall take effect upon its approval by the Securities and Exchange Commission or from the date of filing with the said Commission if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation. (18a)

Sec. 16


171

M e a n i n g of c o r p o r a t e charter.

A charter" is an instrument or authority from the sovereign power bestowing the right or privilege to be and act as a corporation. (Humphrey and Peues, 16 Wall. [U.S.] 244, 21 L. ed. 326.) With regard to corporations, the term is correctly used in its limited sense only with reference to special incorporation by act of the legislature. In the case of a corporation organized under a general law, however, the corporation's charter is not limited to its articles of incorporation, (see 18 Am. Jur. 2d 622.) Distinguished f r o m f r a n c h i s e.

The term is sometimes loosely used in the sense of "franchise." Properly speaking, corporate or primary franchise is the right and privilege itself of being a corporation, (see Sec. 10.) On the other hand, corporate charter applies to the instrument bestowing such right and privilege. C o m p o n e n t s of corporat e charter.

A charter represents the complete grant of authority; hence, the complete charter of a corporation does not rest only upon one instrument. (1) As to corporations formed under the general incorporation law, the charter consists of:

(a) The law under which it is organized (B.P. Big. 68.); (b) Articles of incorporation; (c) By-laws; and (d) All applicable provisions of the Constitution and the general laws of the State in force at the time the corporation is incorporated which are as much a part of its charter as though expressly written therein. (7 Fletcher, pp. 760-761.) (2) As to corporations created by special laws, the charter consists of

(a) The special law which creates the corporation;

"See note 1 under Sees. 14-15.

172


(b) Executive Orders of the President;

Sec. 16

15

(c) Rules and regulations applicable to such corporations; and (d) All laws applicable thereto, including the Corporation Code the provisions of which apply suppletorily. (see Sec. 4.) Nature of corporate charter.

Frequently, a corporate charter is described as a contract of a three-fold nature, that is, a contract between the State and the corporation, a contract between the corporation and its stockholders (or members), and a contract between the stockholders inter se. (18 Am. Jur. 2d 625-626.) (1) A contract between the State and the corporation. — It is com-

monly said that corporations are created by an act of the sovereign — by an act of the Legislature — and in a sense, this is true. But it is not to be understood from this that the Legislature can bring a private corporation into existence of its own accord, and without the consent of the members who compose it. The charter of a private corporation has been regarded as a contract between the corporation and the State. For this reason, courts apply to the formation of a private corporation the principles governing offer and acceptance in the formation of contracts. (Clark on Corporations, p. 55.) The consideration for the grant of powers and privileges by the State is found in the liabilities and duties which the incorporators assume by accepting the terms specified in the charter. (18 Am. Jur. 2d 626.) (a) Acceptance of original charter. —

1) If persons apply to the Legislature for a charter, this is sufficient evidence of consent on their part and

"E.g., the Uniform Charter for Government Corporations. (Executive Order No. 399, Jan. 5,1951.) See Presidential Decree No. 2029 and Letter of Instructions No. 1520 which apply to government-owned or -controlled corporations, whether chartered by special law or organized under the Corporation Code, and Administrative Code of 1987 (Exec. Order No. 292), Book IV, Chapter 9, Section 42.

Sec. 16


173

when the charter is granted, no acceptance of it by them, other than will be implied from their previous application, need be shown. Indeed, they may be considered as having made an offer, and the State as having accepted it. 2) If, however, without such application, the Legislature offers a charter, either to particular persons by a special act, or to persons or a class of persons generally by a general law, an acceptance must be shown. Until acceptance, the offer of a charter, either by a general or a special law, can have no effect whatever. An act of the Legislature authorizing persons to become a corporate body by complying with certain terms and conditions is, until accepted by the persons authorized, nothing but an offer on the part of the State, which may be withdrawn by it at any time; and it is withdrawn, so as to be no longer open for acceptance, by a repeal of the act by the Legislature, or by the adoption of a constitutional provision rendering such an act void. (b) Acceptance of amendment to existing charter. — The

rule that a charter must be accepted before it can have any effect applies to acts amending existing charters under a right reserved to the State when the charter was granted; for though the State may reserve the right to amend the charter of a private corporation, it cannot compel the members to accept the charter as amended, any more than it could compel them to accept the original charter. If they do not choose to adopt the amendment, they may give up their charter altogether. The acceptance of an amendment, like the acceptance of an original charter, may be implied from the conduct of the corporation or its members and it will be conclusively presumed if the powers conferred by the amendatory act are exercised. (Clark on Corporations, p. 55.) (2) A contract between the corporation and the stockholders. — It

is generally held that a corporate charter constitutes a contract between the corporation and its stockholders. The stockholders are presumed to have entered into such a contract with knowledge of the provisions thereof, are bound thereby, and their rights as stockholders are defined and limited by the charter. (18 Am.

174


Sec. 16

Jur. 2d 626.) The articles of incorporation or the corporate charter being considered a contract, the corporation is bound to observe all the provisions thereof. (SEC Opinion, Jan. 22,1986.) (3) A contract between the stockholders inter se. — The charter of

a corporation constitutes a contract also between the stockholders which is entitled to protection as against attempted action by the corporation, though authorized by law and the majority of the stockholders, insofar as the interests of dissenting stockholders are concerned. Thus, there is contractual obligation on the corporation with respect to its stockholders and on the stockholders with respect to each other that no fundamental, radical, or material changes on the purposes of the corporation shall be made, at least in the absence of express or implied consent of the stockholders thereto. (Ibid.; see Sec. 81.) Reserved power of State to a m e n d corporate charter. (1) Constitutional and statutory authority. — The certificate of

incorporation is a contract primarily between the State and the corporation. (Dartmouth College vs. Woodward, 4 Wheat. [U.S.] 518.) Hence, it can be amended only by or under constitutional or statutory authority. (a) The constitutional authority of Congress to change or amend the charter of a private corporation for the operation of a public utility is expressly reserved by Section 11, Article XII of the Constitution which provides that: "Neither shall any such franchise or right [for the operation of a public utility] be granted except under the condition that it shall be subject to amendment, alteration or repeal by the Congress when the common good so requires." (b) The statutory authority of Congress to alter or amend the corporate charter is impliedly reserved by Section 145 of the Code subject to the limitation therein provided with respect to vested rights that have accrued at the time of the enactment of the amendatory law and the prohibition of the Constitution (Art. Ill, Sec. 10 thereof.) against laws impairing the obligation of contracts.

Sec. 16


175

(c) Under the reserved power to repeal the corporate charter, the legislature may terminate corporate existence (18 Am. Jur. 2d 633.) (2) Exercise of power. — The reservation of the power is an incident of the contract between the State and the incorporators. The dissolution of a corporation without cause is void as impairing the obligation of a contract between the incorporators and the State. Note, however, that with respect to the franchise of a public utility, the only limitation is that the power can be exercised only "when the common good requires." Power of stockholders or members to amend articles of incorporation. (1) Power expressly granted. — The authority of stockholders or members to amend the articles of incorporation which forms part of the corporate charter is conferred by Sections 16, 37, and 38. Section 37 refers to the extension or shortening of the corporate term; Section 38, to increase or decrease of the capital stock; and Section 16, to amendments in general, i.e., to matters other than the foregoing, including a change in the corporate name. (Sec. 18.) The power to amend is also expressly granted by Section 36(4). The amendment must also be approved by a majority of the board of directors or trustees. (2) Matters not subject to amendment. — Certain provisions or matters stated in the articles of incorporation cannot be amended. (a) The portion of the articles of incorporation stating the names of the incorporators and the first set of directors/ trustees (see Sec. 15 [fifth and sixth].) cannot be amended by substituting for the name of an incorporator the name of another, for the reason that the same states an accomplished fact, just as the place and date of the execution of the articles and the original subscriptions of the incorporators cannot be changed or amended. Furthermore, such an amendment would go against the meaning and concept of the word "incorporators" as defined in Section 5 as those "mentioned in

176


Sec. 16

the articles of incorporation as originally forming and composing the corporation and who are signatories thereof." (b) Similarly, the names, etc. of the subscribers, the treasurer of the corporation elected by the subscribers (Ibid. [eighth, ninth, tenth].), and the witnesses cannot be amended except to correct mistakes. Necessity of stockholders' or m e m b e r s ' meeting for a m e n d m e n t .

It must be noted that under the first paragraph of Section 16, the amendment may also be effected by the "written assent" of the stockholders representing at least 2 / 3 of the outstanding capital stock of the corporation or 2 / 3 of its members, meaning that such action need not be taken at a meeting and upon a vote. Even holders of non-voting shares or non-voting members, as the case may be, are entitled to vote on the amendment, (see Sec. 6, par. 6[1].) (1) If the amendment consists in extending or shortening the corporate term (Sec. 37.), or increasing or decreasing the capital stock (Sec. 38.), a meeting of the stockholders or members is necessary. (2) In a close corporation, if the amendment of the articles of incorporation refers to any of the matters mentioned in Section 103, the same shall not be valid or effective unless approved by the required vote of the stockholders at a meeting duly called for the purpose. A mere written assent would not also be sufficient. In cases where written consent assent is allowed, the same number of votes shall be observed, and nothing can be done by proxy. (SEC Memo. Cir. No. 4, Series of 2004; see Art. 58.) Limitations on p o w e r of corporatio n to a m e n d .

Section 16 imposes limitations on the power of a corporation to amend its articles of incorporation. They are as follows: (1) The amendment of any provision or matters stated in the articles of incorporation is not allowed when it will be contrary to any provision or requirement prescribed by the Code or by

Sec. 16


177

special law, or change any provision in the articles of incorporation stating an accomplished fact (supra.); (2) It must be "for legitimate purposes." (see Sec. 81[1].) The power of amendment must not be exercised in such a manner as to work injustice. The majority stockholders owe a duty to at least act fairly to the minority interest, and they cannot avoid that duty merely because the amendment is legally authorized (In the Matter of Ayala Corporation, SEC En Banc Decision, Sept. 1,1989.); (3) It must be approved by the required vote of the board of directors or trustees and the stockholders or members; (4) The original articles and amended articles together must contain all provisions required by law to be set out in the articles of incorporation; (5) Such articles, as amended, must be indicated by underscoring the change or changes made, and a copy thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees stating that the amendment or amendments have been duly approved by the required vote of the stockholders or members must be submitted to the Securities and Exchange Commission. Filing fees must be paid; (6) The amendments shall take effect only upon their approval by the Securities and Exchange Commission. They are deemed approved by the Commission from the date of filing if not acted upon within six (6) months from said date for a cause not attributable to the corporation, assuming that the amendments are not illegal. In other words, a subsequent approval is made to relate back to the date of filing of the amendments with the Commission. If the delay is attributable to the corporation, the amendment cannot take effect without approval thereof by the Commission. The provision on automatic approval in Section 16 does not apply to the dissolution of corporations in the light of Section 120 (SEC Opinion, March 30,1982.); and (7) If the corporation is governed by a special law such as banks, banking and quasi-banking institutions, insurance companies, etc., the amendments must be accompanied by a favorable recommendation of the appropriate government agency to

178


Sec. 17

the effect that such amendments are in accordance with law. (Sec. 17, par. 2.) In the case of foreign corporations authorized to transact business in the Philippines, they are merely required to file, within sixty (60) days after the amendment to the articles of incorporation (or by-laws) becomes effective, with the Securities and Exchange Commission and in proper cases, with the appropriate government agency, a duly authenticated copy of the articles of incorporation (or by-laws) for record purposes. The filing thereof, however, shall not of itself enlarge or alter the purpose or purposes for which such corporation is authorized under its license to transact business in the Philippines, (see Sees. 130,125.) Such portion of the articles of incorporation which states an established or accomplished fact at the time of incorporation, e.g., the portion stating the names of the original subscribers or incorporators (Sec. 5.), cannot be changed or amended. Sec. 17. Grounds when articles of incorporation or amendment may be rejected or disapproved. — The Securities and Exchange Commission may reject the articles of incorporation or disapprove any amendment thereto if the same is not in compliance with the requirements of this Code: Provided, That the Commission shall give the incorporators reasonable time within which to correct or modify the objectionable portions of the articles or amendment. The following are grounds for such rejection or disapproval: (1) That the articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed herein; (2) That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations; (3) That the Treasurer's Affidavit concerning the amount of capital stock subscribed and/or paid is false; (4) That the required percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution.

Sec. 17


179

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

Grounds for rejection of articles of incorporation or amendment thereto. Section 17 enumerates the grounds for the rejection of the articles of incorporation or disapproval of any amendment thereto. The grounds are not exclusive. 30

(1) The Securities and Exchange Commission is required to give the incorporators reasonable time within which to correct or modify the objectionable portions of the articles of incorporation or amendment when the same is rejected or disapproved for non-compliance with the requirements of the Code, (see Sees. 14, 15 and 16.) (2) Any decision of the Commission rejecting the articles of incorporation or disapproving any amendment thereto is appealable by petition for review in accordance with the pertinent provisions of the Rules of Court. (Pres. Decree No. 902-A, Sec. 6, last sentence.) (3) In case of corporations governed by special laws such as banks, insurance companies, and educational institutions, the articles of incorporation or amendment shall not be accepted or approved by the Securities and Exchange Commission unless accompanied by a favorable recommendation of the appropriate government agency (e.g., Monetary Board of the Central Bank, with respect to banking institutions) that such articles or amendments is in accordance with law. (see Sec. 107.)

"See note 3 under Sees. 14-15.


180

Sec. 17

(4) Before a foreign corporation can lawfully transact business in the Philippines, it must first obtain a license to transact business in the country in accordance with the Code and a certificate of authority from the appropriate government authority. (Sec. 23.) These requirements insure compliance by the registrant corporation, whether domestic or foreign, with the policies or regulations of the government agency concerned. (5) The Securities and Exchange Commission shall not also accept the articles of incorporation of any stock corporation unless accompanied by a sworn statement of the treasurer elected by the subscribers showing the amount of the capital stock subscribed and paid. (Sec. 14, last par.) (6) The action of the Commission in approving or rejecting the articles of incorporation or any amendment thereto is not a ministerial function but involves the exercise of discretionary power, (see Sees. 14-15.) Suspension or revocation of certificate of registration of corporations. 1. Grounds. — Under Presidential Decree No. 902-A, the Securities and Exchange Commission may suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of corporations, partnerships, or associations upon any of the grounds provided by law, including the following: 31

(a) Fraud in procuring its certificate of incorporation (such as making it appear that it has cash paid-up capital when actually it has none, the money being in fact merely borrowed and returned to the lender after the incorporation); (b) Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of, or damage to, the general public; (c) Refusal to comply with or defiance of a lawful order

It reorganized the SEC with additional powers and placed the said agency under the administrative supervision of the Office of the President. This Decree is superseded by the Securities Regulation Code. (Appendix "A.") The grounds provided by Presidential Decree No. 902-A are still applicable, (see Sec. 5[m], SRC.) 31

Sec. 17


181

of the Commission restraining the commission of acts which would amount to a grave violation of its franchise; (d) Continuous inoperation for a period of at least five (5) years (see Sec. 22, infra.);

(e) Failure to file by-laws within the required period; and (f) Failure to file required reports in appropriate forms as determined by the Commission within the prescribed period. (Pres. Decree No. 902-A, Sec. 6[1].) The authority of the Commission to suspend, cancel or revoke corporate franchise or registration also emanates from Sections 121 and 144* (2) Ejfectivity. — A SEC order of revocation is immediately effective. Once the revocation order is issued, the subject corporation's existence is terminated at that very instant and is deemed terminated until the particular revocation order is lifted. It may not continue to operate its business (see Sec. 122.) and issue shares. It may, however, sell its assets pursuant to Section 122 but it may only purchase property if such purchase will be consistent with liquidation. It may sue for purposes of recovering its property. (SEC Opinion No. 09-24, July 28,2009.) The capacity of a corporation to institute an ejectment suit is not affected by the subsequent suspension and revocation of certificate of registration. (Paredes vs. Don Luis Dison Realty, Inc., 548 SCRA 273 [2008].) A corporation whose existence is deemed terminated may not allege in its complaint in court that it is a corporation duly organized and existing under Philippine laws. (Clemente vs. Court of Appeals, 242 SCRA 717 [1995].) (3) Lifting of Order of Revocation. — The lifting restores the cor-

poration to its original status as if there was no revocation order issued against it, with the capacity to exercise all the powers of a duly registered corporation under the Corporation Code. (SEC Opinion No. 09-29, Nov. 11, 2009.) SEC Memo. Cir. No. 15 (Sept. 5, 2009) extends by one (1) year from the date of revocation the period within which corporations whose certificates of registration were revoked by non-compliance with reportorial requirements to file a petition to lift the order of revocation. 32

182


Sec. 18

Sec. 18. Corporate name. — No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name, (n) Limitations upon use of corporate n a m e . (1) Similarity with another trade name. — The incorporators

may choose and use any name they may see fit, provided it is one not identical with or prejudicially similar to a name which was previously adopted and which is being used by another existing corporation or unincorporated association or a natural person as trade name (Bender vs. Bendor Store, 178 III. App. 203.), or is contrary to existing law. A corporation acquires its name by choice and need not select a name identical with or similar to one already appropriated by a senior corporation while an individual's name is thrust upon him. It can no more use a corporate 33

Încorporation gives protection to the name of the corporation. Before the Securities and Exchange Commission registers any articles of incorporation, the records are checked to make sure that the proposed name is not identical with or closely similar to the name of an entity previously registered with it. Moreover, the registrant is required to submit a written undertaking that the corporation will change its name in the event that another person, firm or entity has acquired a prior right to the use of the same name or one similar to it. (SEC Opinion, May 26, 1968.) Such entity may be a foreign corporation whose trade name, being a property right, a right in rem, is entitled to protection even in countries where it does not transact any business. (Western Equipment & Supply Co. vs. Reyes, 51 Phil. 115 [1927].) A corporation need not register with the Department of Trade and Industry the SEC-approved corporate name if it does not have any intention to use another business name. (SEC Opinion No. 04-21, April 2, 2004.) Neither the Corporation Code nor the Guidelines contains any provision restricting the use of the words "United States" or the initials "U.S." as part of the corporate name. Hence, for as long as they would not be deceptive in the light of the purposes for which the corporation is organized, the use of such words may be allowed, without prejudice to the provision of any existing international agreement to the contrary. (SEC Opinioa April 12,1988.) The Securities and Exchange Commission has prohibited domestic corporations from using the names of multinational corporations unless they are set up as subsidiaries or affiliates of these multinational corporations to prevent misimpressions created by new corporations organized by obscure investors.

Sec. 18


183

name in violation of the rights of others than an individual can use his name legally acquired so as to mislead the public and injure another. (Philips Export B.V. vs. Court of Appeals, 206 SCRA 457 [1992].) For as long as a corporation is existing regardless of whether or not it is in operation, its corporate name cannot be used by any other group. (SEC Opinion, Sept. 2,1993.) If any corporation could adopt at pleasure the name of another corporation, the practice would cause confusion and unfair and fraudulent competitions, open the door to frauds upon the public, promote the evasion of legal obligations and duties, and result in difficulties of administration and supervision over corporations. (Wycott vs. Howe Scale Co., 122 Fed. 348; Red Line Transportation vs. Rural Transit, 30 Phil. 549 [1915]; Industrial Refractories Corporation of the Philippines vs. Court of Appeals, 390 SCRA 252 [2002].) (2) Test of infringement. — The right to the exlusive use of a

corporate name with freedom from infringement is determined by priority of adoption. In determining the existence of confusing similarity in corporate names, the test is whether the similarity is such as to mislead a person using ordinary care and discrimination and the court must look to the record as well as the names themselves. It is settled, however, that proof of actual confusion need not be shown. It suffices that confusion is probably or likely to occur. (Philips Export B.V. vs. Court of Appeals, supra.) (3) Part of name. — The corporate name shall contain the word "Corporation" or "Incorporated," or the abbreviations "Corp." or "Inc.," respectively. The corporate name of a foundation shall use the word "Foundation." (SEC Memo. Circ. No. 5, Series of 2008.) At the time of registration, the corporation through its authorized representative must submit an affidavit containing an unqualified undertaking to change the corporate name in the event that another person, firm or entity has acquired a prior right to the use of said name or one similar to it, signed by at least two (2) incorporators. In case of amendment of the corporate name of an existing company, the affidavit shall be signed by any of the directors. (Ibid.)

184


Sec. 18

ILLUSTRATIONS: (1) "House of Investments, Inc.," a corporation engaged in investments, protested the adoption of the name "House of Insurance, Inc." by a proposed corporation which shall engage in insurance. Is there a similarity between the two names as to cause confusion in the minds of the public regarding the identities of said corporations? None. The two corporations have different main objectives and both cater generally to people of means who, as a rule, exercise careful scrutiny of the identity of the corporation with which they deal and are interested not only in the entity but in the officials thereof as well. Furthermore, only the word "House" appears in both names but as this word is generic or one of general application, it cannot be exclusively appropriated as a corporate name. (SEC Opinion, May 24,1960.) (2) A proposed corporation seeks to adopt "Garcia & Co., Inc." as its corporate name. May the proposed name be permitted? No. The reason for the rule against the adoption of a name similar to the name of an existing entity is to avoid confusion in the minds of the general public. For the same reason, the proposed name should not be approved. A different rule would apply if persons with the surname "Garcia" registered a corporation under the name "Garcia & Co., Inc." and subsequent to said registration, transferred their shares to others, none of whom bear the surname "Garcia." In such event, the transferees of the shares of stock may continue the business of the corporation under its registered corporate name. (SEC Opinion, Aug. 22,1960.) (3) "Universal Textile Mills, Inc." petitioned to have the "Universal Mills Corporation" change its name on the ground that such name is "confusingly and deceptively similar" to that of the former. The Securities and Exchange Commission granted the petition which order was affirmed by the Supreme Court. Though not identical, the names are so similar to cause confusion to the general public, particularly where the latter included the manufacture, dyeing and selling of fabrics of all kinds in which the former had been engaged for more than a

Sec. 18


decade ahead of the latter, enjoying well-earned patronage and goodwill. (Universal Mills Corporation vs. Textile Mills, Inc., 77 SCRA 62 [1977]; see Ang mga Kaanib sa Iglesia ng Dios Kay Kristo Jesus, H.S.K. sa Bansang Pilipinas, Inc. vs. Iglesia ng Dios kay Cristo Jesus, 372 SCRA 173 [2001].) (4) Is the corporate name "Tropiflora, Inc." confusingly similar to "Tropical Flora (Philippines)" considering that the two entities are engaged in the same line of business? Yes. "Tropiflora" is derived from the words "tropical flora," meaning "of, in or characteristic of the tropics, very hot." Tropic is either of two circles of the celestial sphere parallel to the equator. Flora refers to the plants of a specified region or time. "Tropiflora" is nothing but a contraction of the words "Tropical Flora." The former is merely a combination of the latter. The similarity between the two names is too obvious to be overlooked. (Benedict Investment Realty Corp. vs. Tropiflora, Inc., SEC Case No. 2570, Jan. 10,1985.) (5) There is a basic similarity between the trade names "Universal Converse and Device" and "Converse Rubber Corporation" as in both names, "Converse" is the dominant word which identified the latter from corporations engaged in similar business. Appropriation by another of the dominant part of a corporate name is an infringement. (Converse Rubber Corp. vs. Universal Rubber Product, Inc., 147 SCRA 154 [1987].) (6) The corporate names of private respondent educational entities all carry the word "Lyceum" but it has been held that confusion and deception are effectively precluded by the appending of geographic names to the word "Lyceum." Thus, we do not believe that the "Lyceum of Aparri" cannot be mistaken by the general public for the Lyceum of the Philippines, or that the "Lyceum of Camalaniugan" would be confused with the Lyceum of the Philippines. Etymologically, the word "Lyceum" is the Latin word for the Greek lykeion which, in turn, referred to a locality on the river Illisius in ancient Athens "comprising an enclosure dedicated to Apollo adorned with fountains and buildings erected by Pisistratus, Pericles and Lycurgus frequented by the youth for exercise and by the philosopher Aristotle and his followers for teaching." In time, the word "Lyceum" became associated with schools and other institutions providing public lectures and concerts and public discussions. Thus, today, the

185

186


Sec. 18

word "Lyceum" generally refers to a school or an institution of learning. While the Latin word "lyceum" has been incorporated into the English language, the word is also found in Spanish (liceo) and in French (lycee). Roman Catholic schools frequently use the term, e.g., "Liceo de Manila," "Liceo de Baleno" (in Baleno, Masbate), "Liceo de Masbate," "Liceo de Albay." "Lyceum" is in fact as generic in character as the word "university." In other places, however, "Lyceum," or "Liceo" or "Lycee" frequently denotes a secondary school or a college. It may be that the use of the word "Lyceum" may not yet be as widespread as the use of "university," but it is clear that a not inconsiderable number of educational institutions have adopted "Lyceum" or "Liceo" as part of their corporate names. Since "Lyceum" or "Liceo" denotes a school or institution of learning, it is not unnatural to use this word to designate an entity which is organized and operating as an educational institution. (Lyceum of the Philippines, Inc. vs. Court of Appeals, 219 SCRA 610 [1993].) (7) Respondent RCP was incorporated on October 13, 1976 and since then has been using the corporate name "Refractories Corp. of the Philippines." Meanwhile, petitioner was incorporated on August 23,1979 originally under the name "Synclaire Manufacturing Corporation." It only started using the name "Industrial Refractories Corp. of the Philippines" when it amended its Articles of Incorporation on August 23, 1985, or nine (9) years after respondent RCP started using its name. Thus, being the prior registrant, respondent RCP has acquired the right to use the word "Refractories" as part of its corporate name. Petitioner's corporate name is "Industrial Refractories Corp. of the Phils." while respondent's is "Refractories Corp of the Phils." Obviously, both names contain the identical words "Refractories," "Corporation" and "Philippines." The only word that distinguishes petitioner from respondent RCP is the word "Industrial" which merely identifies a corporation's general field of activities or operations. These two corporate names are patently similar that even with reasonable care and observation, confusion might arise. Furthermore, both cater to the same clientele, i.e., the steel industry. (Industrial Refractories Corporation of the Philippines vs. Court of Appeals, 390 SCRA 252 [2002].)

Sec. 18


187

(4) Prohibited use of certain words. — In addition to the limi-

tation provided by Section 18, special laws prohibit the use of certain words as part of the corporate name such as those which imply that a corporation is engaged in an activity in which it is not allowed by law to engage in. Thus: (a) It shall be unlawful for any person, association or corporation to use whether directly or indirectly, the emblem, official seal, and name of the United Nations, both in its full or abbreviated form, for commercial or business purpose. (Sec. 1, R.A. No. 226.) (b) It shall be unlawful to use the word "bonded," in part or in whole, as a trade name or business name, or business name of those operating or maintaining any warehouse not licensed under Act No. 3893 (General Bonded Warehouse Act.) or established under Sections 1302 and 1304 of the Revised Administrative Code. (Sec. 3, R.A. No. 247.) (c) No person, association or corporation unless duly authorized to engage in the business of a bank, quasi-bank, trust entity, or savings or loan association, shall advertise or hold itself out as being engaged in the business of such bank, etc., or use in connection with its business title the word or words "bank," "banking," "banker," "quasi-bank," "quasibanking," "quasi-banker," "savings and loan association," "trust corporation" "trust company," or words of similar import or transact in any manner the business of any such bank, corporation or association. (Sec. 64, R.A. No. 8791.) (d) No bank, person, association, or corporation doing the business of banking but not authorized under the Rural Banks Act, shall use the words "Rural Bank," as part of its name or title. (Sec. 28, R.A. No. 7353.) (e) It shall be unlawful for any person, association, partnership, or corporation to use the term "savings and loan association" unless it is organized under the Savings and Loan Association Act (Sec. 7, R.A. No. 3779.), or the term "development bank" unless it is organized under the Private Development Banks Act. (Sec. 16, R.A. No. 4093.) (f) All banks other than the Philippine National Bank and such other banks now licensed to do business in the Phil-

188


Sec. 18

ippines whose name already includes the word "National" are prohibited from using the word "National" as a portion of their name or title. (Sec. 35, Pres. Decree No. 694, The 1975 Revised Charter of the Philippine National Bank.) (g) The use of "UN," "Olympic," and "Bureau" in full or abbreviated form for commercial or business purposes is prohibited. (Sec. 1, R.A. No. 226.) (h) The use of "Financing Company," or "Finance Company," or "Finance and Leasing Company" "Investment Company" or "Investment Risk" unless organized as a financing investment company is prohibited. (Sec. 14, R.A. No. 5980, as amended by R.A. No. 8556.) (i) The use of "Lending Company" and "Lending Investor" except by lending companies. (Sec. 12[2, c], R.A. No. 9474.), or "Pawnshop" except by entities authorized to operate pawnshop. (Sec. 11, Pres. Decree No. 114.) (j) The practice of a profession regulated by special law which among others, provides for the permissible use of the profession name in a firm, partnership or association shall govern the use of the same, e.g., "Engineer" or "Engineering" (Sec. 24, R.A. No. 544, as amended by R.A. No. 1582.), "Architect" (Sec. 25, R.A. No. 9266.) or "Geodetic Engineer" (Sec. 24, R.A. No. 8560.) (k) The corporation which is a subsidiary of a foreign firm may carry the name of the principal company with the word "(Phil.)" or "(Philippines)" affixed to the firm name. The written consent of the mother company as regards the use of the firm name must be submitted. (1) The name of an internationally known foreign corporation or one similar to it may not be used by a domestic corporation unless it is a subsidiary and the parent company has consented to such use. (m) If the full name of a person forms part of the corporate name, the consent of such person or his heir(s) must be obtained. (n) Unless otherwise authorized by the Commission, "National," "Bureau," "Commission," "State," and other

Sec. 18


189

words, acronyms, and abbreviations that have been given acceptance in the Philippines as being used only by entities that perform governmental functions. (SEC Memo. Circ. No. 5, Series of 2008.) (5) Use of generic, geographical, and descriptive terms and

names. — Certain words, terms, or names are regarded by law as incapable of exclusive appropriation. Of this class are generic terms and geographical names and terms which are merely descriptive of the goods, services, places where made, the character of the business, or the name of the maker. (Columbia Mill Co. vs. Alcorn, 150 U.S. 460.) The general rule is that a corporation cannot acquire such a right in such names, words or terms as to have their use by others enjoined (General Industries Co. vs. Wacker Drive Building Corp., 57 F. Sup 573.) unless such words have acquired a secondary meaning or have become distinctive so as to distinguish not only the product of a particular service and its quality but also the name of the producer of the service. (Wyoming National Bank of Casper vs. Security Bank & Trust Co., 472 2d 1120.) Thus, the use, for example, of the words "La Union" which is a geographical name, and "provincial" which is merely descriptive as business trade names including the use of the same in the transportation business, may not be enjoined. (SEC Opinion, July 16,1991.) (6) Use of trade name of another corporation. — The SEC Guide-

lines, specifically requires that: (a) a corporate name shall not be identical, misleading or confusingly similar to one already registered by another corporation with the Commission; and (b) if the name applied for is similar to the name of a registered firm, the applicant shall at least contain one or more distinctive words to the proposed name to remove the similarity or differentiate it from the registered name. This guideline does not apply where 34

35

"SEC Memo. Cir. No. 5, Series of 2008. ^However, the addition of one or more distinctive words shall not be allowed if the registered name is coined or unique unless the board of directors of the subject corporation gives its consent to the applied name. Production marks, spaces, signs, symbols, and other similar characters shall be acceptable for purposes of differentiating a proposal name from a registered name. A name that consist solely of special symbols, punctuation marks or specially designed characters shall not be registered. A tradename or trademark

190


Sec. 18

the questioned word happens to be the valid trademark or trade name of another corporation, in which case, the latter shall have the exclusive right to its use as registered owner. (Philips Export B.V. vs. Court of Appeals,* 206 SCRA 457 [1992].) (7) Use of a person 'sfull name or surname. — It may be used in a

corporate name if he/she is a stockholder of the corporation and has consented to such use. If the person is already deceased, the consent shall be given by his/her estate. The Commission may require a registrant to explain to its satisfaction the reason for the use of a person's name. The meaning of initials used in a name shall be stated by the registration the articles of incorporation or in a separate document signed by an incorporator or director. (SEC Memo. Circ. No. 5, Series of 2008.) (8) Doctrine of secondary meaning. — This doctrine originated

in the field of trademark law. Its application has, however, been extended to corporate names since the right to use a corporate name to the exclusion of others is based upon the same principle which underlies the right to use a particular trademark or trade name. In Philippine Nut Industry, Inc. vs. Standard Brands, Inc. (65

SCRA 575 [1975].), the doctrine of secondary meaning was elaborated in the following terms: "x x x a word or phrase originally incapable of exclusive appropriation with reference to an article on the market, because geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his article that, in that trade and to that branch of the purchasing public, the word or phrase has come to mean that the article was his product." In Lyceum of the Philippines vs. Court of Appeals (supra.), the

question which arose was whether or not the use by petitioner

registered with the Intellectual Property Office may be used as part of the corporate name of a party other than its owner if the latter gives its consent to such use. (Ibid.) In case a company has more than one business or trade name, the SEC requires that business or trade name which is different from corporate or partnership name should be indicated in the Articles of Incorporation. (Ibid.; as amended by SEC Memo. Circ. No. 12.) *In this case, the SEC, in allowing private respondent the continued use of its corporate name "Standard Philips Corporation," maintains that the corporate names of petitioners "Philips Electrical Lamps, Inc. and "Philips Industrial Development, Inc." contains at least two words different from that of the corporate name of respondent.

Sec. 18

TITLE II. INCORPORATION AND ORGANIZATION OF PRTVATE CORPORATIONS

191

of "Lyceum" in its corporate name has been for such length of time and with such exclusivity as to have become associated or identified with the petitioner institution in the mind of the general public (or at least that portion of the general public which has to do with schools). The Supreme Court ruled: "The number alone of the private respondents in the case at bar suggests strongly that petitioner's use of the word 'Lyceum' has not been attended with the exclusivity essential for applicability of the doctrine of secondary meaning. It may be noted also that at least one of the private respondents, i.e., the Western Pangasinan Lyceum, Inc., used the term 'Lyceum' seventeen (17) years before the petitioner registered its own corporate name with the SEC and began using the word 'Lyceum.' It follows that if any institution had acquired an exclusive right to the word Lyceum, that institution would have been the Western Pangasinan Lyceum, Inc. rather than the petitioner institution, x x x We conclude and so hold that petitioner institution is not entitled to a legally enforceable exclusive right to use the word 'Lyceum' in its corporate name and that other institutions may use 'Lyceum' as part of their own corporate names. To determine whether a given corporate name is 'identical' or 'confusingly or deceptively similar' with another entity's corporate name, it is not enough to ascertain the presence of 'Lyceum' or 'Liceo' in both names. One must evaluate corporate names in their entirety and when the name of petitioner is juxtaposed with the names of private respondents, they are not reasonably regarded as 'identical' or 'confusingly or deceptively similar' with each other." (8) Where business of junior corporation different or noncompet-

ing. — The protection to which the prior user of a corporate name is entitled is not limited to guarding its goods or business from actual market competition with identical or similar products of the parties but extends to all cases in which the use by the junior appropriator of the name is likely to lead to a confusion of source, as where prospective purchasers would be misled into thinking that the complaining corporation has extended its business into


192

Sec. 18

the field, or is in any way connected with the activities of the infringer; or when it forestalls the normal potential expansion of its business, (see Sta. Ana vs. Maluwat, 24 SCRA 1018 [1968].) Remedy of corporation w h o s e n a m e has been adopted by another.

(1) Injunction. — A corporation has an exclusive right to the use of its name, which may be protected by injunction upon a principle similar to that upon which persons are protected in the use of trademarks and trade names. 37

(a) Fraud upon the aggrieved corporation. — The use of a

name similar to one adopted by another corporation, whether a business or a non-profit organization, if misleading or likely to injure in the exercise of its corporate functions, regardless of intent, may be prevented by the corporation having a prior right, by a suit for injunction against the new corporation to prevent the use of the name. (Philips Export B.V. vs. Court of Appeals, 206 SCRA 457 [1992]; Ang mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus, H.S.K. sa Bansang Pilipinas, Inc. vs. Iglesia ng Dios Kay Crista Jesus, 372 SCRA 171 [2001].) Such principle proceeds upon the theory that it is a fraud on the corporation which has acquired a right to that name and perhaps carried on its business thereunder, that another should attempt to use the same name, or the same name with slight variation in such a way as to induce persons to deal with it in the belief that they are dealing with the corporation which has given a reputation to the name. (Philips Export B.V. vs. Court of Appeals, supra.) (b) Interference with its business. — Broadly speaking, the

general rule is that the right of one corporation to enjoin the use of the name of a similar name by another depends upon whether such use has interfered with the former's business whatever it may be and without regard to whether it is comA trade name is any individual name or surname, firm name, device or work used by manufacturers, industrialists, merchants and others to identify their businesses, vocations, or occupations. It refers to the business and its goodwill while trademark refers to the goods. (Converse Rubber Corp. vs. Universal Rubber Products, supra.) 37

Sec. 18


193

mercial, trading or otherwise. Thus, not only are corporations organized for pecuniary profit entitled to protect their names by injunction, but it has also been held that an injunction may issue to protect the name of a benevolent fraternal society, a patriotic society, a social club, or a charitable religious society, (see 6 Fletcher, pp. 26-47; 18 C.J.S. 579-580.) (2) De-registration. — To restrain the wrongful assumption of a name by a corporation is not to annul the corporation by depriving it of a name. If restrained from using a name chosen, it may choose another name. (18 Am. Jur. 2d 684.) Section 18 empowers the Securities and Exchange Commission to de-register a corporate name deceptively similar to that already used by an existing corporation not only for the protection of the complaining corporation but more so for the protection of the public. (Ang mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus, H.S.K. sa Bansang Pilipinas, Inc. vs. Iglesia ng Dios Kay Cristo Jesus, supra.) Change of corporate name. (1) Compliance with formalities. — A corporate name is an artificial name and is selected with an object, and may be changed and a new one taken. (9-A Words and Phrases 391.) A corporation can change the name originally selected by it after complying with the formalities prescribed by law, to wit: amendment of the articles of incorporation and filing of the amendment with the Securities and Exchange Commission. (Sec. 16.) Hence, the mere approval by the stockholders of the amendment of the articles of incorporation changing the corporate name does not automatically change the name of the corporation as of that date. (Phil. First Ins. Co., Inc. vs. Hartigan, 34 SCRA 252 [1970].) (2) Effectivity. — When a change of name is approved, it is required that the Commission must issue an amended certificate of incorporation under the amended name. (Sec. 18.) The change of name is deemed effective as of the date of the Commission's approval of the amended articles or from the date of filing with it if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation.

194


Sec. 18

(Sec. 16, last par.) Said change impliedly amends the corporate name as appearing in the by-laws; hence, the corporation need not amend its by-laws in order to reflect its new corporate name. (SEC Opinion, Oct. 2,1986.) (3) Effect. — An authorized change in the name of the corporation, whether effected by a special act or under a general law, has no more effect upon its identity as a corporation than a change of name of natural person upon his identity. The change of name does not affect the property, rights, or liabilities of the corporation, nor lessen or add to its obligations. After a corporation has effected a change in its name, it should sue and be sued in its new name. (18 Am. Jur. 2d 682-683.) It is in no sense a new corporation, nor the successor of the original corporation. It is the same corporation with a different name and its character is in no respect changed. As a general rule, officers and directors who acted in their capacity as agents of the corporation under the old corporate name, bear no personal liability for acts done or contracts entered into by them, if duly authorized. (Republic Planters Bank vs. Court of Appeals, 216 SCRA 738 [1992]; PC. Javier & Sons, Inc. vs. Court of Appeals, 462 SCRA 36 [2005].) Use of c h a n g e d or a b a n d o n e d corporate n a m e s . (1) Former name of same corporation. — The mere fact that the

former name is indicated in the certificate of filing of amended articles of incorporation would militate against anyone using said name and, therefore, said previous name cannot be appropriated or used by any other person for a certain period {e.g., 5 years) to avoid confusion, not to mention infringement of goodwill, where said name has continued to be associated with the corporation. (SEC Opinion, Aug. 3,1988.) (2) Name(s) of merged or consolidated corporations. — In case

the change of the corporate name is due to merger or consolidation, the corporate name(s) of the merged or consolidated corporations may not be used by another corporation, without the consent of the surviving corporation although there is a dissolution of the absorbed corporation in view of Section 80(4).

Sec. 18


195

(3) Name of dissolved corporation or whose registration has been

revoked. — It shall not be used by another corporation within three (3) years from the approval of the dissolution or six (6) years from the date of revocation unless its use has been allowed at the time of the dissolution or revocation by the stockholders or members who represent a majority of the outstanding capital stock or membership of the corporation. (SEC Memo. Circ. No. 5, Series of 2008.) (4) Name of dissolved corporation acquired by new corporation. —

A new corporation which has acquired the property and name of a dissolved corporation is in the same position as the original corporation would have been had it continued to exist and may, therefore, in a proper case, enjoin the use of such name by another. (SEC Opinion, Aug. 22,1985, citing 6 Fletcher, pp. 10, 52.) (5) Name of corporation dissolved through expiration of term. —

But when the corporate name is abandoned due to the dissolution of the corporation through expiration of its corporate life, such corporate name may be used by another corporation. (Ibid.) Misnomer of a corporation. The general rule is that the mere misnomer of a corporation in a bond, note, or other deed or contract does not render the same invalid or inoperative but the corporation may sue or be sued thereon in its true name with proper allegation and proof that it is the corporation intended; and its identity may be established by parol evidence. Nor will a grant or conveyance to or by a corporation be avoided because of a misnomer. (18 C.J.S. 572-574; 1 Fletcher, pp. 742-743.) This rule has also been applied in case of subscription to the stock of a corporation. (18 Am. Jur. 2d 680.) Generally speaking, a corporation if sued by the wrong name is bound if duly served. (21 R.C.L. 599.) If there is enough expressed to show that there is such an artificial being and to distinguish it from all others, the body corporate is well named although there is a variation of words and syllables. (Moultrie Country vs. Fairfield, 105 U.S. 370, 26 L. ed. 945.)


196

Sec. 19

Sec. 19. Commencement of corporate existence. — A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporate from the date the Securities and Exchange Commission issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law. (11) Acquisition of juridical personality. (1) Issuance of certificate of incorporation. — A corporation

commences to have juridical personality and legal existence only from the moment the Securities and Exchange Commission issues to the incorporators a certificate of incorporation under its official seal. 39

(a) Such certificate is a final determination of the corporation's right and competence to transact business or enter into contracts in its name, (see, however, Sec. 61.) An entity without the necessary corporate legal personality has the status of an "unregistered" association and the members themselves shall be held personally liable for their acts or contracts, and not the association. (b) It is the certificate of incorporation that not only gives juridical personality to a corporation but places it under the jurisdiction of the Commission. This jurisdiction is not affected even if the authority to operate a certain specialized activity is withdrawn by the appropriate regulatory body other than the Commission. (Filipinas Loan Company, Inc. vs. Securities and Exchange Commission, 356 SCRA 193 [2001].)

An unregistered organization cannot exercise the powers, rights and privileges expressly granted by the Corporation Code to registered corporations. Its status is that of an ordinary association which has no separate juridical personality. (SEC Opinion, Aug. 39

Sec. 20


197

(c) The issuance of the certificate calls the corporation into being but it is not really ready to do business until it is organized. The corporation must formally organize and commence the transaction of its business or the construction of its works within two (2) years from the date of its incorporation or, otherwise, its corporate powers shall cease and it shall be deemed dissolved. (Sec. 22.) The law under which the corporation is organized may require a separate permit or license to operate from other government agencies. (2) Filing of articles of incorporation. — In the case of religious

corporations, the Code does not require the Securities and Exchange Commission to issue a certificate of incorporation, (see Sees. 112,117.) In fact, Section 112 clearly states that from and after the filing with the Commission of the articles of incorporation, the chief archbishop, etc. shall become a corporation sole. (par. 2.) (3) Registration of cooperative. — A cooperative acquires

juridical personality upon registration with the Cooperatives Development Authority. (R.A. No. 6938, Sec. 16.) It need not be registered again with the Securities and Exchange Commission. The methods or causes of dissolution of corporations are discussed under Title XIV. Sec. 20. De facto corporations. — The due incorporation of any corporation claiming in good faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding, (n) De jure corporation/de facto corporation defined.

(1) A de jure* corporation is one created in strict or substantial conformity with the mandatory statutory requirements for incor-

'According to law.'


198

Sec. 20

poration and the right of which to exist as a corporation cannot be successfully attacked or questioned by any party even in a direct proceeding for that purpose by the State. (2) A de facto corporation is one which actually exists for all practical purposes as a corporation but which has no legal right to corporate existence as against the State. (8 Fletcher, pp. 62-63.) It is a corporation from the fact of its acting as such, though not in law or right a corporation. (18 Am. Jur. 2d 593-594.) 40

It is one which has not complied with all the requirements necessary to be a dejure corporation but has complied sufficiently to be accorded corporate status as against third parties although not against the State. Requisites of a de facto corporation .

It is essential to the existence of a de facto corporation that there be: (1) A valid law under which a corporation with powers assumed might be incorporated; (2) A bona fide attempt to organize a corporation under such law; and (3) Actual user or exercise in good faith of corporate powers conferred upon it by law. Stockholders of a de facto corporation enjoy exemption from personal liability for corporate obligations as do stockholders of de jure corporations. Existence of law.

In order that there can be a de facto corporation, there must be a law authorizing it to be a corporation de jure for there cannot be a corporation de facto when there cannot be one de jure, even though there may have been an assumption of corporate powers. (1) Accordingly, there cannot be a corporation de facto under an unconstitutional statute for such statute is void and a void law is no law. (Clark vs. American Cannal Coal Co., 73 N.E. 1083.) A "Tn fact.

Sec. 20


199

statute, however, is presumed valid until it has been judicially declared otherwise. (2) Similarly, a corporation cannot be recognized as having a de facto existence when its purpose is prohibited by law or contrary to public policy. (Art. 1409, Civil Code.) (3) Neither can there be a corporation for the practice of a learned profession in the absence of a law expressly permitting the organization of such corporations. (1 Fletcher, p. 339.) B o n a fide a t t e m p t to incorporate.

When there has been no attempt in good faith to create a corporation de jure, there can be no de facto corporation. Any other rule might well open the door to fraud upon the public. Mere intent is not sufficient. In addition, there must be a bona fide attempt to comply with the requirements of the law (8 Fletcher, pp. 102-103.), which goes far enough to amount to "colorable compliance" with the law. (Ballantine, p. 77.) (1) Creation of corporation precluded. — The following are

examples of defects which will preclude the creation of even a de facto corporation:

(a) Absence of articles of incorporation; (b) Failure to file articles of incorporation with the Securities and Exchange Commission (Cagayan Fishing Dev. Co. vs. Sandiko, 60 Phil. 223 [1934].); and (c) Lack of certificate of incorporation from the Securities and Exchange Commission. In all the above cases, the omissions would be fatal to de facto corporate existence for even its stockholders may not probably claim good faith in being a corporation. The filing of articles of incorporation and the issuance of certificate of incorporation may, therefore, be considered essential for the existence of a de facto corporation. (Hall vs. Piccio, 86 Phil. 603 [1950]; see Albert vs. University Publishing Co., Inc., 13 SCRA 84 [1965].) (2) Creation of de facto corporation results. — The following are

examples of defects which do not preclude the creation of a de facto corporation:

200


Sec. 20

(a) The articles of incorporation fails to state all the matters required by the Code to be stated, or state some of them incorrectly; (b) The name of the corporation closely resembles that of a pre-existing corporation that it will tend to deceive the public; (c) The incorporators or a certain number of them are not residents of the Philippines; (d) The acknowledgment of the articles of incorporation or certificate of incorporation is insufficient or defective in form, or it was acknowledged before the wrong officer (see 8 Fletcher, pp. 108-113.); (e) The percentage of Filipino ownership of the capital stock required for the business is less than that prescribed by law; (f) The minimum paid-up capital stock has not been paid to and received by the corporate treasurer contrary to his affidavit; and (g) The failure to submit its by-laws on time. (Sawadjaen vs. Court of Appeals, 459 SCRA 516 [2005].) The above may be considered as inadvertent or minor defects or errors which can be excused to prevent injustice. Colorable compliance with the law.

To constitute a corporation de facto, there must be, it is true, a colorable compliance with the statute, but there need not be a substantial compliance. A substantial compliance makes the body a corporation de jure. (Clark on Corporations, p. 107.) There is no fixed rule on how far the proceedings must go or what steps are sufficient to amount to this colorable compliance. It will depend on the situation and knowledge of the parties. The mere naked claim and assumption of corporate name and capacity will not be sufficient to give a pretended corporation the de facto status. It is not enough to show that the associates have intended to incorporate and have agreed among themselves to act and have acted as if they were a corporation. The efforts to

Sec. 20


201

incorporate must give an appearance of sufficiency of compliance with statutory requirements, so that the associates may in good faith suppose that they have actually become incorporated. (Ballantine, pp. 77-78.) User of corporate powers in good faith. To create a corporation de facto, it is not sufficient to show the existence of a law under which a corporation might be formed and an honest attempt to comply with the requirements thereof, but it is also necessary to show an actual user or exercise of corporate powers or franchise. (1) User contemplated. — In substance, user consists in an enjoyment and exercise (although not rightful) of such corporate franchises and powers as would be given by the law to an association if the attempted organization had been perfected. The acts relied upon as showing user must be corporate acts as distinguished from acts which might as well be performed by an incorporated association, or from acts of individuals which would not be corporate acts if there were a charter. But if the business is such that it can only be carried on by a corporation, then the carrying on of such business is enough since its members must of necessity act as a corporation, if they act at all. (8 Fletcher, pp. 149-159.) 41

42

(2) Duty to correct defect if discovered. — Furthermore, it is

essential that the corporation must act in good faith in claiming to be a corporation and exercising corporate powers. (Sec. 20.) Therefore, if after incorporation, the incorporators discovered that they have not complied substantially with the law and still continued transacting business as a corporation, without doing

"This element seems to be a factor of minor significance. (Ballantine, p. 77.) t a k i n g subscriptions to and issuing shares of stock, electing directors and officers, adopting by-laws and buying a lot and constructing and leasing a building upon it, are sufficient acts of user of corporate powers to constitute a corporation de facto. It is doubtful, however, whether the mere organization of a corporation by the election of officers and adoption of a board resolution authorizing a contract preliminary to the actual doing of business with third parties will constitute "acts of user." (Ballantine, pp. 81-82.)

202


Sec. 20

anything to correct the defect, the privilege of de facto existence can no longer be invoked. Basis of de facto doctrine.

The recognition of de facto existence has been found necessary to promote the security of business transactions and to eliminate quibbling over irregularities. (1) A third person dealing with a corporation will rarely be prejudiced if the company is recognized as a corporation in spite of minor defects in its formation. (2) Seldom would it be just to allow a wrongdoer to quibble over such objections to escape liability for wrongdoing. (3) Equally, it would be unjust to allow a claimant against a supposed company to assert the individual liability of innocent passive investors on the ground of flaws in the formal steps of incorporation, when they have attempted in good faith to comply with statutory requirements and the objecting party is not prejudiced. (Ballantine, p. 87.) Questioning validity of c o r p o r a t e existence.

The well-settled rule is that assuming that a de facto corporation actually exists, its existence as a corporation cannot be collaterally attacked either by the State or by private individuals. (1) The State must bring a direct proceeding (quo warranto) against the corporation to oust it from the exercise of corporate powers usurped by it and to have it dissolved. So far as the State is concerned, the distinction between a corporation de jure and a corporation de facto is that one can successfully resist a suit by the State, brought directly to test the rightfulness of its existence, and the other cannot. (2) As to individuals dealing with it as a corporation, there is no essential distinction. The stockholders or members of both are alike protected from individual liability for debts except to the extent provided by the charter or act of incorporation. (9-A Words and Phrases 96.)

Sec. 20


203

Direct attack/collateral attack of corporate existence defined.

(1) Direct attack is one whereby the State, in a proceeding brought for that purpose, attacks the existence of an association claiming to be a corporation. A direct attack can only be instituted by the government through the Solicitor General by quo warranto proceedings. (Sec. 20; see Sec. 121.)

(2) A collateral attack is one whereby corporate existence is questioned in some incidental proceedings not provided by law for the express purpose of attacking the corporate existence. ILLUSTRATION: Upon failure of A to pay his debt, X Corporation sued A. Can A interpose the defense that X, being a de facto corporation, has no right to exist as a corporation and, therefore, has no capacity to enter into any contract and to sue in its own name? No, because A is attacking the existence of X collaterally. The defense of A is merely an incident to the main action or principal case the purpose of which is to enforce the contract of X with A. The right of X to exist as a corporation can only be inquired into directly in a quo warranto proceeding which is brought precisely for the purpose and this proceeding can only be instituted by the Government through the Solicitor General (Sec. 20.) and not by A. Rule against collateral attack.

(1) Rationale. — The general rule against collateral attack upon corporate existence is based upon the ground, not of equitable estoppel (see Sec. 21.), but of public policy. (a) Individual right is not invaded; it is the State's right and authority which are invaded and usurped. If the State, which alone grants the authority to incorporate, remains silent, an individual would not be allowed and permitted to raise the inquiry. (b) It would produce endless confusion and hardship and probably destroy the corporation if the legality of its existence could be questioned in every suit to which it is a

204


Sec. 20

party, for then no judgment could be rendered which would finally settle the question. (18 Am. Jur. 2d 606.) (c) Likewise, the rule is in the interest of the public and is essential to the validity of business transactions with corporations. (Ibid., 594.)

(2) When rule not applicable. — The rule that collateral attack on the organic entity or existence of a corporation will not be permitted does not apply, however, when the lack of right or the wrongdoing of the corporation is in issue because in violation of public policy or of express or implied statutory requirement, such as denial of its right to enforce contracts entered into without compliance with prohibitions of express or implied statutory or public policy. (Ibid., 605.) Thus, the defendant may question the personality of a foreign corporation transacting business in the Philippines to maintain a suit on the ground that it is not duly licensed to do business in our country, (see Sec. 133.) W h e r e organization not e v e n a de f a c t o corporation.

If there has been a bona fide attempt to incorporate, under a law authorizing incorporation, and the law has been so far complied with as to make the association what is called a corporation de facto, the only way in which its corporate existence can be questioned is in a direct proceeding by the State, brought for that purpose. Private individuals cannot raise the objection in such a case, either directly or indirectly, and nobody can raise the objection collaterally. (1) Direct or collateral attack. — If failure to comply with

conditions precedent prevents the coming into existence of any corporation either de jure or de facto, then, on principle and in reason, the question may be raised collaterally as well as directly, and by private individuals as well as by the State, unless there is something to operate as an estoppel. When a private individual, therefore, raises the objection that conditions precedent have not been complied with, the question, in the absence of elements of estoppel, is whether or not there is a corporation de facto. If there is, he cannot object; otherwise, he can.

Sec. 20


205

(2) Capacity to sue or be sued. — If a party is not either dejure or

de facto, it has no legal capacity to sue or be sued. And it follows that where the corporate existence of the plaintiff suing as a corporation is defined, the burden is on it to prove its corporate existence either de jure or de facto, or at least to show an estoppel on the part of the defendant to deny such existence. (3) Liability as partners. — If neither a de jure nor a de facto

corporation results, the incorporators should be held liable as partners together with stockholders who subscribed to stocks knowing the failure of the attempted incorporation of the business. (Sec. 21.) It is the regular courts, not the Securities and Exchange Commission, that have jurisdiction over disputes or controversies among them. (4) Es toppel as a defense. — Where there is not even a corporation de facto, a private person may, according to many cases, be barred from raising the objection on the ground that he is estopped by his conduct, as by having dealt with the pretended corporation as a corporation, or by having held it out to the public as a legally constituted corporation. (Ibid.; Clark on Corporations, pp. 65-66.) Proof of corporate existence. (1) Proof of de jure existence. — The sufficiency of the proof of

corporate existence will depend to a great extent upon the nature of the proceeding in which the question is raised and the circumstances of the particular case. In quo warranto proceedings by the State to test the right of an alleged corporation to exercise corporate powers, corporate existence de jure must be shown; and to show this, it must be made to appear that there is a valid law creating or authorizing such a corporation, that there was a valid organization under it and a substantial compliance with all conditions precedent. (2) Proof of de facto existence. — On the other hand, as has

been stated, if the question of corporate existence is raised collaterally, it is sufficient if a de facto existence be shown. Such proof is admissible whenever the question comes up collaterally as in a criminal prosecution for forgery or any other crime against an alleged corporation, or in any civil proceeding, other


206

Sec. 20

than proceedings by the State to test the existence of the alleged corporation. It is only necessary, in order to prove de facto corporate existence, to show a law under which the alleged corporation might have been formed, a colorable bona fide compliance with that law, and an assumption or user of corporate powers. (3) Proof of facts operating as an estoppel. — Again, there are

many cases in which a party may, by his conduct, as by dealing with or holding out a body as a corporation, be estopped to deny its existence as a corporate body. Here, it is not necessary to prove even a de facto corporate existence. All that is necessary is to show the facts that will operate as an estoppel, (see Sec. 21.) Where a person has contracted or dealt with an association as a corporation, proof of that fact alone is prima facie evidence of the corporate existence of the body as against him, as in action by the alleged corporation on a subscription to its stock. (Clark on Corporations, Sec. 40.) Thus, an indorsee for a note payable to a corporation need not prove the corporate capacity of the payee since the maker "engages that he will pay it according to its tenor, and admits the existence of the payee and his then capacity to indorse." (Act No. 2031 [Negotiable Instruments Law], Sec. 60.) Powers a n d liabilities of a de facto corporation.

(1) In general. — Such a corporation is practically as good as a de jure corporation. It is deemed to have a substantial legal existence and ordinarily, in its relation with all persons except the State, has the same powers and is subject to the same liabilities, duties and responsibilities, as a corporation dejure, and is bound by all such acts as it might rightfully perform if it were a corporation de jure.

In other words, so long as the State acquiesces in its existence and its exercise of corporate functions, it is under the protection of the same law and governed by the same legal principles as de jure corporations, and may legally do and perform every act and thing which the same entity could do or perform were it a dejure corporation. As to all the world except the paramount authority under which it acts and from which it receives its charter, it

Sec. 20


207

occupies the same position as though in all respects valid, and even as against the State, except in direct proceedings to arrest its usurpation of power, its acts are to be treated as efficacious. (2) Liability to taxation. — So, the property of a de facto corpo-

ration is subject to taxation in the same manner as though it were a de jure corporation and under the statutes relative to the taxation of corporations of the latter class. (1 Fletcher, pp. 627-628.) (3) Binding effect of contracts. — Similarly, a transfer of prop-

erty to or by a corporation de facto is valid and binding against all persons except the State; bonds, deeds, and mortgage executed by such a corporation are valid, not only as against the corporation itself, but also as against anyone making a claim against its assets, whether as a creditor directly of the corporation or as a creditor of its creditors or stockholders. (4) Protection against unauthorized acts. — Whether a corpora-

tion is de facto or dejure, it is entitled to protect itself from unauthorized acts. (26 Am. Jur. 2d 583-584.) Liabilities of officers a n d m e m b e r s of a de facto corporation .

(1) In general. — The officers and directors (or trustees) of a de facto corporation are subject to all the liabilities and penalties attending to officers and directors duly chosen by a corporation de jure, including liability under the criminal law, and their acts are binding when such acts would be within the power of such officers if the corporation were one de jure. (Ibid., p. 655.) (2) Liability as partners to third persons. — The members of a de

facto corporation cannot be held liable as partners by third persons who deal with them in their supposed corporate capacity, merely on account of a technical defect in the formation of the corporation. This is especially true where the stockholders had no knowledge of the defects and had no intent to become partners and the ostensible corporation is apparent to third persons. On the other hand, where an attempt to organize a corporation fails by omission of some substantial step or proceeding required by the law, its members or stockholders are liable as partners.

208


Sec. 21

The decisive question is always whether what has been done toward incorporation and organization is sufficient to constitute a corporation dejure or de facto. (Ibid., 600-601.) (3) Liability among themselves. — In actions among the mem-

bers themselves, however, for advances, commissions, etc., the test of whether the corporation is de jure or de facto has been disregarded. When persons associate together and do business as a corporation and the latter is defectively organized, their rights, duties, and liabilities, as between themselves, should be determined and governed by the express or implied terms, conditions, and limitations contemplated by their agreement. They are not partners unless they have agreed to be such. The result thus obtained is the same as that reached on the theory of estoppel. (Ibid., 601.) Sec. 21. Corporation by estoppel. — All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof: Provided, however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation, (n) Estoppel to deny corporate existence.

An unincorporated association which represented itself to be a corporation, will be estopped from denying its corporate capacity in a suit against it by a third person who relied in good faith on such representation. It cannot allege lack of personality to be sued to evade its responsibility for a contract it entered into and by virtue of which it received advantages and benefits. (Lim Tong Lim vs. Philippine Fishing Gear Industries, Inc., 317 SCRA 728 [1999].) (1) Principles as to de facto corporation not applicable. — In cer-

tain circumstances, an organization may not be a corporation de

Sec. 21


209

jure — or perhaps not even de facto — may, so far as the parties to a given transaction are concerned, be regarded practically as a corporation, being recognized as such by the parties themselves. Actually, an organization which has not complied with the conditions precedent to even de facto existence is not, for any purpose, a corporation. Nevertheless, the incidents of a corporate existence may exist as between the parties by virtue of an estoppel. Thus, besides corporation de jure and de facto, there is sometimes a recognition of a third class known as corporation by estoppel, also known as ostensible corporation.

It is generally conceded that corporations by estoppel are not based upon the same principles as are corporations de facto. The doctrine of de facto corporation has nothing to do with the principle of estoppel. A corporation de facto cannot be created by estoppel, the only effect of an estoppel being to prevent the raising of the question as to the existence of a corporation. (18 Am. Jur. 2d 615.) (2) Jurisdictional requirements not subject to estoppel. — The

doctrine of corporation by estoppel cannot override jurisdictional requirements. Jurisdiction is fixed by law and is not subject to agreement of the parties. Thus, it cannot be acquired through, or waived, enlarged or diminished by any act or omission of the parties; neither can it be conferred by the acquiescence of the court or SEC. (Lozano vs. De los Santos, 274 SCRA 452 [1997].) (3) Foundation of and reason behind doctrine. — Corporation by

estoppel is founded on principles of equity and is designed to prevent injustice and unfairness. It applies when persons assume to form a corporation and exercise corporate functions and enter into business relations with third persons. Where there is no third person involved and the conflict arises only among those assuming the form of a corporation who, therefore, know that it has not been registered, there is no corporation by estoppel. (Ibid.) The application of the doctrine applies to a third party only when he tries to escape liability on a contract from which he has benefited on the irrelevant ground of defective incorporation. (International Express Travel & Tour Services, Inc. vs. Court of Appeals, 343 SCRA 674 [2000].)


210

Sec. 21

The reason behind this doctrine is obvious — an unincorporated association has no personality and would be incompetent to act and appropriate for itself the power and attributes of a corporation as provided by law; it cannot create agents or confer authority on another to act in its behalf; thus, those who act or purport to act as its representatives or agents do so without authority and at their own risk. And as it is an elementary principle of law that a person who acts as an agent without authority or without a principal is himself regarded as the principal, possessed of all the right and subject to all the liabilities of a principal, a person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and becomes personally liable for contracts entered into or for other acts performed as such agent. (Lim Tong Lim vs. Philippine Fishing Gear Industries, Inc., 317 SCRA 728 [1999]; International Express Travel & Tour Services, Inc. vs. Court of Appeals, supra.) Corporation by estoppel w i t h o u t de facto existence.

In some jurisdictions, the rule is that a corporation must have at least a de facto existence before there can be an estoppel to deny its existence; but this is not the universal rule. (Ibid.) The better doctrine seems to be that the estoppel prevails, notwithstanding that not all the three requisites necessary to constitute as association of persons a de facto corporation are present. In other words, corporation by estoppel may arise even if no de facto corporation exists. 43

A corporation by estoppel has no real existence in law. It is neither a de jure nor a de facto corporation, but is a "mere fiction existing for the particular case, and vanishing where the element of estoppel is absent." (8 Fletcher, p. 219.) It exists only between the persons who misrepresented their status and the parties who The doctrine of estoppel supplements the de facto doctrine in case of serious defects and applies to the third party as well as to the purported corporation. (Ballantine, p. 88.) Thus, if a party deals with a corporation as though it were validly formed, he may later be estopped from questioning the validity of the formation or the existence of the enterprises. 43

Sec. 21


211

relied on the misrepresentation. Its existence may be attacked by any third party except where the attacking party is estopped to treat the entity other than as a corporation. ILLUSTRATION: Where a group of persons represented that their organization called X & Co. is a corporation, when it is not, to Y who recognized it as such, and on this representation, entered into a contract with Y, and without assuming to act as a corporation entered into another contract with Z, in an action against them on such contracts, they are estopped from denying the corporate existence of X & Co. as against Y but not as against Z. Neither is Y allowed to question or challenge the validity of the organization or formation of X & Co. in an action by the latter against the former. If not all the associates participated or consented to the representation, as to them, the doctrine of estoppel will not apply. If the group of persons (would-be corporation) does not qualify as a corporation, whether dejure, de facto, or by estoppel, there is no corporation and the stockholders are individually liable. Estoppel of persons dealing with a corporation. Even if the ostensible corporation is proven to be legally nonexistent, a party may be estopped from denying its corporate existence. (1) The stockholders or members of a pretended or ostensible corporation who participated in holding it out as a corporation are generally estopped or precluded to deny its existence against creditors for the purpose of escaping liability for corporate debts or for unpaid part of a subscription to stock. (8 Fletcher, pp. 275-278.) A corporation which continues its business instead of liquidating its affairs after the expiration of its corporate term, is a corporation by estoppel for the purpose of being sued on its contracts, not a corporation de facto because it no longer exists in fact and in law as a body corporate, except only for purposes of liquidating its affairs, (see Sec. 122.)

212


Sec. 21

The doctrine of estoppel to deny corporate existence applies to domestic as well as to foreign corporations. (2) So, also are the third persons who deal with such a corporation recognizing it as such and the pretended corporation itself, estopped from denying its corporate existence and raising the defense of its lack of corporate personality for the purpose of defeating a liability growing out of the contractual relation between them and such entity (Compania Agricola de Ultramar vs. Reyes, 4 Phil. 2 [1904].), or any tort committed by it as such (Sec. 21.), or later taking advantage of their non-compliance with the law, chiefly in cases where such persons have received the benefits of the contract. (Merrill Lynch Futures, Inc. vs. Court of Appeals, 211 SCRA 824 [1992].) Thus, where a mortgage, promissory note, or other instrument is given to a corporation, as such, the party giving it in effect admits and is thereby estopped to deny its existence as a corporate body involving such contract or dealing unless its existence is attacked for causes which have arisen, since making the contract or dealing relied on as an estoppel. (Chinese Chamber of Commerce vs. Pua Te Ching, 14 Phil. 222 [1909]; Asia Banking Corporation vs. Standard Products Co., 46 Phil. 145 [1924].) In order for one to be estopped to deny the corporate existence of an organization, he must have contracted or dealt with it as a corporation. Thus, if one deals with the members of a corporation as a partnership, he is not estopped to show this fact or hold such individuals liable as partners. (18 Am. Jur. 2d 618.) But one who is induced to deal with an apparent corporation by fraud will not be estopped to deny the corporate existence. (Ibid., 617-618.) (3) All persons not stockholders or members who assume to act

as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities, and damages incurred or arising as a result thereof. 44

"The pertinent provisions of the Civil Code are: Art. 1816. All partners, including industrial ones, shall be liable pro rata with all their property and after all the partnership assets have been exhausted, for the contracts which may be entered into in the name and for the account of the partnership, under its signature and by a person authorized to act for the partnership. However, any partner may enter into a separate obligation to perform a partnership contract, (n)

Sec. 21


213

P e r s o n s liable as g e n e r a l partners.

The Code makes liable as general partners "all persons who assume to act as a corporation," and they include persons who attempt, but fail, to form a corporation and who carry on business under the corporate name. A de facto partnership among them is created. Are both active and inactive members of an unsuccessfully attempted corporation, neither de facto nor de jure, liable as partners?

Art. 1817. Any stipulation against the liability laid down in the preceding article shall be void, except as among the partners, (n) Art. 1822. Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership or with the authority of his co-partners, loss or injury is caused to any person, not being a partner in the partnership, or any penalty is incurred, the partnership is liable therefor to the same extent as the partner so acting or omitting to act. (n) Art. 1823. The partnership is bound to make good the loss: (1) Where one partner acting within the scope of his apparent authority receives money or property of a third person and misapplies it; and (2) Where the partnership in the course of its business receives money or property of a third person and the money or property so received is misapplied by any partner while it is in the custody of the partnership, (n) Art. 1824. All partners are liable solidarily with the partnership for everything chargeable to the partnership under Articles 1822 and 1823. (n) Art. 1825. When a person, by words spoken or written or by conduct, represents himself, or consents to another representing him to anyone, as a partner in an existing partnership or with one or more persons not actual partners, he is liable to any such persons to whom such representation has been made, who has, on the faith of such representation, given credit to the actual or apparent partnership, and if he has made such representation or consented to its being made in a public manner he is liable to such person, whether the representation has or has not been made or communicated to such person so giving credit by or with the knowledge of the apparent partner making the representation or consenting to its being made. (1) When a partnership liability results, he is liable as though he were an actual member of the partnership; (2) When no partnership liability results, he is liable pro rata with the other persons, if any, so consenting to the contract or representation as to incur liability, otherwise separately. When a person has been thus represented to be a partner in an existing partnership, or with one or more persons not actual partners, he is an agent of the persons consenting to such representation to bind them to the same extent and in the same manner as though he were a partner in fact, with respect to persons who rely upon the representation. When all the members of the existing partnership consent to the representation, a partnership act or obligation results; but in all other cases, it is the joint act or obligation of the person acting and the persons consenting to the representation, (n)

214


Sec. 21

The general rule under American law is that active managerial stockholders are liable personally as partners, upon failure of the attempted incorporation, both de jure and de facto, (see Bacon vs. Christian, 184 Ind. 517.) Thus, it has been held that the managing stockholders were personally liable as partners, but that the subscribers to the stock of the supposed corporation were not personally liable. (Baker vs. Bates Street Shirt Co., 7 Fed. [2d] 854.) The creditors of the supposed corporation could recover from subscribers to stock and inactive members of the corporation to the extent only of their unpaid subscription. (Stevens vs. Episcopal Church History Co., 140 N.Y. Appl. Div. 570.) This rule is criticized. The emphasis, it is said, should be laid upon the reaping of profits by the owners of a business, rather upon the management of the business, (see L. Teller, Law of Partnership, 1949 ed., pp. 18-19.) In a local case, the Supreme Court ruled that while "stockholders" of a defectively incorporated association become, in legal effect, partners inter se, such a relation does not necessarily exist, for ordinarily persons cannot be made to assume the relation of partners, as between themselves, when their purpose is that no partnership shall exist; it should be implied only when necessary to do justice between the parties. Thus, one who takes no part except to subscribe for stock in a proposed corporation which is never legally formed does not become a partner with other subscribers who engage in business under the name of the pretended corporation, as to be liable as such in an action for settlement of the alleged partnership and contribution. (Pioneer Insurance & Surety Corp. vs. Court of Appeals, 175 SCRA 668 [1989], citing American cases.) On the other hand, a third party who, knowing an association to he unincorporated, nonetheless treated it as a corporation and received benefits from it, may be barred from denying its corporate existence in a suit brought against the alleged corporation. In such case, all

those who benefited from the transaction made by the ostensible corporation, despite knowledge of its legal defects, may be held liable for contracts they impliedly assented to or took advantage of. It is immaterial that a party did not directly act on behalf of a non-existent corporation and his name did not appear on any of

Sec. 22


215

the contracts entered by it. Under the law on estoppel, those acting in behalf of a corporation and those benefited by it, knowing it to be without valid existence, are held liable as partners. (Lim Tong Lim vs. Philippine Fishing Gear Industries, Inc., 317 SCRA 728 [1999].) Sec. 22. Effects of non-use of corporate charter and continuous inoperation of a corporation. — If a corporation does not formally organize and commence the transaction of its business or the construction of its works within two (2) years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. However, if a corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five (5) years, the same shall be a ground for the suspension or revocation of its corporate franchise or certificate of incorporation. (19a) This provision shall not apply if the failure to organize and commence the transaction of its business or the construction of its works, or to continuously operate is due to causes beyond the control of the corporation as may be determined by the Securities and Exchange Commission.

Statutory requirements before and after incorporation. The right of exemption from personal liability resulting from incorporation, being entirely statutory, can be acquired only on the terms specified by the statute. (18 Am. Jur. 2d 578.) Our corporation law contains various requirements and conditions which must be complied with in order that persons desiring to be so may become a body corporate. The courts have established between mandatory and directory conditions. The rule is that as to provisions of the statute which are mandatory, non-compliance with its terms will prevent the creation of a de jure corporation but as to those provisions which are merely directory, a departure will not have this consequence. Strict compliance with the terms of the statute is not required. The law requires only substantial compliance, (see Sec. 14, par. 1; Sec. 15, par. 1; Sec. 17[i].)

216


Sec. 22

Of course, what constitutes substantial compliance is a question to be determined in each case. It does not follow, however, that because a substantial compliance is sufficient, any positive statutory requirement may be omitted on the ground that it is unimportant. There are conditions that cannot be dispensed with, (see 18 Am. Jur. 2d 578.) Mandatory and directory provisions explained.

Whether a particular provision is mandatory or merely directory must be determined by ascertaining the intention of the legislature, to be gathered from the statute and its purpose. (Clark on Corporations, p. 62.) Generally, mandatory provisions prescribe formalities for incorporation which are designed to protect the public. When a provision is construed as directory, it is regarded as relatively inconsequential so that failure to comply with a directory provision will not be fatal to a valid incorporation. (Stevens on Corporations, pp. 112-114.) Mandatory conditions may be either conditions precedent or conditions subsequent. Conditions precedent e x p l a i n e d .

Conditions precedent are those conditions non-compliance with which will prevent the legal existence of a corporation. Examples are: (1) Filing of the articles of incorporation with the Securities and Exchange Commission as required by Section 14; (2) The issuance of the certificate of incorporation by the Securities and Exchange Commission under Section 19; (3) The minimum number of five (5) incorporators required by Section 10; and (4) The legal requirements under Section 13 that 25% of the authorized capital stock must be subscribed and 25% thereof paid.

Sec. 22


217

Conditions s u b s e q u e n t e x p l a i n e d .

Conditions subsequent are conditions to be complied with after acquiring corporate existence in order that a corporation may legally continue as such. (1) Under Section 22, the two required acts of organization and commencement of its business operations are conditions subsequent, failure to comply with which, it has been held, will result in the automatic cessation of corporate powers and the dissolution of the corporation. (Perez vs. Balmaceda, [C.A.] 40 O.G. No. 9, Suppl. 194, Aug. 30,1941.) Such a corporation is not even a de facto corporation and, therefore, its legal existence may be collaterally attacked. (Sec. 20.) Any attempted organization and commencement of business after the expiration of the period fixed will not give it even a de facto existence. The corporation may be treated as a corporation by estoppel (Sec. 21.) for the protection of those with whom it contracted. The Securities and Exchange Commission has opined, however, that the dissolution contemplated by Section 22 is not automatic. The corporation continues to exist as such, notwithstanding its non-operational status until dissolution or revocation has been lawfully declared by the Commission after due notice and hearing. (SEC Opinion, Oct. 4, 1989.) The Commission will take action on the non-operational status of a corporation only after the lapse of the two (2)-year period as prescribed under Section 22. (SEC Opinion, May 22,1998.) Note that under the second paragraph of Section 22, which provision is not found in Section 19 of the former Corporation Law, the corporation is given a chance to show that its failure to organize and commence business is due to causes beyond its control. (2) Non-compliance with a condition subsequent which is mandatory may not affect corporate existence although it can be a ground for proceedings by the State to forfeit its charter. An example is the keeping of books and records required by Section 74. Formal organization an d c o m m e n c e m e n t of business.

A corporation achieves legal existence from the date the Securities and Exchange Commission issues a certificate of incor-

218


Sec. 22

poration under its official seal (Sec. 19.) but formal organization brings the corporation to life. (1) Acts constituting formal organization. — Formal organi-

zation of a corporation is the process of structuring the corporation so that it can carry out the purposes for which it has been incorporated. It would include the adoption of bylaws, the filing of the same with the Securities and Exchange Commission (Sec. 46.), the election of the board of directors (or trustees) and of the officers by the board pursuant to the by-laws (Sec. 25.), establishment of the principal office, providing for the subscription and payment of the capital stock, and the taking of such other steps as are necessary to enable the corporation to transact the legitimate business or accomplish the purpose for which it was created, (see Benguet Consolidated Mining Co. vs. Pineda, 98 Phil. 711 [1956]; SEC Rules, Dec. 29,1992.) (2) Substantial compliance sufficient. — Strict compliance with

this condition subsequent is not required. Thus, in a case, a corporation was deemed to have formally organized, it appearing that from the very day of its formation, the corporation had a governing board which directed its affairs, as well as a treasurer and a clerk, and that through these instrumentalities, it actually functioned and engaged in the business for which it was organized, and, therefore, it could not be held to have forfeited its charter simply because it had not specifically shown that it also had a president and a secretary. (Perez vs. Balmaceda, supra.) (3) Acts constituting commencement of business. — Acorporation

shall be considered to have commenced the transaction of its business when it has performed preparatory acts geared toward the fulfillment of the purposes for which it was established such as but not limited to the following: entering into contracts or negotiation for lease or sale of properties to be used as business or factory site; making plans for and the construction of the factory; and taking steps to expedite the construction of the corporation's working equipment. (SEC Rules, Dec. 29,1992.) (4) Effect of subsequent continuous inoperation. — Where the

corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least five (5) years, such continuous inoperation shall be a

Sec. 22


219

ground for the suspension or revocation of its corporate franchise or certificate of incorporation but notice and hearing in such case are required as provided in Presidential Decree No. 902-A. (supra.) The corporation continues to exist, notwithstanding its non-operational status, until the revocation or cancellation of its certificate of registration has been lawfully declared by the Securities and Exchange Commission or it is dissolved in accordance with law. CSEC Opinion, May 22,1998.)

If the non-use of corporate charter or continuous inoperation of a corporation is due to causes beyond its control as found by the Commission, the effects mentioned shall not take place. (Sec. 22.) Thus, where a corporation after its registration or incorporation elected its board of directors and its officers, and in accordance with its corporate purpose and in order to commence business operations made presentations to prospective investors but due to the shift in the government's privatization policy, failed to entice investors and was not able to continue with its business although it still intends to pursue its business when the conditions are appropriate, there is no ground, given these conditions, to revoke or suspends its registration and, therefore, it cannot be deemed dissolved. (SEC Opinion No. 07-23, Dec. 4, 2007.) — oOo —

Title III BOARD OF DIRECTORS/TRUSTEES/ OFFICERS Sec. 23. The board of directors or trustees. — Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year and until their successors are elected and qualified. (28a, 29a) Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines. (30a) Structure of the corporate organization. (1) Binding effects of acts or contracts. — Action proposed to be

taken by a corporation involves two basic questions: First, in order to bind the corporation, who within the organization must act on its behalf? Second, what is the result if the statutory requirements are not complied with and the proper parties do not act? 220

Sec. 23

TITLE III. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

221

(2) Tri-level structure. — The standard operating procedure for corporations, frequently referred to as a corporate norm, might be described as pyramidal in form. At the base are the shareholders (or members) whose vote is required to elect the board of directors (or trustees) and to pass on other major corporate actions. The next level is represented by directors who constitute the policy-making body of the corporation and select the officers annually, as a rule. The keystone of corporate procedure is the provision common to most corporate laws that the business of a corporation shall be managed by its board of directors. Finally, at the top of the pyramid are the officers who have some discretion but in general deemed to execute policies formulated by the board. The board of directors and corporate officers are frequently referred to as management. In its strict sense, the term refers to the corporate officers given the authority to implement the policies determined by the board of directors as the governing body of the corporation. 1

(3) Respective powers and functions. — In the light of this tri-

level structure, the question then arises: What are the respective functions and powers of officers, directors, and shareholders within the corporate organization? (WL. Cary, Cases and Materials on Corporations, 1969 ed., pp. 151-152.) Corporate powers may be directly conferred upon corporate officers or agents by statute, the articles of incorporation, the by-laws, or by resolution or other act of the board of directors. (Citibank, N.A. vs. Chua, 220 SCRA 75 [1993].)

•The Bangko Sentral ng Pilipinas (BSP), the Insurance Commission, and the Securities and Exchange Commission have all issued circulars and/or memoranda requiring corporations to have at least two (2) independent directors, i.e., BSP Circular No. 296, IC Circular Letter 31-2005, and SEC Memorandum Circular No. 6, respectively, over which they exercise supervision. SEC Memorandum Circular No. 6 (June 29, 2009) is the Revised Code of Corporate Governance. (Appendix "K.") It superseded SEC Memorandum Circular No. 2 (April 5, 2002).


222

Sec. 23

Corporate powers exercised by board of directors or trustees.

All corporations being invisible, existing only in contemplation of law, can only act and contract through the aid and by means of individuals. Such individuals may be those holding corporate offices or agents properly appointed by such officers. The same general principles of law which govern the relation of agency for a natural person govern the officer or agent of a corporation in respect to his power or authority to act for the corporation. (1) Governing body of the corporation. — It is well established

in corporation law that the corporation can act only through its board of directors in the case of stock corporations, or board of trustees in the case of non-stock corporations. Section 23 provides that "unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees." The board of directors or trustees, therefore, is the governing body of the corporation chosen by the stockholders or members. Thus, contracts or acts of a corporation must be made either by the board of directors or trustees or by a corporate officer duly authorized by the board. The general rule is that in the absence of authority or valid delegation from the board of directors or trustees, no person, not even its officers, can validly bind a corporation. 2

(2) Binding effect of stockholders'action. — The stockholders or

members elect a board of directors (or trustees) to oversee the management and operation of the corporation. They are not the agents of the corporation and cannot bind it by their acts. They have only indirect control of the corporation through their votes. With the exception only of some powers reserved by law to stockholders (or members), the directors (or trustees) have sole impliedly, it is not necessary for the stockholders (or members) to ratify the acts of the board save the instances wherein the Corporation Code or the by-laws provides otherwise, e.g., investment of corporate funds (Sec. 42.), declaration of stock dividends (Sec. 43.), and other acts where approval or consent of stockholders (or members) is necessary. (SEC Opinion, May 21,1982.)

Sec. 23

TITLE III. BOARD OF DIRECTORS / TRUSTEES / OFFICERS

223

authority to determine policy, enter into contracts, and conduct the ordinary business of the corporation (in all matters which do not require the consent or approval of the stockholders) within the scope of its charter, i.e., its articles of incorporation, by-laws, and relevant provisions of law. (a) The law is settled that contracts between a corporation and third persons must be made by or under the authority of its board of directors (or trustees) and not by its stockholders (or members). Hence, the action of the stockholders in such matters is only advisory or recommendatory and not in any wise binding on the corporation. (Barreto vs. La Previsora Filipina, 57 Phil. 649 [1932].) 3

(b) For the same reason that a corporation can act only through the board of directors, a resolution adopted at a meeting of stockholders refusing to recognize a corporate contract effected with the approval of the board of directors or repudiating it, is without effect. (Ramirez vs. Orientalist, 38 Phil. 634 [1918].) 4

(c) Stockholders entrust their investments in the corporate business to the management of the board of directors, thus establishing a fiduciary relationship between them. Accordingly, it is the prerogative and discretion of the board of directors of a parent or holding corporation to choose its nominees in the board of directors of its subsidiaries. The stockholders of the parent or holding company cannot demand proportionate representation in the board of directors of its subsidiaries. (SEC Opinion, Aug. 8,1995.) (3) Extent of judicial review. — As long as the directors (or

trustees) act honestly and their acts or contracts do not disregard the rights of the minority, the courts will not interfere. They are not liable for losses if the cause is merely error in business judgment, not amounting to bad faith or negligence. Visayan vs. National Labor Relations Commission, 196 SCRA 410 (1991), citing DE LEON, The Corporation Code of the Philippines, 1989 ed., p. 168. It may weU be recognized, however, that where the stockholders unanimously vote that certain actions be taken, this should control the discretion of the directors. Directors have no personal interest as such in their official acts. If the real parties in interest unanimously agree on lawful corporate acts, their voice should control. (Ballantine, p. 123.) 3

4

224

Sec. 23


(a) The well-known "business judgment" rule is that courts cannot undertake to control the discretion of the board of directors about administrative matters as to which they have the legitimate power of action, and contracts intra vires entered into by the board of directors are binding upon the corporation and courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to a wanton destruction of the rights of the minority. As long as it acts in good faith, its orders are not reviewable by the courts. (Gov't, vs. El Hogar Filipino, 50 Phil. 399 [1927]; Gamboa vs. Victoriano, 90 SCRA 40 [1979]; Ingersoll vs. Malabon Sugar Co., 53 Phil. 745 [1929]; Estacio vs. Pampanga Electric Cooperative, Inc., 596 SCRA 542 [2009].) 5

(b) Whether the business of a corporation should be operated at a loss during depression, or closed down at a smaller loss, is a purely business and economic problem to be determined by the directors and not by the court. A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and with a distinct legal personality. As to its corporate and management decisions, the State will generally not interfere with the same. Questions of policy or of management are left solely to the honest decision of the board as the business manager of the corporation, and the court is without authority to substitute its judgment for that of the board, and as long as it acts in good faith and in the exercise of honest judgment in the interest of the corporation, its orders are not reviewable by the courts.

6

'This rule must be qualified with respect to the power to declare dividends since its exercise is governed by specific rules provided by law. (see Sec. 43.) 'The reason for the rule is aptly explained thus: "Courts and other tribunals are wont to override the business judgment of the board mainly because courts are not in the business of business, and the laissez faire rule or the free enterprise system prevailing in our social and economic set-up dictates that it is better for the State and its organs to leave business to the businessmen; especially so, when courts are ill-equipped to make business decisions. More importantly, the social contract in the corporate family to decide the course of the corporate business has been vested in the board and not with courts." (Ong Yong vs. Tiu, 405 SCRA 1 [2003], citing Cesar L. Villanueva, Philippine Corporate Law, 1998, Ed., p. 228.) It has been held that while the Securities and Exchange Commission is without authority to substitute its judgment for that of the corporations board of directors on business matters so long as the board acts in good faith, it has the power to enjoin an association of stock transfer agents' plan to increase the transfer processing fees

Sec. 23

TITLE ffl. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

225

(see Montelibano vs. Bacolod-Murcia Milling Co., Inc., 5 SCRA 36 [1962]; Sales vs. Securities and Exchange Commission, 169 SCRA 109 [1989]; Philippine Stock Exchange, Inc. vs. Court of Appeals, 281 SCRA 232 [1997]; Filipinas Port Services, Inc. vs. Go, 518 SCRA 453 [2007].) Its acts or contracts are presumed to be valid and regular. (c) Any corporate act which does not fall under any of the transactions requiring stockholders' or members' approval (see note 5.) can be carried out by mere board resolution although the activities or transactions involved may span beyond the term of the directors or trustees and entail obligations to be borne by succeeding boards as long as the action was done in good faith and for the best interest of the corporation. (SEC Opinion, Feb. 21,1994.) (d) The minority directors or stockholders cannot come into court upon allegations of a want of judgment or lack of efficiency on the part of the majority and change the course of administration. Corporate elections furnish the only remedy for internal dissensions, as the majority must rule so long as it keeps within the powers conferred by the corporate charter. (Flynn vs. Brooklyn City R. Co., 53 N.E. 520.) Reason for the rule. The theory of every corporate organization is that the stockholders may have all the profits but shall turn over to a small and compact body — the board of directors — the exclusive authority to manage and control the transaction of its business and the use of its assets, the power of the stockholders being limited to a few specified matters concerning its internal affairs. This concentration of the power of control of the business and of appointing of officers and managers in the board of directors (or trustees) is deemed necessary to efficiency especially in a large organization. It is clearly impractical and unwise to entrust the administration of corporate management. Stockholders are too numerous and scattered and unfamiliar with the business of after it had determined that such act if pursued may cause grave or irreparable injury prejudice to the investing public. (Phil. Assoc. of Transfer and Registry Agencies, Inc. i Court of Appeals, 536 SCRA 61 [2007].)

226


Sec. 23

a corporation to conduct its business directly. It is accordingly the plan of corporate organization that the stockholders shall choose the directors who shall control and supervise the conduct of the corporate business, (see Ballantine, pp. 121-122; Ramirez vs. Orientalist, 38 Phil. 634 [1918]; Filipinas Port Services, Inc. vs. Go, 518 SCRA 483 [2007].) If they are not satisfied with the policies or management of the board of directors, the remedy of the stockholders is to replace them, (see Sec. 28.) In a close corporation, however, the articles of incorporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. (Sec. 97, par. 2.) Nature of powers of board of directors or trustees.

(1) The powers of the board of directors or trustees are, in a very important sense, original and undelegated. The stockholders or members do not confer, nor can they revoke, those powers. They are derivative only in the sense of being received from the State in the act of incorporation. Obviously, they cannot exercise powers which the corporation does not possess, nor is their action valid when inconsistent with valid by-laws. Neither can they perform constituent acts, that is, acts which involve fundamental changes in the constitution of the corporation, and which can be done only by the stockholders or members as constituting the corporation. (14-A C.J. 82.) In other words, acts of management pertain to the board, and those of ownership to the stockholders or members. In the latter case, the board cannot act alone, but must seek approval of the stockholders or members. (Tan vs. Sycip, 499 SCRA 216 [2006], citing J. Campos, Jr. & M.C. Campos, The Corporation Code, 1990, Vol. 1, p. 490.) (2) The other view favors the delegation theory, which holds that the directors are the officers and agents of the corporation, representing the interests of that abstract legal entity and of those who own shares of stock (see Mead vs. McCullough, 21 Phil. 95 [1911]; Angeles vs. Santos, 64 Phil. 697 [1937].), and as such, they can bind the corporation provided they act within the scope of their authority.

Sec. 23


227

(3) Actually, the powers of the board of directors or trustees are directly conferred by statute and, as a general rule, the

stockholders or members cannot control their actions or exercise of judgment vested in them by virtue of their office. Once the directors or trustees are elected, the stockholders or members relinquish corporate powers to the board as provided by law. In certain corporate acts, however, the approval or authorization of the stockholders or members is necessary for their validity. Limitations o n p o w e r s o f b o a r d of directors or trustees .

Broad as it is, the managerial authority of the board of directors or trustees is thus subject to Sections 31-34 of the Corporation Code and to at least three (3) limitations. They are as follows: (1) Limitations or restrictions imposed by the Constitution, statutes, articles of incorporation, or by-laws of the corporation; (2) It cannot perform constituent acts, that is, acts involving fundamental or major changes in the corporation (such as amendment of the articles of incorporation under Sec. 16.), which require the approval or ratification of the stockholders or members; and 7

(3) It cannot exercise powers not possessed by the corporation, (see Clark on Corporations, Sec. 192.) The corporate powers conferred upon the board of directors usually refer only to the ordinary business transactions of the

corporation and does not extend beyond the management of ordinary corporate affairs nor beyond the limits of its authority. (SEC Opinion, May 2, 1994.) There are powers which are reserved to the stockholders/members and, therefore, cannot be exercised solely by the directors/trustees until they are ratified or approved by the stockholders/members. It has been held that the power of the board of directors to control the corporation's property and business does not empower them to provide themselves compensation. The law is well-settled that directors of a corporation presumptively serve without compensation and in the absence of express agreement or resolution in relation 7

See "Matters in which the law requires specific number of votes/' under Section

228


Sec. 23

thereto, no claim can be asserted therefor. (Central Cooperative Exchange Co., Inc. vs. Tibe, Jr., 33 SCRA 593 [1970]; see Sec. 30.) Powers exercised by board of directors or trustees as a board.

The board of directors or trustees must act together as a body in a lawful meeting, not individually or separately, in order to bind the corporation by their acts. In other words, to exercise their powers, they must meet as directors or trustees and act "at a meeting at which there is quorum." (see Sec. 25 as to requisites for board meetings.) If they act or give their consent separately or if they act at a meeting which is not a legal meeting, their action is not that of the corporation, although all may consent, and the corporation is not bound. There are recognized exceptions to the rule that a corporation cannot act except by authority of the board of directors or trustees in a meeting duly convened, (infra.) Reasons for the rule.

The general rule that the directors or trustees can bind the corporation only by action taken at a board meeting seems to rest upon two reasons: (1) A meeting is necessary in order that any action may be deliberately adopted, after opportunity for discussion and an interchange of views; and (2) As agents of the corporation managing its affairs, directors (or trustees) have no power to act other than as a board. (Ballantine, p. 124.) Unlike its officers (Sec. 25.), directors are not the agents of the corporation per se and they have no power acting individually to bind the corporation. Exceptions to the rule.

The requirement that the directors or trustees must act as a body and personally (see Sec. 25.) to bind the corporation is not without any exception. This is true where there are extraordinary situations or conditions to justify the act of stockholders or cor-

Sec. 23

TITLE HI. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

porate officers as to make a board action as nothing more than a mere formality. (1) It has been held that a contract entered into by the directors without a meeting of the board is binding upon the corporation where the directors happen to be the sole stockholders.

(Zamboanga Transportation Co. vs. Bachrach Motor Co., 52 Phil. 244 [1928].) (2) The corporation is similarly bound by a contract entered into by a corporate officer such as the general manager, authorized by the board of directors either expressly or impliedly, to bind it by contract. (Acufia vs. Batac Producers Cooperative Assoc., Inc., 20 SCRA 526 [1967].) Settled jurisprudence has it that where similar acts have been approved by the directors as a matter of general practice, custom, and policy, the general manager may bind the company without formal authorization of the board of directors. In varying language, existence of such authority is established by proof of the course of business, the usages and practices of the company, and by the knowledge which the board of directors has, or must be presumed to have, of acts and doings of its subordinates in and about the affairs of the corporation. (Board of Liquidators vs. Heirs of Maximo Kalaw, 20 SCRA 987 [1967].) (3) The corporation is also bound by a particular transaction ratified in a subsequent board meeting (Ramirez vs. Orientalist Co.,

38 Phil. 634 [1918].); the ratification may be express by a formal affirmative vote or resolution of the board or it may be implied and if implied, it may take diverse forms such as by silence or acquiescence, by acts showing approval or adoption of the contract or by acceptance and retention of benefits flowing therefrom (Acufia vs. Batac Producers Cooperative Assoc., Inc., supra.) and such ratification relates back to the time of the contract and is equivalent to original authority. (Board of Liquidators vs. Heirs of Maximo Kalaw, supra.) (4) The corporation is likewise bound by the acts of one of its directors or agents held out by the corporation to the public as possess-

ing power to do those acts. (Yu Chuck vs. Kong Li Po, 46 Phil. 608 [1924].) The authority to act for and bind the corporation may be presumed from acts of recognition in other instances, wherein the power was in fact exercised without any objection from its

230


Sec. 23

board or stockholders. (People's Aircargo & Warehousing, Co., Inc. vs. Court of Appeals, 297 SCRA 170 [1998].) The rule that the members of the board have authority to act only when convened in a board meeting, is for the benefit of the shareholders which they are authorized to waive. The stockholders are the residuary owners, and the rule requiring directors' meetings to authorize acts is for their benefit. (Merchants & F. Bank vs. Harris Lumber Co., 103 Ark. 283.) (5) Where the stockholders, by acquiescence, invest the executive officers of the corporation with powers of the directors as the usual method of doing business, the board being inactive, the acts of such officers will bind the corporation according to some courts although not authorized by any vote either of stockholders or directors. (Ballantine, p. 126.) (6) The stockholders may waive the necessity for a meeting of

the board of directors, and without such meeting may authorize acts to be done by agents of the corporation or ratify acts already done and bind the corporation. Again, the shareholders are the residuary owners, and the rule requiring directors' meetings to authorize acts is for their benefit. (Ballantine, pp. 125-126.) (7) Under exceptional situations, stockholders' agreement though

it provides for the exercise of management ordinarily delegated to the board, is valid and enforceable, where no creditors, minority stockholders, or other persons of the public are affected. However, mere lack of quorum in the board alone where the body is not inactive would not justify stockholders' action. (SEC Opinion, Dec. 15,1987; March 21,1990.) (8) The by-laws of a corporation may create an executive com-

mittee with authority to act on such specific matters within the competence of the board, as may be delegated to it in the by-laws of the corporation, or on a majority vote of the board, except on certain matters specified in Section 35. (9) A corporation is expressly allowed, subject to certain limitations provided in Section 44, to enter into a management

contract under which it delegates the management of its affairs to another corporation for a certain period of time. (10) In a close corporation, any action by the directors without a meeting or at a meeting improperly held, shall, unless the by-

Sec. 23

TITLE m. BOARD OF DIRECTORS / TRUSTEES / OFFICERS

231

laws otherwise provide, be deemed valid or ratified in the cases mentioned in Section 101. P o w e r of directors or trustees to delegate authority.

(1) General rule. — The general rule is that, in the absence of authority from the board of directors, no persons, not even its officers, can validly bind a corporation. The power to bind the corporation by contracts rests in its board of directors or trustees, but the power may be delegated either expressly or impliedly to other officers or agents of the corporation appointed by it. (Yu Chuck vs. Kong Li Po, 46 Phil. 608 [1924]; Visayan vs. National Labor Relations Commission, 196 SCRA 410 [1991].) The authority of such individuals to bind the corporation is generally derived from laws, the by-laws, or authorization from the board impliedly by habit, custom or acquiescence in the general course of business. (People's Aircargo & Warehousing Co., Inc. vs. Court of Appeals, 287 SCRA 170 [1998]; Associated Bank vs. Pronstroller, 558 SCRA 113 [2008]; Cebu Mactan Members Center, Inc. vs. Tsukahara, 593 SCRA 172 [2009].) Although it cannot completely abdicate its power and responsibility to act for the juridical entity, the board may expressly delegate specific powers to the President or any of its officers (Prime White Cement Corp. vs. Intermediate Appellate Court, 220 SCRA 103 [1993].), particularly with respect to employment of lower level personnel. The directors or trustees do not themselves exercise delegated authority so as to be precluded from delegating power by the maxim, delegata potestas non potest delegare.

(a) It is stated broadly that they may delegate to agents of their own appointment the performance of any act what they themselves can legally perform. Certainly, as the governing body of the corporation vested with the management of its corporate affairs (Sec. 23.), it has the power and authority to adopt a resolution appointing one of its members, or an executive committee, or a particular officer or agent the power to perform purely ministerial acts. (19 C.J.S. 100.) (b) The same is true even in matters involving the exercise of judgment and discretion. Their authority in the matter, to a

232


Sec. 23

large extent, must be implied from necessity and usage for the directors or trustees cannot attend to the details and current business of the corporation. (2 Fletcher, p. 495.) Whatever authority the officers or agents of a corporation may have is derived from the board of directors or other governing body, unless conferred by the charter of the corporation. (Vicente vs. Geraldez, 52 SCRA 210 [1973].) (c) The delegation of corporate powers, except for the executive committee, must be for specific purposes. Such delegation to officers make the latter agents of the corporation; accordingly, the general rules of agency as to the binding effects of their act would apply. (ABS-CBN Broadcasting vs. Court of Appeals, 301 SCRA 572 [1999].) (2) Exceptions. — The rule recognizing the power of the board to delegate authority is not without limitations. (a) It has been held that discretionary powers which, by provisions of law (e.g., to declare dividends, Sec. 43.) or the by-laws or by the vote of the stockholders, are vested exclusively in the board of directors or are especially delegated to them, cannot be delegated to subordinate officers and agents. (Bliss vs. Kaweah Canal, etc., 65 Cal. 502; see Sec. 25, re other officers and agents.) (b) There is a limit, even to the power of the directors or trustees to delegate authority. As their authority to delegate is implied from the necessities in the management of the corporation and from the usage, so also, it is limited by the same considerations. They cannot delegate entire supervision and control of the corporation to others for this is not only unnecessary and contrary to usage, but it is inconsistent with Section 23, which requires that "the corporate powers x x x shall be exercised, all business conducted and all property of such corporation controlled and held by its board of directors or trustees." (see 2 Fletcher, pp. 378-379.) (c) Neither can the board delegate special powers especially conferred upon it by a resolution of the stockholders or members of the corporation. Unquestionably, it may delegate purely ministerial duties. (2 Fletcher, p. 537.) It is quite clear that the power of the board to delegate authority is subject to restrictions as may be provided in the by-laws.

Sec. 23


233

Term of office of directors or trustees.

(1) One year. — As a general rule, the directors or trustees/ officers of a corporation shall serve only for the term as fixed in the by-laws. The word "term," in a legal sense, means the fixed and definite period of time which the law prescribes that an officer may hold office and a hold-over does not change the length of the term but results in shortening the period served by his successor. It is now expressly provided that the board of directors or trustees to be elected "shall hold office for one (1) year (i.e., term expires one year after election to the office) and until their successors are elected and qualified." (Sec. 23, par. 1; see Sec. 25, par. 1.) 8

(2) Hold-over. — This principle is sanctioned by the above provision of Section 23. Upon failure of a quorum at any meeting of the stockholders or members called for an election, the directorate naturally holds over and continues to function until another directorate is chosen and qualified, (see Sec. 24, last sentence.) The failure to elect does not terminate the terms of incumbent officers nor dissolve the corporation. (a) To "hold over" when applied to an office implies that the office has a fixed term which has expired, and the incumbent is holding the succeeding term. (19 Words and Phrases 576.) Although the members of the board are holdover directors or trustees, they still possess the powers of bona fide members until their successors are duly elected and 9

'Being a fixed period, it cannot be split into two or more terms so as to consider the remaining period as another term. Thus, a director (previously elected in the immediately preceding election) who merely served the remaining period of the original term of a resigned director (subsequently elected) is not covered by the prohibition in the by-laws against serving more than two consecutive terms unless the clear intention is to cover such a situation. (SEC Opinion, Feb. 8, 1993.) Term is distinguished from tenure in that the latter represents the period during which the incumbent actually holds office. Thus, tenure may be shorter (or, in case of holdover, longer) than the term for reasons within or beyond the power of the incumbent. The holder-over period — that time from the lapse of one year from a member's election to the board and until his successor's election and qualification — is not part of the director's original term of office, nor is it a new term. (Valle Verde Country Club, Inc. vs. Africa, 598 SCRA 200 [2009].) ""'Election" is the choice of one man among a number to fill a certain office. In a holdover, an officer is merely allowed to continue functioning as such. He is not chosen over other contenders for the position he occupies.

234


Sec. 23

qualified. Thus, a hold-over board has the power to declare the position of the President vacant and elect another. (SEC Opinion, Aug. 3,1976.) (b) The rule that where the articles of incorporation or by-laws of a corporation provide for the annual election of directors and no election is held, the former directors hold over until their successors are elected and qualified, applies to a going concern where there is no break in the exercise of duties of directors. (2 Fletcher Cy Corp., p. 138 [1982 ed.].) (c) It must be noted that hold-over is a situation that arises when no successor is elected due to valid and justifiable reason (e.g., pending election protest on the outcome of the annual election), in which case the incumbent holds over and continues to function until another officer is chosen and qualified. (SEC Opinion, June 24, 1998.) The corporation should, as soon as possible, call a special meeting for such purpose with proper notice given to all stockholders or members. (d) The hold over doctrine has a purpose which is at once legal as it is practical. It accords validity to what would otherwise be deemed as dubious corporate acts and gives continuity to a corporate enterprise in its relation to outsiders. The old holdover officer is a de facto officer and by fiction of law, his acts as such are considered valid and effective. (Seneres vs. Commission on Elections, 585 SCRA 557 [2009].) (e) Where the reason for hold-over is not for failure to elect but to give the incumbents more time to learn, or for reasons of economy and the uncertainty that a quorum can be secured, the hold-over is in violation of the provision requiring an annual election of the directors or trustees (SEC Opinions, July 3, 1989 and May 18, 1993.), and this is especially true where the hold-over extends beyond the one-year term. (SEC Opinion, March 1, 1988.) The regular election of directors as stated in the by-laws cannot be dispensed with by the board in order to extend the term of the incumbents. (SEC Opinion, Feb. 3,1994.) (3) Modification of term. — Unlike in the case of non-stock corporations (see Sec. 92.) and educational corporations (see Sec. 108.), stock corporations under the general provisions of Title III are not authorized to divide the members of its board of directors

Sec. 23

TITLE m. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

235

into groups with each group having a different term of office (SEC Opinion, Feb. 4,1971.) Their term of office being fixed by law, the same cannot be shortened or extended by agreement of the parties or by those interested in the position. (SEC Opinion, Jan. 15, 1975.) "An annual meeting required and stated for each year cannot be dispensed with and the directors cannot so change the date of the annual election so as to continue themselves in office for more than a year," unless the reason is justifiable and proper notice of the postponement is given. (SEC Opinion, Jan. 5, 1981, citing 5 Fletcher, p. 22.) Number of directors or trustees to be elected. (1) Under the Code, the number of directors in a stock corporation must "not be less than five (5) nor more than fifteen (15)" (Sec. 14[6].), except as otherwise provided by the Code or by special law. Since the members of the board are required to be stockholders of record of the corporation, it follows that there must be at least five (5) stockholders in a corporation. (SEC Opinion, Jan. 28,1985.) (2) In ordinary non-stock corporations, the boards of trustees, unless otherwise provided in the articles of incorporation or the by-laws, "may be more than fifteen (15) in number," with the term of office of 1 / 3 of their number expiring every year (see Sec. 92, par. 1.) but the number must not be less than five (5). (3) In a close corporation, the articles of incorporation may provide that the business of the corporation shall be managed by its stockholders rather than by a board of directors in which case no meeting of stockholders need be held to elect directors, (see Sec. 97, par. 2.) (4) Trustees of non-stock educational corporation "shall not be less than five (5) nor more than fifteen (15)," provided that the number "shall be in multiples of five (5)," with the term of office of 1/5 of their number expiring every year, (see Sec. 108, pars. 1, 2.) (5) In a corporation sole, there is no board of directors or trustees as it consists of one member or corporator only.


236

Sec. 23

(6) The board of trustees of religious societies shall also "be not less than five (5) nor more than fifteen (15)." (see Sec. 116[6].) Election of less than the required number.

The limitation as to the number of directors or trustees seeks to give ample representation to stockholders or members of a corporation to its board while at the same time avoiding that it will be too unwieldy. The failure of the stockholders or members to elect the required number of directors or trustees provided for by statute or its articles of incorporation does not invalidate the title of those elected as long as they constitute a quorum. An election of less number of directors than the number which the meeting was called to elect is valid. Thus, the stockholders of a corporation may opt to elect only three (3) directors instead of five (5) at the annual stockholders' meeting. Such act would not violate the provisions of the Corporation Code, specifically Section 14(6), for such situation merely gives rise to vacancies of two (2) seats in the board which may be filled up in a subsequent special stockholders' meeting duly called for the purpose. (SEC Opinions, Feb. 2,1987 and June 10,1992.) Qualifications of directors or trustees. (1) Stock corporations. — The qualifications

10

of directors of

stock corporations are as follows: The Code does not state whether or not the members of the board of a corporation, whether stock or non-stock, must be of legal age at the time of their election as such. In the light of Articles 18 and 339 of the Civil Code, emancipated minors may become members of the board. However, their vote will not be counted in approving any act or contract involving the borrowing of money, or the alienation or encumbrance of real property of the corporation, or the filing of suits by the company. The powers of a corporate officer who is an emancipated minor will be similarly restricted. Since the management of corporate affairs is vested in the board of directors or trustees which as a body will enter into legal relations with third persons, it is extremely unwise and not in keeping with sound corporate practice for the board to have as members, persons whose capacity to act is restricted. Be that as it may, Article 18 of the Civil Code expressly provides that "in matters which are governed by the Code of Commerce and special laws, the deficiency shall be supplied by the provisions of the Code." Both Articles 38 and 39 of the Civil Code provide that minority restricts or limits the capacity to act while Article 1327 states that unemancipated minors cannot give consent to a contract. (SEC Opinions, May 17, 1967, Dec. 28, 1967 and Feb. 2, 1981.) But a minor cannot be an incorporator, (see Sec. 10.) Article 339 of the Civil Code is now Article 236 of the Family Code, (see note 4 under Title II.) 10

Sec. 23


237

(a) Every director (including an incorporating director) must own at least one share of the capital stock (see Detective & Protective Bureau, Inc. vs. Cloribel, 26 SCRA 255 [1968].); (b) The share of stock held by the director must be registered in his name on the books of the corporation;" (c) Every director must continuously own at least a share of stock during his term; otherwise, he shall automatically cease to be a director; and (d) A majority of the directors must be residents of the Philippines. (2) Non-stock corporations. — Trustees of non-stock corporations must be members in good standing thereof and like in stock corporations, a majority of them must be residents of the Philippines. The phrase "residents of the Philippines," as contemplated in Section 23 (and Section 25.), refers to "legal residence (animus manendi) from which a person could or might depart or be absent temporarily for a certain purpose and to which he always intended to return" (King vs. Republic, 89 Phil. 4 [1951].), not merely the place. 12

A person who has the disqualification mentioned in Section 27 is not qualified to hold the position of director or trustee. Natural p e r s o n s c o n t e m p l a t e d by law.

It is clearly deducible from Section 23 that only natural persons can be elected as directors or trustees (infra.) and they must be elected from among the stockholders or members. However, a corporation which owns shares of stock or is a corporate member in another corporation can designate by "The election of a person to the board of directors of a corporation does not necessarily mean that he has paid for the shares recorded in his name. In most cases, nominee directors do not pay for the qualifying shares assigned to them. (Baguio vs. Court of Appeals, 226 SCRA 366 [1993].) It is, however, difficult to define in precise language what constitutes a residence or what makes one a resident of a place. Much depends upon the circumstances surrounding the person, upon the character of the work to be performed, upon whether he has a family or a home in another place, and largely upon his present intention. Suffice it to say that the term "resident," as used in the law, imports more than a temporary stay in a place for the performance of a single piece of job or work. (37 Words and Phrases 424.) ,2

238


Sec. 23

board resolution its officer or representative to sit in the latter's board and thus qualifying him to be elected as director or trustee. A contrary rule would create a situation where there would be no board as where all the stockholders or members are corporations or juridical persons. The appointment must be recorded in the corporate books. (SEC Opinion No. 05-06, June 8, 2005.) Citizenship requirement.

There is no citizenship requirement demanded of the members of the board of directors. (1) In corporations not organized under the Code, citizenship requirements are established. Thus, in case of domestic banks, the General Banking Law of 2000 allows non-Filipino citizens to become members of the board of directors to the extent of the foreign participation in the equity of said bank. (Sec. 15, R.A. No. 8791.) For rural banks (Sec. 5, R.A. No. 7353.), registered investment companies (Sec. 15, R.A. No. 2029.), and private development banks (Sec. 4, R.A. No. 4093.), all the members of the board of directors must be citizens of the Philippines. (2) Under the Constitution, aliens may not be elected as directors or officers of corporations engaged in business or industries which are totally or partially nationalized business or industries, (see Sec. 12.) Stock ownershi p requirement.

(1) Holder of legal title. — The general rule is that the person who holds the legal title to the stock as shown by the books of the corporation is qualified although some other person may be the beneficial owner of the stock recorded in his name, (see Sec. 63.) The old Corporation Code required that "every director must own in his own right at least one share of the capital stock of the corporation." (Sec. 30 thereof.) Thus, under the former law, the eligibility of director, strictly speaking, could not be adversely affected by the simple act of such a director being a party to a voting trust agreement (see Sec. 59.) inasmuch as he remained owner (although beneficial or equitable only) of the shares subject of the agreement. (Lee vs. Court of Appeals, 205 SCRA 752 [1992].) The phrase "in his own right" is deleted in Section 23. A

Sec. 23


239

mere proxy who is not a stockholder cannot be elected as a member of a corporation's board of directors or trustees. (2) Voting trustee. — Whatever doubt may have existed before, a voting trustee may now be considered as the legal owner of the shares transferred to him by virtue of a voting trust agreement and, therefore, eligible to office of director. With the omission of the phrase "in his own right," the election of trustees and other persons who, in fact, are not the beneficial owners of the shares registered in their names on the books of the corporations becomes formally legalized. Consequently, the transferors who cease to own at least one (1) share standing in their names on the books of the corporation as required under Section 23 also cease to be directors. (Lee vs. Court of Appeals, supra.) (3) Transferee of qualifying share. — A person to whom one

share of stock has been transferred for the express purpose of qualifying him as a director is eligible. Ownership of the qualifying share need only be in a nominal capacity, with the beneficial title remaining in the transferor who or which actually owns the share. It is sufficient that the title to the stock, as it appears in the books of the corporation, is in the director. (SEC Opinion, Jan. 25, 1985.) The transfer need not comply with the restrictions in the articles of incorporation such as giving the corporation the right of first refusal thereon or prohibiting the transfer of founders' shares. To rule otherwise would create an injustice to corporate stockholders who, under the law, have the right to be represented in the Board." (SEC Opinions, Dec. 15,1987 and March 2,1988.) (4) Pledgee/pledgor of shares. — The legal title is what counts. Hence, a person to whom shares have been transferred on the books of the corporations as pledgee is not qualified to be a director because he holds the shares merely as security and not as

The transfer is not violative of the transfer restriction clause in the articles of incorporation, as it would be more of a "trust" and not a transfer of "ownership." The transferee should be described in the deed of assignment, corporate books, and certificate of stock merely as a qualifying stockholder or nominee of the transferor or assignor. Such description serves as notice to the corporation and third parties that the holder thereof does not hold the share in his own right, but only as nominee for the benefit of the real owner. Any unpaid balance of the subscription to the qualifying share transferred would remain the liability of the transferor-beneficial owner. (SEC Opinion, Aug. 4, 1995.) 13

240


Sec. 23

owner. Upon like principle, a director is not disqualified when he merely pledged his shares or entered into an executory contract to sell the same. (5) Subscriber of shares held in escrow. — A subscriber to shares

held in escrow cannot be eligible as a director since the holder does not become the owner of said shares until the conditions for their release are fully met. (see comments under Sec. 6.) (6) Transferee of shares he previously sold. — Where a director

makes a valid and effective transfer of all his stockholdings, he ceases to be a director and the subsequent purchase by him of shares does not reinvest him with title to his former position. (SEC Opinion, June 6,1971.) (7) Transferee at time of assumption of office. — It is not essential

to the validity of the election of one as a director that he be a legal owner of stock at the time of the election. His subsequent acquisition of stock before entering the duties of his office has the effect of validating his election as director. (SEC Opinion, April 5, 1990.) (8) Co-owners of shares. — Where the system of absolute community governs the property relations between husband and wife, the provisions on co-ownership shall apply to the community of property, (see Arts. 75, 90, Family Code.) Accordingly, the husband or wife who desires to be elected as a member of the board must secure standing by having their shares recorded in the corporate books as co-owned by them, in which case either of them, not both, may be voted for as director for purposes of voting said shares. Section 56 of the Corporation Code shall apply. As co-owners of the shares, the husband and wife shall be considered as one stockholder. (SEC Opinion, Sept. 4,1990.) Reason for the requirement.

The reason for requiring a director to own stock in the corporation is simple enough. It is commonly felt that a man with a financial interest at stake will devote more attention to the business. Today, however, management is chosen for its professional competence rather than its financial contribution. In any event,

Sec. 23


if the financial contribution of management is very small, it is hardly an incentive to the individual director to be more careful or a deterrent to carelessness. On the other hand, to require a director that he invest substantially all of his fortune to the company of which he is a director would mean losing many valuable men. (Bonneville, Dewey, and Kelley, Organizing and Financing Business, 6th ed., p. 85.) A d d i t i o n a l qualifications in t h e by-laws.

The qualifications of directors or trustees of the corporation, i.e., qualifications in addition to those specified in Section 23 (par. 1.), may be prescribed by the by-laws (Sec. 47[5].) but their qualifications may not be modified if such modification would be in conflict with the requirements prescribed by the corporation law. (1) For instance, the by-laws may not provide that a director need not be owner of stock. Such provision in the by-laws would be invalid. But the by-laws may provide that no person may be elected as director unless he owns two or more shares of stock. This is not inconsistent with the law because "at least one share" means one or more shares. The requirement, while in the form of disqualification, is really a qualification expressed in a negative way. (2) A provision in the corporate by-law requiring that persons elected to the board of directors must be holders of shares of the paid-up value of a specified amount which shall be held as security for their action, was held valid on the ground that Section 21 (now Sec. 47.) of the Corporation Law expressly gives the power to the corporation to provide in its by-laws for the qualifications of directors and such provision "is highly prudent and in conformity with good practice." (Gov't, vs. El Hogar, 50 Phil. 399 [1927].) (3) Similarly, an amendment to the by-laws to the effect "that no person shall qualify or be eligible for nomination or election to the Board of Directors if he is engaged in any business (as an officer, manager, or controlling person of, or the owner of at least 10% of any of the outstanding class of shares of a competing corporation) which competes with or is antagonistic to that of the corporation" was sustained as valid, upon the principle that

242


Sec. 24

where the director is so employed in the service of a rival company, he cannot serve both but must betray one or the other. "Sound principles of corporate management counsel against sharing sensitive information with a director whose fiduciary duty to loyalty may well require that he disclose this information to a competitive rival. These dangers are enhanced considerably where the common director is a controlling stockholder of two of the competing corporations. It would seem manifest that in such situations, the director has an economic incentive to appropriate for the benefit of his own corporation the corporate plans and policies of the corporation where he sits as director." (Gokongwei, Jr. vs. Securities and Exchange Commission, 89 SCRA 336 [1979].) Additional qualifications of directors or trustees cannot be enforced unless approved by the stockholders or members and contained in the by-laws of the corporation. (SEC Opinion, July 13,1966.) Effect of wan t of eligibility.

Votes cast for a person who is not eligible as a director cannot elect him. In any event, one not eligible as director because not owning any stock is not a de facto director where he never accepted the office, nor performed any act as director, nor ever held himself out as director in any way. It does not follow, however, that ineligibility of a person who has been elected as an officer will invalidate his acts as such. Persons dealing with a corporation are not required to ascertain whether the directors or other officers of the corporation have the qualifications prescribed by the by-laws. Acts of a director or other officers are, therefore, valid so far as third persons are concerned, although he may not possess the qualifications prescribed, if he has been elected or appointed by the corporation and permitted to act for it. (2 Fletcher, p. 98.) Sec. 24. Election of directors or trustees. — At all elections of directors or trustees, there must be present, either in person or by representative authorized to act by written proxy, the owners of the majority of the capital stock, or if

Sec. 24


243

there be no capital stock a majority of the members entitled to vote. The election must be by ballot if requested by any voting stockholder or member. In stock corporations, every stockholder entitled to vote shall have the right to vote in person or by proxy the number of shares of stock standing, at the time fixed in the by-laws, in his own name on the stock books of the corporation, or where the by-laws are silent, at the time of the election; and said stockholder may vote such number of shares for as many persons as there are directors to be elected or he may cumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal, or he may distribute them on the same principle among as many candidates as he shall see fit: Provided, That the total number of votes cast by him shall not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected: Provided, however, That no delinquent stock shall be voted. Unless otherwise provided in the articles of incorporation or in the by-laws, members of corporation which have no capital stock may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. Candidates receiving the highest number of votes shall be declared elected. Any meeting of the stockholders or members called for an election may adjourn from day to day or from time to time but not sine die or indefinitely if, for any reason, no election is held, or if there are not present or represented by proxy, at the meeting, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. (31a) Election of directors or trustees.

The following limitations or conditions are imposed in the election of directors or trustees: 14

The Securities and Exchange Commission has "original and exclusive jurisdiction to hear and decide cases involving x x x controversies in the election or appointment of directors, trustees, officers, or managers of such corporations, partnerships, or associations." (Pres. Decree No. 902-A, Sec. 5[a].) Thus, in a labor case, the claim for unpaid salaries filed with the Ministry (now Department) of Labor and Employment by complainant 14


244

Sec. 24

(1) At any meeting of stockholders or members called for the election of directors or trustees, there must be present in person or by representative authorized to act by written proxy, the owners of the majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. 15

(a) In determining the presence of stockholders representing "the majority of the outstanding capital stock" (see Sec. 137.), non-voting stocks are to be taken into account although they are not entitled to vote. (b) Voting is on the bases of the number of shares (one share-one vote) and not on the number of stockholders present in the stockholders' meeting. (c) The law prescribes who shall be entitled to vote for directors or trustees of corporation. Hence, creditors of the corporation cannot be given the right to vote at the meetings for election of directors or trustees, or on other questions either by a by-law of the corporation or by contract, even with the consent of all the stockholders or members; (2) The election must be by ballot if requested by any voting stockholder or member. This means that voting by ballot is the exception rather than the rule. Hence, voting by viva voce or roll call (raising of hands) is valid except when there is a request that the election be by ballot in which case such voting is mandatory; (3) A stockholder cannot be deprived in the articles of incorporation or in the by-laws of his statutory right to use any of the methods of voting in the election of directors; (4) No stock delinquent for unpaid subscription shall be voted. A delinquent stock is not entitled to vote or be represented for any corporate purpose whatsoever; who was one of the controlling stockholders and the general manager of a corporation who was suspended by its board of directors was properly dismissed, as this question should be left to the Securities and Exchange Commission to decide in conjunction with the case pending with the SEC brought by complainant assailing the validity of his suspension. (Palma vs. Cost Plus Furniture, Inc., NLRC Case No. RB-PV 20858-78, 3rd Division, June 30,1980; see Phil. School of Business Administration vs. Leano, 127 SCRA 778 [1984].) The election can only be held at a meeting of stockholders or members because Section 24 requires presence either in person or proxy, (see, however, Sec. 89, last par.) 15

Sec. 24


245

(5) If a quorum is present, the candidates receiving the highest number of votes shall be declared elected. ' The law requires only plurality, and not majority of the votes cast at the election. Delinquent stock is not included in determining the existence of the required quorum; 1

(6) In case of failure to hold an election for any reason, the meeting may be adjourned from day to day or time to time but it cannot be adjourned sine die or ^definitely; and (7) The requisite notice must be given, (see Sec. 50, par. 1.) For one to be elected as director/trusteee or officer, it is not required that he must be physically present at the meeting at the time of his nomination and election, unless it is otherwise provided by the by-laws, (see Sec. 47[5].) But a director or trustee cannot attend or vote by proxy at board meetings. (Sec. 25, last par.) Where directors or trustees merely designated. Section 23 is very clear that the corporate powers of all corporations shall be exercised by the elected members of the board of directors or trustees. Therefore, mere designation by the stockholders or by a corporate officer empowered by the stockholders without election of the directors in the manner as provided in the by-laws or applicable provisions of the Corporation Code will not be sufficient. Election of directors cannot be the subject of a contract or agreement among the stockholders. (SEC Opinions, March 18, 1981 and March 28, 1985.)

•'Deadlock in corporate elections may be decided by the drawing of lots (which is a common practice) among the candidates concerned in the absence of any provision in the by-laws on the matter. If they do not agree on drawing of lots, the stockholders or members may vote again and elect among them the remaining members of the board. This matter cannot be left for decision to the old board or to the newly elected directors. Pending resolution of the deadlock, it is proper for the elected directors to convene and organize and elect the officers of the corporation provided that the vote requirements of Section 25 are complied with. (SEC Opinion, April 14,1981.)

246


Sec. 24

Time of annual election.

Since Section 23 fixes the tenure of directors or trustees at one (1) year, their election must be held substantially once in each year. The Code does not provide when the first election of directors or trustees shall be held. It, however, authorizes the corporation to provide in its by-laws "the time for holding the annual election of directors or trustees." (Sec. 47[6].) Incidentally, the Code deleted Section 29 of the former Corporation Law providing, among others, that the first election of directors shall be held "at the meeting for the adoption of the original by-laws, or at such subsequent meeting as may be then determined." Postponement of the election.

The board of directors cannot change the date of the annual meeting prescribed in the by-laws of the corporation so as to lengthen their terms of office unless the reason is justifiable {e.g., lack of quorum) and proper notice of the postponement is given to the stockholders or members. (SEC Opinion, April 23,1987.) The meeting must be held within a reasonable time from the date it has been postponed, with proper notice of the change of date given to all the stockholders of record. (SEC Opinion, April 17,1986.) Methods of voting.

Every stockholder entitled to vote shall have the right to vote in person or by proxy the numbers of shares of stock standing, at the time fixed in the by-laws (e.g., as of 10 days before the election), in his own name on the stock books of the corporation (see Sec. 55.) or, where the by-laws are silent, at the time of the election, and said stockholders may vote his shares in any of the ways mentioned below.

17

•The stockholder of record (as of the cut-off date fixed in the by-laws, or where the by-laws are silent, as of the day of the election) entitled to vote may no longer be a shareholder at the time of the election by reason of the transfer of his shares before the meeting, (see Sec. 63.) The buyer, however, has the right to compel the record owner to give him proxy to vote the stock sold.

Sec. 24

TITLE ni. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

247

(1) Straight voting. — By this voting method, every stockholder "may vote such number of shares for as many persons as there are directors" to be elected. ILLUSTRATION: A owns 100 shares of stock in a corporation. If there are five directors to be chosen, A is entitled to 500 votes obtained by multiplying 100 by 5. He may give to the five candidates he wants to be elected 100 votes each. Under this method, the votes are distributed equally among the five candidates without preference. (2) Cumulative voting for one candidate. — By this method, a

stockholder is allowed to concentrate his votes and "give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal." Needless to say, straight voting does not benefit minority stockholders for they would not be able to elect any director over the objection of the stockholder or stockholders who own at least 51% of the capital stock. (a) The privilege of cumulative voting is accorded for the purpose of giving minority stockholders representation in the board of directors by electing one or more directors but such a provision has been held not to insure minority stockholders of proportional representation or of representation in that board of directors under all circumstances. (b) The effectiveness of cumulative voting varies with the number of directors to be chosen, the number of shares represented at the meeting, their distribution among minority stockholders (19 Am. Jur. 2d 169.), and the number of shares held by the minority stockholders. Indeed, it is possible for minority stockholders to obtain greater representation than it is entitled to if the group controlling the majority of the shares does not cumulate its votes or cumulates them improperly. (c) A director elected because of the vote of minority stockholders who united in cumulative voting cannot be removed without cause. (Sec. 28, last sentence.)

248


Sec. 24

(d) Minority stockholders cannot demand as a matter of right for proportionate representation in the board of directors of its subsidiaries. It is the sole prerogative and discretion of the board of directors of a parent or holding corporation to choose its nominees in the board of directors of its subsidiary. However, the dealings of the parent company and its directors with the subsidiary will be subjected to vigorous scrutiny, and where their interests are adverse, they must be under a burden to prove not only the good faith of the transaction but also its fairness. The fiduciary obligation is designed not only for the protection of the minority stockholders but for the creditors as well. But the fiduciary thereof will not be employed merely to enable a minority to dictate corporate policies. (SEC Opinion, March 1 3 , 1 9 9 1 , citing Ballantine, pp. 326-328.) ILLUSTRATIONS: (1) If A owns 200 shares of stock and there are five directors to be elected, he is entitled to 1,000 votes all of which he may cast in favor of any one candidate. (2) Suppose that out of a total of 1,000 shares, A and B (representing a group of stockholders) own 800 shares while C, D, E and F (representing another group of stockholders) own 200 shares. If there are five directors to be elected, A and B are entitled to 4,000 votes and C, D, E and F, to 1,000 votes. The highest number of votes that A and B can give each of their four candidates is 1,000. Hence, by cumulating their 1,000 votes in favor of a candidate, C, stockholders D, E and F would be able to secure representation in the board of directors. (3) If the majority group owns 501 shares and the minority group, 499 shares, the former would have a total of 2,505 (501 x 5) votes, and the latter 2,495 (499 x 5) votes. By cumulating its votes, the minority could elect two (2) candidates (one receiving 1,248 and the other, 1,247 votes). Under straight voting, the majority could always elect all its five candidates, giving them 501 votes each, since the minority group could cast only a maximum of 499 for each of its candidates. Now assume that the majority group cast 501 votes each for five candidates, and the minority group distributes its votes

Sec.

24


249

(infra.) to four candidates (e.g., one receiving 623 votes, and the other three, 624 votes), the minority would have control of the board. The same is true if the minority group concentrates its votes, 831, 832, and 832 respectively, while the majority group cumulates its votes also on three candidates, giving them 830, 835, and 840 votes, respectively, the minority will have three candidates elected to the board. (3) Cumulative voting by distribution. — By this method, a stockholder may cumulate his shares by multiplying also the number of his shares by the number of directors to be elected and distribute the same among as many candidates as he shall see fit. In electing directors by cumulative voting, "the total number of votes cast by a [stockholder] shall not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected." ILLUSTRATIONS: (1) With 100 shares of stock, A is entitled to 500 votes if there are five directors to be elected. A may distribute his votes to candidates W, X, and Y, giving W, 100 votes, X, 150 and Y, 250. A may cast his votes in any combination desired by him provided that the total number of votes cast by him does not exceed 500, which is the number of shares owned by him multiplied by the total number of directors to be elected. (2) Suppose the total number of outstanding shares entitled to vote in a corporation is 50,000 and the total number of directors to be elected is 11. The total number of votes that can be cast for the 11 directors is 550,000 (50,000 x 11). What is the minimum number of shares necessary to elect six directors? What is the minimum number of votes required to elect six directors? Under the cumulative voting system, the number may be calculated by using the following formula:


250

Sec. 24

Where: A = Total number of outstanding shares entitled to vote (at meeting); B = Number of directors desired to be elected; C = Total number of directors to be elected; D = Number of shares necessary to elect desired number of directors; and E = Number of votes required to elect desired number of directors. Thus: A. Total no. of outstanding shares entitled to vote

—

50,000

—

x6

Multiplied by: B. No. of directors desired to be elected Divided by: Sum of: C. Total no. of directors to be elected +1(11 + 1)

300,000 —

+12 25,000

Plus 1

—

+1

—

25,001

D. = No. of shares necessary to elect desired no. of directors Multiplied by: C. = Total no. of directors to be elected — x 11 E. = No. of votes required to elect desired no. of directors — 275,011 Thus, the 275,011 votes may be distributed equally to six candidates for directors, five of whom will receive 45,835 votes and the sixth, 45,836 votes. If the remaining 24,999 shares are controlled by another group, it can only elect a maximum of five directors with its 274,989 (24,999 x 11) votes which, if distributed equally to six candidates, will give each of them only less than 45,835 votes. (3) X, a stockholder, is a candidate to a nine-man board. He expects that out of 3,000 outstanding shares, only 2,000

Sec. 24

TITLE III. BOARD OF DIRECTORS / TRUSTEES / OFFICERS 251

shares will be represented at the meeting. How many of the 2,000 shares does X need to get elected? By applying the formula, X will need 200 of the 2,000 shares to be elected. Now, if X seeks control of the corporation and desires to elect five directors, then, he will need 1,001 (or simply 5 / 1 0 [ B / C + 1] A + 1) shares to elect the five. (4) Assume: 18,825 — total outstanding shares; 13 — numbers of directors to be elected; all shares (244,725) will vote. (a) to elect 13 directors: 1) 18,825(A) x 13(B) = 244,725 + 1 4 (13 + 1) = 17,480.35 + 1 = 17,482 (D; rounded off) x 13(C) = 227,266(E) 2) 17,481 x 13 = 227,253. This number of shares is sufficient. 3) 244,725 - 227,266 = 17,459. This number of shares cannot elect one (1) director. 4) 244,725 - 227,253 = 17,472. This number of shares cannot also elect one (1) director. (b) to elect 12 directors: 1) 18,825 x 12(B) = 225,900 - 14 = 16,135.71 + 1 = 16,137 (rounded off) x 13 = 209,781 2)

244,725 - 209,781 = 34,944 -H 2 = 17,472

34,944 shares cannot elect two (2) directors, only one (1). 3)

209,781^-12 = 17,481

(c) to elect 11 directors: 1) 18,825 x 11 = 207,075 + 14 = 14,791 + 1 = 14,792 x 13 = 192,296 2) 244,725 - 192,296 = 52,429. This number of shares cannot elect three (3) directors, only two (2). 192,296 H- 11 = 17,481 52,429 + 3 = 17,476 (d) to elect 10 directors: 1) 18,825 x 10 = 188,250 + 14 = 13,446 + 1 = 13,447 x 13 = 174,811 2) 244,725 - 174,811 = 69,914. This number of shares cannot elect four (4) directors, only three (3).


252

Sec. 24

174,811 + 10 = 17,481 69,914 + 4 = 17,478 (e) to elect three (3) directors: 1) 18,825 x 3 = 56,475 - 14 = 4,034 + 1 = 4,035 x 13 = 52,445 2) 244,725 - 52,445 = 192,280. This number of shares cannot elect 11 directors, only 10. 192,280 -s-11 = 17,480 52,445 + 3 = 17,481 (f) to elect two (2) directors: 1) 34,970

18,825 x 2 = 37,650 + 14 = 2,689 + 1 = 2,690 x 13 =

2) 244,725 - 34,970 = 209,755. This number of shares cannot elect 12 directors, only 11. 209,755 + 12 = 17,479 34,970 T 2 = 17,485 (g) to elect one (1) director: 1) 18,825 x 1 = 18,825 * 14 = 1,345 + 1 = 1,346 x 13 = 17,498 2) 244,725 - 17,498 = 227,227. This number of shares cannot elect 13 directors, only 12. 227,227 -s-13 = 17,479 17,498 + 1 = 17,498 Right of stockholder to use cumulative voting. Cumulative voting being a statutory right, a corporation is without power to deprive the stockholders of its use (SEC Opinion, Oct. 2 0 , 1 9 6 4 . ) or even to restrict the right to vote to only one way or method. A stockholder may or may not exercise the right as "he shall see fit." (Sec. 24.) He may contract with other stockholders with reference to his stock or such right, (see Sees. 59, 100.) Cumulative voting may not be used as a device to achieve stealthily or indirectly what the law does not allow such as to

Sec. 24

TITLE in. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

253

undermine the local majority "ownership in industries where constitutional and legal requirements reserve controlling ownership to Filipino citizens by the election, through the combined cumulative votes of a group of foreign investors, of more than the number of directors which the group is entitled to elect under a joint venture agreement." (Aurbach vs. Sanitary Wares Manufacturing Corp., 180 SCRA 130 [1989].) Situations involving cumulative voting. In a study of proxy fights, situations involving cumulative voting were found to be generally of six (6) types: (1) Cases growing out of conspicuous management or board failures; (2) Situations grounded in conflicts of important business interests among stockholders, or between stockholders and management; (3) Where stockholders became convinced on rather general grounds that the board of directors was unrepresentative of, and generally insensitive to, stockholders' interest; (4) Instances involving clashes of strong personalities; (5) Struggles for control of the corporation in which representation through cumulative voting was an intermediate objective; and (6) Cases of "anglers" — opposition leaders who appeared to seek board membership in order to push narrow and selfish interests of their own. (W.L. Cary, Cases and Materials on Corporations, 1969 ed., p. 285, citing C M . Williams, Cumulative Voting, 33 Harv. Bus. Rev. 108, at 113 [May-June, 1955].) Arguments for cumulative voting. They have been summarized as follows: (1) Perhaps, foremost of the varied arguments made by proponents of cumulative voting is that it is basically fair. They argue that it is only equitable that stockholders with a large stake in the corporation have the opportunity to gain representation on the board of directors, in proportion to their holdings;

254


Sec. 24

(2) Minority representation under cumulative voting does not constitute a breakdown of the principle of majority rule since the number of directors elected by each group will vary with its proportions of ownership; 18

(3) Significant conflicts of interest can develop between the stockholder groups (or the stockholders in general) and management and the board of directors. Unless minority groups can gain representation on the board, they may fail to get an adequate voice in policy (Illustration of conflict: dividend policy or majority shareholders taking out profits in salaries); (4) In the case of many larger corporations, proponents of cumulative voting argue that the management virtually controls the typical board of directors — the stockholders merely ratify the selections. Thus, cumulative voting represents potential power to assert stockholders' points of view; (5) The position of the management and the controlling interests is generally very strong; the balance of power lies heavily with the "ins" who hold great advantages in the event of a proxy fight; and (6) Minority representation on the board can be helpful in protecting or advancing the interests of minority groups. If boards are composed of men who think essentially alike, and operations are conducted in a private club atmosphere — as does happen too often — an intelligent gadfly can prove useful. (Ibid., pp. 287-288.) A r g u m e n t s against cumulative v o t i n g .

They have been summarized as follows: (1) A basic argument against cumulative voting is that it means the election of directors who are, by their nature, partisans of particular interest groups; and the role of a partisan on the board of directors is inherently inconsistent with the proper function of a director, which is to represent all interest groups in the corporation;

'Thus, cumulative voting cannot be considered undemocratic.

Sec. 24


255

(2) The board of directors is an integral part of the management team; (3) Disharmony in the board can dissipate and destroy the energy of management and lead to an atmosphere of uncertainty and inaction at the top level. Officers susceptible to unfriendly criticism are likely to avoid action which might result in failure and hostility, even when such drastic and risky action is appropriate and necessary; (4) A director who cannot be trusted may leak such information to the harm of the corporation; (5) Too frequently, cumulative voting tends to be used in practice by persons who are motivated by narrow selfish interests rather than by the broader interests of the stockholders (which they may profess to represent); and (6) Not infrequently, opposition groups use cumulative voting to secure a toe-hold in a long-run fight for control of the company. The result is that each board meeting becomes a skirmish in a continuing battle. Each group keeps trying to get something on the other group that can be used in the next proxy fight. The board neglects its real functions, top management is demoralized, and serious harm is done to the corporation. (Ibid., p. 288.) Voting in a non-stoc k corporation.

Members of non-stock corporations may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. This is the manner of voting in non-stock corporations unless otherwise provided in the articles of incorporation or in the by-laws, (see Sec. 89.) ILLUSTRATION: If A is a member of a non-stock corporation and there are five directors to be elected, he is entitled only to five votes. He may give one vote to each of the five candidates he wants to be elected. If he has only one candidate, he can cast only one vote for said candidate unless cumulative voting is authorized in the articles of incorporation or in the by-laws. Thus, where

256

THE CORPORATION CODE OF T H E PHILIPPINES

Sec. 25

cumulative voting exists, and there are nine trustees to be elected, a member is entitled to cast nine votes for one candidate or to distribute the same among as many candidates as he shall see fit. Separate voting by zone s or regions not allowed.

It is clear from Section 24 that in the election of the trustees of a non-stock corporation, it is necessary that at least "a majority of the members entitled to vote" must be present at the meeting held for the purpose. It follows that trustees cannot be elected by zones or regions, each zone or region electing independently and separately a member of the board of trustees of the corporation, such method being violative of Section 24. (SEC Opinions, Jan. 30, 1969 andApril 1,1981.) This opinion applies as well to the election of directors of stock corporations where there must be present the owners of at least "the majority of the outstanding capital stock." However, the by-laws of a non-stock corporation can validly provide in its by-laws for the election of trustees by category (e.g., age bracket, regional area), a practice followed by most corporations with nationwide membership. (SEC Opinion, Feb. 22,1972.) For purposes of electing directors or trustees, the by-laws may divide the members into groups, with each group entitled to nominate qualified members coming from said group, but the nominated members shall be elected not by the group itself but by the entire members of the corporation in accordance with Sections 23 and 24. (see SEC Opinion, Sept. 4,1989.) Sec. 25. Corporate officers, quorum. — Immediately after their election, the directors of a corporation must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time.

Sec. 25


257

The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and by the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the members of the board. Directors or trustees cannot attend or vote by proxy at board meetings. (33a)

Corporate officers. The board of directors or trustees, as we have seen, formulates the broad policy of the corporation and directs the conduct of its business operations. (Sec. 23.) But the task of actual management and carrying on the details of business operations and corporate policy are delegated to the officers elected by it and over whom it exercises supervision. The only officers of a corporation are those who are given that character either by the Code (Sees. 24, 25.) or the charter or by-laws; the rest can be considered merely as employees or subordinate officials. (Gurrea vs. Lezama, 103 Phil. 553 [1958].) In most cases the "by-laws may and usually do provide for such other officers" and that where a corporate office is not specifically indicated in the roster of corporate offices in the by-laws of a corporation, the board of directors may also be empowered under the by-laws to create additional officers as may be necessary. (Nacpil vs. Intercontinental Broadcasting Corporation, 379 SCRA 653 [2002].) Thus: (1) Although the intention of the board of trustees of a corporation is to make the "General Financial Secretary" an officer thereof, he cannot be classified as such where the by-laws of the corporation discloses that the position is not one of the offices provided therein. (SEC Opinion, May 15, 1969.) The by-laws must first be amended.

258


Sec. 25

(2) The scope of the term "officers" in the phrase "and such other officers as may be provided for in the by-laws" (Sec. 25, par. 1.), would naturally depend much on the provisions of the by-laws of the corporation. (SEC Opinion, Dec. 4, 1991.) The president, vice-president, treasurer and secretary are commonly regarded as the principal or executive officers of a corporation. (Tabang vs. National Labor Relations Commission, 266 SCRA 462 [1997].) However, if the by-laws enumerate the officers to be elected by the board, the provision is conclusive, and the board is without power to create new offices without amending the bylaws (SEC Opinion, Oct. 19,1971.) except where it is empowered by the by-laws to create additional officers as may be necessary. (3) The board may create appointive positions other than positions of corporate officers but the persons occupying such positions are not considered as corporate officers within the meaning of Section 25 and are not empowered to exercise the functions of the corporate officers, except those functions lawfully delegated to them. Their functions and duties are to be determined by the board. (SEC Opinion, Nov. 25, 1993.) If, for example, the general manager of a corporation is not listed as an officer, he is to be classified as an employee although he has always been considered as one of the principal officers of a corporation. But a Superintendent /Administrator /Manager/ Assistant to the President who is included in the by-laws of an association in its roster of corporate officers is an officer of said corporation and not a mere employee. (Ongkingco vs. National Labor Relations Commission, 270 SCRA 613 [1997]; Union Motors Corporation vs. National Labor Relations Commission, 314 SCRA 531 [1999].) (4) Where the by-laws of the corporation provides "and for such other officers as the board of directors may from time to time does fit to provide for" and "said officers shall be elected by majority vote of the board of directors," a comptroller appointed by the general manager which appointment was subsequently approved by the board of directors, said comptroller is a corporate officer, not an employee, although the position is not expressly mentioned among the officers of the corporation in the by-laws. (Nacpil vs. Intercontinental Broadcasting Corporation, supra.)

Sec. 25

TITLE ni. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

259

Corporate e m p l o y e e s .

Actually, all officers of the corporation are its employees, although in common usage the term "officers" is meant to refer to those elected by the board or stockholders/members, occupying positions involving the exercise of authority and power in the management of corporate affairs, while the term "employees," to those whose duties are of a clerical or manual nature. (1) An "office" has been defined as a creation of the charter of a corporation. An employee is appointed, not elected, unless he is also a corporate officer. He usually occupies no office and is generally employed not by the action of the directors or stockholders but by the managing officer of the corporation who also determines the compensation to be paid to such employee. (Alldritt vs. Kansas Central Global Exposition, Inc., 371 P 2d 818; Nacpil vs. Intercontinental Broadcasting Corporation, 379 SCRA 653 [2002]; Uy vs. Villanueva, 526 SCRA 73 [2007].) (2) When the President, for example, acts only as such, performing its regular executive duties pertaining to his office, he is not considered an employee. However, a corporation may hire its President to perform services under circumstances which will make him an employee. (SEC Opinion, May 9,1989, citing 2 Fletcher, Chap. II, Sec. 266.1.) Election of officers by the b o a r d .

The directors or trustees of the corporation are elected to their office by the stockholders or members to represent them in the affairs of the corporation at the stockholders' or members' meeting. (Sec. 24.) (1) The election of the administrative officers, such as the president, treasurer, secretary, and "such other officers as may be provided for in the by-laws" is, in turn, entrusted to the board of directors or trustees." Thus, pursuant to the by-laws, the board "See note 5; Where W Corporation obtained a loan from X Corporation and Y Corporation, guaranteed by Z Corporation, the condition in the guaranty agreement between W and X requiring all appointments to executive positions in W should be made only with the approval of X's management, though intended to protect the interest of X, denies W's board of directors of prerogative to elect corporate officers and violates Section 25. The appointment of officers by the directors cannot be the subject of a valid contract between the directors and persons seeking such appointment. (SEC Opinion, March 18,1981.)

260


Sec. 25

by a vote of majority of all or entire number of its members may elect a vice-president, a general manager, an auditor, and such other officers as the needs and nature of the business may demand. In a case, the board of directors, at its regular meeting declared vacant all corporate positions in order to effect a reorganization, and at the ensuing election of officers, the respondent was not re-elected as Executive Vice-President. It was held that the controversy was fundamentally intra-corporate in nature and not a case of dismissal. An intra-corporate controversy would call for SEC (now regional trial court) jurisdiction; a labor dispute, that of the National Labor Relations Commission. The matter of whom to elect is a prerogative that belongs to the board, and involves the exercise of deliberate choice and the faculty of discriminative selection. Generally speaking, the relationship of a person to a corporation, whether as officer or as agent or employee, is not determined by the nature of the services performed, but by the incidents of the relationship as they actually exist. (Phil. School of Business Administration vs. Leafio, 127 SCRA 778 [1984].) (2) The articles of incorporation of a close corporation may provide, however, that all officers or employees or that specified officers or employees shall be elected by the stockholders, instead of the board of directors. (Sec. 97, last par.) (3) In a non-stock corporation, the officers may be directly elected by the members unless otherwise provided for in the articles of incorporation or the by-laws. (Sec. 92, last par.) (4) In firms engaged in wholly or partially nationalized activities, aliens are banned from being appointed to management positions such as president, vice-president, treasurer, auditor, etc. although they can be elected directors in proportion to their allowable participation or share in the capital of such activities in accordance with the Anti-Dummy Law. (see Sec. 2, C.A. No. 108, as amended by P.D. No. 715.) (5) The Code requires that the President must be a director. (Sec. 25, par. 1.) Other officers may be elected or appointed although they do not own shares of stock of the corporation. (6) Section 25 clearly requires an election of a new set of officers immediately after the election of the newly elected members of

Sec. 25

TITLE III. BOARD OF DIRECTORS /TRUSTEES / OFFICERS

261

the board which is, therefore, not bound by the choice of the previous board. Accordingly, a resolution of the stockholders and the board of directors of a corporation amending the bylaws of the corporation which would provide that the incumbent vice-chairman of the board of directors shall automatically be the chairman of the succeeding board if he is elected as a member of the said board, is invalid as it would deny the newly elected board the prerogative to elect the new chairman. (SEC Opinion, Aug. 4,1995.) (7) There is no prohibition as to the right of any elected board member who is also a stockholder to participate in the election of president or any other officer of a corporation. There is no conflict of interest considering that a stockholder has the right to vote and be voted upon in the corporate election process. (SEC Opinion No. 04-37, June 28, 2004.) Compensation, terms of office, and removal. (1) It is within the power of the board to fix the salaries of corporate officers whom it appoints, for the power to employ must necessarily include the power to grant compensation. It may likewise grant bonuses to them subject to the test of reasonableness. (2) The terms of office of these officers may be fixed in the by-laws; otherwise, they shall be deemed for one (1) year and until their successors shall have been elected by the board. (a) It would seem that under Section 25 (par. 1.), the term of the officers of the corporation cannot extend beyond that of the directors which under Section 23 is only one (1) year (par. 1 thereof.), since they shall be elected immediately after the election of the board of directors. Section 47(7), however, permits a corporation to provide in its by-laws a term longer than one (1) year for its corporate officers, other than directors or trustees. (b) In the case of the President, since he must also be a director, his term of office as such would necessarily be coterminous with his term as director. (c) It has been a long standing policy of the SEC not to allow a provision in the articles of incorporation or by-laws

262


Sec. 25

providing for a lifetime term of office of corporate officers to avoid possible abuse of persons in power. Contracts of employment for life or indefinite period of officers and other key personnel are generally invalid because they bind the hands of future board of directors. They also deprive other members of the corporation of the opportunity to become officers of the corporation. (SEC Opinion, Dec. 16,1991.) (d) The Securities and Exchange Commission has ruled on several occasions that hold over of incumbent corporate officers whose term has already expired is allowable when no successors are elected due to justifiable or valid reasons. (SEC Opinion, April 5, 1995.) Non-holding of the annual meeting for the election of the board of directors/trustees and officers without justifiable reason is subject to the SEC Rules Governing the Filing of Information Sheet by Domestic Corporations. (Appendix " E " ) Violations of said rules carry with it the corresponding penalty prescribed therein. (SEC Opinion, Oct. 16,1995.) (3) The power to remove an officer for cause inheres in every corporation as part of its existence. The power to elect or appoint corporate officers being vested with the board, the power of removal must necessarily be exercised by it as an incident to its power of appointment. However, in non-stock corporations, if the officers are elected by the members, as allowed under Section 92, the power to remove them is also vested directly in the latter. (a) In instances where the term of an officer is not fixed by contract or in the by-laws, he may be removed at any time with or without cause at the pleasure of said body. But the power must not be exercised in bad faith or in such a manner as to work injustice. (b) Where the term of an officer as fixed in the by-laws or in a contract of employment is for more than one (1) year, he has to be re-elected by the board until the expiration of the term; otherwise, the corporation may be held liable for damages. (c) The election of successors to corporate officers after the expiration of their term does not constitute their dismissal. The matter of whom to elect is a prerogative that belongs

Sec. 25

TITLE III. BOARD OF DIRECTORS /TRUSTEES /OFFICERS

to the board and involves the exercise of deliberate choice and the faculty of discriminate selection. Generally speaking, the relationship of a person to a corporation, whether as officer or as agent or employee, is not determined by the nature of the services performed, but by the incidents of the relationship as they actually exist. (Phil. School of Business Administration vs. Leafio, 127 SCRA 778 [1984].) Positions c o n c u r r e n t l y held by same person.

The directors or trustees and officers elected shall perform the duties enjoined on them by law and by the by-laws of the corporation. Any two (2) or more positions may be held concurrently by the same person except as provided in Section 25. The positions of president and secretary or treasurer are considered by law as incompatible with each other due to the very nature appertaining to each office. The rationale behind the provision is to ensure the effective monitoring of each officer's separate functions. (Ong Yong vs. Tiu, 401 SCRA 1 [2003].) 20

There is no prohibition in the law against a stockholder being a director or officer of two or more corporations. The Corporation Code does not prohibit a corporate officer from occupying the same position in another corporation organized for the same purpose. However, such a situation may be prohibited by special law, the articles of corporation, or the bylaws of the corporation. A c c e p t a n c e of office a n d taking of oath of office.

(1) To make one an officer of a corporation, his consent, as well as an appointment or election, is necessary. (a) A person who is appointed/elected without his knowledge, and who does not accept the office, or act as an

"In American law, directors who are also officers of a corporation are called inside directors. Too many inside directors create the danger of the board being under the control of officers.

264


Sec. 25

officer, is not an officer, although he may have received stock after his election. (b) No formal acceptance is necessary. If a person enters upon the duties of an office after his election or appointment, it is a sufficient acceptance or, rather, efficient ground for implying acceptance, in the absence of proof to the contrary. Indeed, acceptance of an office may be presumed without any act, in the absence of evidence to the contrary. (2 Fletcher, pp. 99-100; 19 C.J.S. 64.) (2) There is no provision in the Corporation Code which requires the taking of an oath of office to qualify the elected directors and officers. Oath of office constitutes no part of the office itself. Acceptance of the office will suffice unless the taking of an oath is required by the corporate by-laws in which case they are not de jure but de facto officers (infra.) until they have taken the oath. (SEC Opinion, Jan. 21,1986.) Sources of p o w e rs or authority of corporate officers.

An officer's authority to act for the corporation in a particular matter is determined by his actual office and not by the description he may use in acting for the corporation. This authority may be derived from (1) some provision of statute or (2) the articles or incorporation. It may be contained in (3) a by-law, assuming that the by-law is deemed not to violate some rules of law such as the provision of the Code vesting powers of management in the board of directors or trustees. Authority may also be conferred on an officer by (4) a resolution of the board of directors or trustees, provided that the resolution does not attempt to delegate non-delegable powers. (W.L. Cary, op. ext., pp. 190-191.) Corporate officers shall perform the duties and functions enjoined by them by law and the by-laws of the corporation. However, powers of corporate officers under the by-laws are always subject to the rule in Section 23 that the board of directors or trustees is the governing body of the corporation. By virtue of Section 23, the board may in its best judgment and for the best interest of the corporation, appoint or authorize the President or

Sec. 25

TITLE III. BOARD OF DIRECTORS /TRUSTEES /OFFICERS

265

another officer or agent to act for and in behalf of the corporation, but in all cases such officers shall be under the ultimate direction of the board. (SEC Opinion, Jan. 18,1995.) One may be an agent of a private domestic corporation although he is not an officer thereof. (Aboitiz International Forwarders, Inc. vs. Court of Appeals, 488 SCRA492 [2006].) It has been held that where the real party-in-interest is a body corporate, neither the administrator of the agency or a project manager could sign the certificate against forum shopping without being duly authorized by resolution of the board of the corporation. (Eslaban, Jr. vs. Onorio, 360 SCRA 230 [2001].) Extent of p o w e r s or authority of c o r p o r a t e officers. (1) Determination of authority. — The full extent of the

powers or authority of any particular officer of a corporation is to be determined by inquiring into: (a) the authority which he has by virtue of his office; (b) the authority which is expressly conferred upon him or is incidental to the effecrualness of such express authority; and (c) as to third persons dealing with him without notice of any restriction thereof, the authority which the corporation holds the officer out as possessing or is estopped to deny. In the determination of the authority which certain officers may exercise by virtue of their office, (d) the nature of the corporate business must also be taken into consideration. In addition to the foregoing, (e) the act of an officer though originally unauthorized, may become binding upon the corporation by a subsequent ratification. (13 Am. Jur. 875.) (2) Exemption from liability. — Officers of a corporation who

acted for and in behalf of the corporation within the scope of their authority and in good faith do not become liable with the corporation, whether civilly or otherwise, for the consequences of their acts. Those acts are properly attributed to the corporation alone and no personal liability is incurred by such officers. (Benguet Electric Cooperative, Inc. vs. National Labor Relations Commission, 209 SCRA 55 [1992]; Mindanao Motor Line, Inc. vs. Court of Industrial Relations, 6 SCRA 710 [1962].) When they exceed their authority, the corporation is not bound unless it has


266

Sec. 25

ratified them expressly or tacitly, (see Art. 1910, Civil Code.) or it may be held in estoppel, (infra.) (3) Authority to bind by contract. — The lack of authority of a

corporate officer to bind the corporation by contract executed in its name, is a defense which should be especially pleaded by the corporation. (Lao vs. Court of Appeals, 325 SCRA 694 [2000].) It should first prove by clear evidence that its corporate officer is not in fact authorized to act in its behalf before the burden of evidence shifts to the other party to prove, for example, that, by previous specific acts, an officer was cloaked by the corporation with apparent authority. (Westmont Bank vs. Inland Construction and Development Corp., 582 SCRA 230 [2009].) The general rule is that a contract, to be binding on the parties thereto, need not be in writing, unless the law requires that such contract be in some form in order that it may be valid or enforceable or that it be executed in a certain form, (see Art. 1356, Civil Code.) Indeed, corporate policies need not be in writing. But a verbal promise made by the corporation, through its chairman and president, obligating itself, as a matter of policy, to grant petitioner (who retired as general manager, after 36 years of service) the cash value of his vacation and sick leave credits cannot bind the corporation in the absence of a board resolution to that effect. (Kuok vs. Phil. Carpet Manufacturing Corp., 457 SCRA 465 [2005].) Classification of p o w e r s or authority of corporate officers.

The general principles of agency applicable to agents of individuals govern the relation between the corporation and its officers or agents, subject to the articles of incorporation, by-laws, or relevant provisions of law. (San Juan Structural & Steel Fabrica21

The elements of agency are: (a) consent of the parties to establish the relationship; (b) the object is execution of a juridical act in relation to a third person; (c) the agent acts as a representative and not for himself; and (d) the agent acts within the scope of his authority. (Yu Eng Cho vs. Pan American World Airways, Inc., 308 SCRA 7175 [2005].) The mere fact that an entity may be a 100% subsidiary corporation of another corporation does not necessarily mean that the former is a duly authorized agent of the latter, because for a contract of agency to exist, it is essential that the principal consents that the other party, the agent, shall act on its behalf and the agent consents so as to act. (Apex Mining Co., Inc. vs. Southeast Mindanao Gold Mining Corp., 492 SCRA 355 [2006].) 2I

Sec. 25


267

tors, Inc. vs. Court of Appeals, 293 SCRA 631 [1998]; Litonjua, Jr. vs. Eternal Corporation, 490 SCRA 204 [2006]; Philippine Rabbit Bus Lines, Inc. vs. Aladdin Transit Corp., 493 SCRA 358 [2006].) (1) The inherent authority or power of an officer or agent is

taken to mean that authority to act and bind the corporation which the officer has by reason of his office, although it may not be sanctioned by express authority. (Ibid.) (2) The express authority of an officer or agent includes every power or authority expressly conferred upon him by law and the by-laws of the corporation. (3) The implied authority of an officer or agent of a corporation includes all such incidental authority as is necessary, usual, and proper to effectuate the main authority expressly conferred. (a) A corporate officer entrusted with the general management and control of the corporate business has the implied authority to act or contract for the corporation which may be necessary or appropriate to conduct the ordinary business. If the act or contract comes within corporate powers but it is done without any express or implied authority therefor from the by-laws, board resolution or corporate practices, such unauthorized act or contract does not bind the corporation unless ratified by the board of directors or the corporation may be held in estoppel (infra.) from denying as against innocent third persons the authority of the corporate officer. (Rural Bank of Milaos vs. Ocfemia, 325 SCRA 99 [2000].) (b) An officer of a corporation who is authorized to purchase the stock of another corporation has the implied power to perform all other obligations arising therefrom such as payment of the shares of stock. (Inter-Asia Investments Industries, Inc. vs. Court of Appeals, 403 SCRA 452 [2003].) (4) When in the usual course of business of the corporation, an officer or agent is held out by such corporation, or has been permitted to act for it in such way as to justify third persons who deal with him in assuming that he is doing an act or making a contract within the scope of his authority, the corporation is bound thereby even though such officer or agent does not have

268


Sec. 25

the actual authority to do such act or make such contract. This authority is known as apparent or ostensible authority. It is essen-

tially a question of fact. (5) Apparent authority is naturally the same as and based upon the same principle as authority by estoppel. (a) Stating the rule in terms of estoppel, a corporation, which by its voluntary act, places an officer or agent in such a position or situation that persons of ordinary prudence are justified in assuming that he has authority to perform the act in question, is estopped as against such persons from denying the officer's or agent's authority. (13 Am. Jur. 869-871; BPI Family Savings Bank, Inc. vs. First Metro Investment Corp., 429 SCRA 30 [2004]; Hydro Resources Corp. vs. National Irrigation Administration, 441 SCRA 614 [2004]; Development Bank of the Phils, vs. Ong, 460 SCRA 170 [2005].) Thus, in a case where the board secretary sent to VF a telegram purportedly signed by the general manager of the GSIS accepting VF's offer to liquidate his daughter's mortgage indebtedness and pursuant to such telegram VF paid P30,000.00 for which a receipt was issued by the GSIS and subsequently, GSIS claimed that the telegram should be disregarded in view of its failure to express accurately the contents of the board's resolution due to the error of its minor employees and that the board secretary sent the telegram without the knowledge of the general manager, it was held that GSIS could not evade the binding effect produced by the telegram which was within the general manager's apparent authority. Corporate transactions would speedily come to a standstill where every person dealing with a corporation held duty bound to disbelieve every act of its responsible officers no matter how regular they should appear on their face. (Francisco vs. GSIS, 7 SCRA 577 [1963]; see Maharlika Publishing Corporation vs. Tagle, 142 SCRA 553 [1986]; First Phil. International Bank vs. Court of Appeals, 252 SCRA 257, 259 [1996].) (b) The authority of a corporate officer to act for and bind the corporation may be presumed from acts of recognition in other instances where the power was in fact exercised. It

Sec. 25

TITLE m. BOARD OF DIRECTORS / TRUSTEES / OFFICERS

269

is well-settled in jurisprudence that where similar acts have even approved by the board of directors as a matter of general practice, custom, and policy, a corporate officer may bind the

company without formal authorization of the board. Thus, where the practice of the corporation had been to allow its general manager to negotiate and execute contracts in its copra trading activities for and in the corporation's behalf without prior board approval, it was held that the board itself, by its acts and through acquiescence, practically laid aside the by-laws' requirement of prior approval. (Board of Liquidators vs. Heirs of Maximo M. Kalaw, 20 SCRA 987 [1967]; see Lipat vs. Pacific Banking Corporation, 402 SCRA 399 [2003].) (c) Apparent authority is derived not merely from corporate practice (defined as frequent or customary action). Its existence may be ascertained through: 1) the general manner in which the corporation holds out an officer or agent as having the power to act or, in other words, the apparent authority to act in general, with which it clothes him; or 2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or beyond the scope of his ordinary powers. It requires presentation of similar act(s) executed either in its favor or in favor of other parties. It is not the quantity of similar acts which establishes apparent authority but the vesting of a corporate officer with the power to bind the corporation. (People's Aircargo & Warehousing, Co., Inc. vs. Court of Appeals, 297 SCRA 170 [1998].) (d) Where a power is one which would otherwise be possessed by an officer, it is generally held that a by-law (or a board resolution or articles of incorporation provision) restricting his authority is not effective against an outsider who has no actual notice. Thus, a corporation was held bound by a note signed by the president and secretary where they had signed numerous other notes which had been paid, although there was no evidence that the plaintiff knew of this fact, notwithstanding a provision of its by-laws requiring checks or notes to be signed by the president and treasurer.

270


Sec. 25

(Ibid., citing Produce Exchange Trust Co. vs. Bierberbach, 176 Mass'. 58 N.E. 167 [1900].) Extent of authority of particular officers.

(1) Chairman of the Board. — The concept of board chairman and his functions as an executive vary so widely in different companies as to be indefinable. There is no settled practice. (2 Fletcher, p. 541; Ballantine, p. 142 [1946 ed.].) (a) The typical pattern of executive duties is that the president or the chairman of the board is designated usually by the by-laws but sometimes, in board resolutions, as the general manager or chief executive officer of the corporation. If the chairman of the board is so designated, the president is frequently designated the chief administrative or chief operating officer, or may simply be the officer who succeeds to the chairman's executive duties in his absence or disability. (Ballantine & Sterling, p. 42 [1982 ed.].) In such a given situation, an alien cannot qualify as chairman of the board of directors in enterprises where aliens are banned by law or the Constitution from management positions. (SEC Opinion, May 15,1985.) (b) Where the president is the chief executive officer, typically, the duties of the chairman relate to presiding at meetings of the board and of committees of which he is a member, and of stockholders or members, and carrying out such other duties as the board shall assign. The duty of the chairman of the board as presiding officer is not an executive one. Thus, where the functions of the chairman of the board as provided in the by-laws consists merely of presiding at the meetings of the board or of committees of which he is a member, an alien may qualify as chairman of the board in such enterprises. (SEC Opinion, May 15, 1985, citing 2 Fletcher, p. 542 and Ballantine & Sterling, supra.) (c) If a vice-chairman is appointed, he presides at the meetings in the absence of the chairman. He shall exercise such powers and perform such duties and functions as the board may, from time to time, assign to him.

Sec. 25

TITLE ni. BOARD OF DIRECTORS / TRUSTEES / OFFICERS

271

(2) President. — The president of a corporation must be a director or trustee (see Sec. 87, par. 2.) of the corporation, but he cannot act as president and secretary or as president and treasurer at the same time. (Sec. 25.) The president is the only officer required by law to be a member of the board of directors. Upon the expiration of his term as member of the board, he automatically ceases to be president for lack of qualification. (Sec. 23, par. 2.) (a) The powers of the president of the corporation are such only as are conferred upon him by the board of directors or trustees or vested in him by the by-laws. If there is nothing in the by-laws conferring any particular authority upon him, he has from his office and alone no more power over the corporate property and business than has any other director. (Fisher, op. cit., p. 357.) It is the board of directors or trustees, not the President, that exercises corporate powers. (Safic Alcan & Cie vs. Imperial Vegetable Oil Co., Inc., 355 SCRA 559 [2001].) However, according to the view taken by many authorities, regard must be had to the fact that presidents of corporations are often given general supervision and control of the business as chief executive officers from which is to be inferred that contracts or acts made or done by the president in the ordinary course of business are presumed to be duly authorized unless the contrary appears. (2 Fletcher, p. 443.) Even in the absence of express delegation by the board or implied authority by ratification, unless there is a charter or by-law provision to the contrary, the President, as such, may, as a general rule, bind the corporation by a contract in the ordinary course of business, provided that the same is reasonable under the circumstances, (see Prime White Cement Corp. vs. Intermediate Appellate Court, 220 SCRA 103 [1993].) Furthermore, a person dealing with the President of a corporation is entitled to assume that he has the authority to enter, on behalf of the corporation, into contracts that are within the scope of the powers of the corporation. (People's Aircargo & Warehousing, Co., Inc. vs. Court of Appeals, 297 SCRA 170 [1998].) (b) On the other hand, where the president acts in matters not within the scope of his authority although they may

272


Sec. 25

relate to the company's business as where he acts in matters within the exclusive province of the board of directors, the corporation cannot be bound; or where he performs an act not incidental to the business of the corporation, it must, as a general rule, be shown that he was duly authorized by the board of directors. (19 C.J.S. 1001.) In the absence of a special power in favor or a president of a corporation, no valid mortgage on the corporation's property can be executed by him. Such a mortgage is void and cannot be ratified. (Yasuma vs. Heirs of C.S. de Villa, 499 SCRA 466 [2006]; see Art. 1878, Civil Code.) A contract entered into by the president who was also the chairman of the Board, in behalf of the corporation, was held void in the absence of any provision in the by-laws conferring upon him the authority to enter into such contracts independently of the Board of Directors, particularly in view of the fact that the corporation had a general manager who, under its by-laws, was given the active management of the corporation, there being no evidence adduced to show that the corporation clothed him with apparent power to act for it. (Yao Ka Sin Trading vs. Court of Appeals, 209 SCRA 763 [1992].) (c) In the absence of specific provisions governing the situation and where circumstances of an emergency nature arise which necessitate the exercise of discretion, the rule on agency may be applied. (SEC Opinion, June 11,1974.) Article 1881 provides: "The agent must act within the scope of the agency. He may do such acts as may be conducive to the accomplishment of the purpose of the agency." The unauthorized act of an agent is subject to ratification. (Art. 1910.) Such ratification is implied from the acceptance of benefits as where a corporation deposited in its current account the proceeds of a loan obtained by its president, allegedly without authority, retained and disbursed the same for corporate purposes. Indeed, such use may be taken as evidence to belie the claim of lack of authority. (De Asis & Co. vs. Court of Appeals, 136 SCRA 599 [1985].)

Sec. 25


273

(d) By law, the president shall preside at all meetings of the directors or trustees as well as of the stockholders or members, unless the by-laws provide otherwise (Sec. 54.) or in the absence of the chairman or vice-chairman. (e) The president of a corporation, by the authority of his office alone, has no power to delegate the powers and duties of his position as president to any member of the board of directors or trustees. Should he become incapacitated to perform his functions, what should be done, in the absence of a vice-president or any specific provision in the by-laws on the matter, is for the board to temporarily elect an acting president. Nevertheless, if the director, who was allowed to discharge the duties of president, performed his functions and presided over board meetings without objection on the part fifiof the other members of the board, it would seem that as long as no irregularity has been committed by him, his past actuations need not be the subject of further inquiry. (SEC Opinion, May 21,1971.) (f) In some corporations, the chairman is made the chief executive officer with most of the important and substantial powers and duties ordinarily given to the president, with the latter as chief operating officer in charge of daily operations and carrying out the policies and instructions laid down by the board of directors. (g) A public officer's effort to make a distinction between his being the head of a government agency (Chairman of the Securities and Exchange Commission) and the president of a building condominium corporation (a sustantial portion of the building being owned and occupied by SEC) is vacuous where his being president is inseparable and completely appendant to his title as head of the agency, that is, he cannot be the president of the corporation unless he is the head or at least an officer of the agency. Differently stated, his standing as president of the corporation arises from or is the necessary effect of his being the head of the government agency and not because of anything else, and therefore, his acts as president must also be viewed in the light of his powers and functions as head of the government agency. (Yasay, Jr. vs. Desierto, 300 SCRA 494 [1998].)


274

Sec. 25

(3) Vice-President. — The vice-president has always been considered as an officer next-in-rank to the president. (a) He is commonly referred to as a "fifth wheel," i.e., a conditional officer who acts as president in case of death, absence, or inability of the president to act. "Prima facie, it would seem that the only function of the vice-president, as his title indicates, is to replace the president in case of the latter's death, incapacity, etc." (SEC Opinion, May 20, 1975, citing 2 Fletcher, p. 774.) He has no authority by virtue of his office alone to enter into contracts in behalf of the corporation. However, it is frequently the case that the vice-president of a corporation is given certain executive duties by the board of directors or by-laws of the corporation. (American Exh. Nat. Bk. vs. Ward, III, F, 782, 55 L.R.A. 356.) (b) Where the by-laws provide that it shall be the duty of the vice-president to take the place of the president during the absence of the latter, the vice-president should likewise be a director. (SEC Opinion, Feb. 5, 1962.) If the vice-president is also a secretary or a treasurer, he cannot act as president at the same time. (Sec. 25.) There may be more than one (1) vice-president, including an executive vice-president. (4) Secretary. — The secretary must be a resident and a citizen of the Philippines. The assumption is that the secretary, being the custodian of corporate records, should at all times be available in the regular conduct and operations of the corporation. He is not allowed to act as president and secretary at the same time. (Sec. 25.) He need not be a director unless required by the by-laws. 22

(a) It is generally the duty of the secretary of a corporation to make and keep its records and to make proper entries of

citizenship requirement is imposed by the Code with respect to other corporate officers. However, in enterprises or industries which are totally or partially reserved for Filipino citizens, the election of aliens as officers and/or members of the board of directors is prohibited or restricted under specific provisions of the Constitution and special laws, (see Sec. 13.) Where an officer is required to be a Filipino citizen, a Filipino with dual citizenship may be elected provided that prior to such election he/she shall have complied with the requirements under the "Citizenship Retention and Re-Acquisition Act of 2003 (R.A. No. 9225.) and its implementing rules and regulations." 2 2 N o

Sec. 25


275

the votes, resolutions and proceedings of the shareholders (or members) and directors (or trustees) in the management of the corporation and all other matters required to be entered on the records. (Ballantine, p. 142.) As custodian of corporate records, corollarily, he keeps the stock and transfer book and makes proper and necessary entries therein. (Torres, Jr. vs. Court of Appeals, 278 SCRA 793 [1997].) (b) He issues notices of meetings and has custody of the corporate seal which he uses when attesting the signatures of the officers to important documents. The secretary may perform other functions. Where the corporate by-laws state, among others, that the secretary shall also "send notices of all regular and special meetings of the members and of the board of directors," this connotes that the principal signatory to such notices is the corporate secretary. The term "to send" may be deemed synonymous with "issuance" of the notices, in accordance with sound corporate practices, supported by jurisprudence. (SEC Opinion, Oct. 1,1981.) (c) A secretary is not obligated to include everything that is said in the minutes as long as he accurately transcribes what has taken place. The minutes, however, should clearly record the proceedings as they actually occurred and should positively show what action was taken by the corporation. (5 Fletcher, Sec. 2190.) (d) A corporate secretary's certification, when regular on its face, is sufficient for a third party to rely on. It need not investigate the truth of the facts contained in such certification. Otherwise, business transactions of corporations would become tortuously slow and unnecessarily hampered. (Esguerra vs. Court of Appeals, 267 SCRA 380 [1997].) (e) The secretary is a ministerial officer who cannot bind the corporation unless he is especially authorized to do so. (Ballantine, p. 142.) There may be an assistant secretary. (5) Treasurer. — The treasurer may not hold at the same time the position of president. Unlike with respect to the corporate secretary, the law does not require that the treasurer shall be a resident and a citizen of the Philippines. (Sec. 25, par. 1.)

276


Sec. 25

(a) The treasurer of the corporation is the proper officer entrusted with the authority to receive and keep the money of the corporation and to disburse them as he may be authorized. (b) The view is taken that he has no inherent power to bind the corporation by contracts or to borrow money in behalf of the corporation. (Ballantine, p. 143; 13 Am. Jur. 886.) There may be an assistant treasurer. Except where otherwise provided by the Constitution or existing laws, a corporate officer need not be a resident or citizen. It has been opined, however, that there is all the more reason for the treasurer to also possess the same qualifications as the secretary. Being the holder of the purse, the treasurer is entrusted with the authority to receive, keep, and disburse funds of the corporation. Furthermore, there is a need to provide to local investors ample protection from the danger of getting victimized by foreign nationals. Thus, while the Corporation Code does not impose Philippine residency requirement, nevertheless, considering the nature of his functions, good corporate practice dictates that the treasurer must be a resident of the Philippines. (SEC Opinions, April 13, 1989 and Jan. 30,1990.) The Securities and Exchange Commission has adopted as a matter of policy to require the treasurer of a private corporation to be a resident of the Philippines. This policy would prevent the possibility on the part of a non-resident treasurer to effect the transfer of corporate funds out of the country, for, in view of his status as a non-resident, he can easily leave the country and escape. (SEC Opinion, May 27,1991.) A comptroller is different from a treasurer. The former is said to be an officer appointed to control accounts and to check expenditures. By virtue of his office, the authority of a comptroller is restricted to doing those things which are usual and necessary in the performance of his duties. (19 Am. Jur. 2d 599.) (6) General Manager. — At the present time, the general business of corporations is frequently entrusted to the management

Sec. 25


277

of a general manager or managing officer who has power to bind the corporation by acts within the scope of his apparent authority. Accordingly the general manager or managing officer has very broad powers, especially as far as third persons are concerned. (a) He has been deemed by numerous authorities to be the principal officer of the corporation, having general charge of those business matters for the carrying on of which the company was incorporated, and he has the implied or ostensible power to do any act which is usual or necessary in the ordinary transaction of the company's business. This power has been broadly described as being co-extensive with the powers of the corporation itself unless specifically restricted. (b) He has implied authority to make any contract or do any other act which is necessary or appropriate to the conduct of the ordinary business of the corporation, including the authority to institute proceedings against all accountable persons in order to protect and preserve the assets of the corporation and to prevent their dissipation. This authority, however, is generally qualified as not extending to matters which are not properly incidental to the management of the corporate business nor to matters over which the stockholders alone have control, (see 19 Am. Jur. 2d 599-560; see Board of Liquidators vs. Heirs of Maximo Kalaw, 20 SCRA 987 [1967]; Central Cooperative Exchange, Inc. vs. Enciso, 162 SCRA 706 [1988].) In a case, the general manager of a company terminated the services of certain employees. There was no evidence on record that he acted maliciously or in bad faith. It was held that he could not be made personally liable for damages as his act was within the scope of his authority and was a corporate act. (Sunio vs. National Labor Relations Commission, 127 SCRA 390 [1984].) Requisites for board meeting.

Under Section 25, the validity of a corporate act is predicated on the presence of the following requisites: (1) Meeting of the directors or trustees duly assembled as a board, i.e., as a body in a lawful meeting;


278

Sec. 25

(2) Presence of the required quorum; (3) Decision of the majority of the quorum or, in other cases, a majority of the entire board; and (4) Meeting at the place (see Sec. 51, par. 1.), time, and manner provided in the by-laws, (see Sees. 47[12], 53,101.) The board of directors or trustees may adopt its own internal rules in the conduct of its meetings provided that the same will not run counter to the provisions of the Code, the articles of incorporation, and by-laws of the corporation. Whether an individual director may have a lawyer, accountant, or adviser present, a meeting of the board is a matter of internal corporate management upon which the courts properly decline to rule. (SEC Opinion, Jan. 25, 1990.) Quorum.

Quorum is such number of the membership of a collective body as is competent to transact its business or do any other corporate act. (1) Number required for presence of quorum. — Section 25

provides that "unless the articles of incorporation or the bylaws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business." The majority means the number greater than half or more than half of any total. It would be at least one-half plus one of the number of directors as fixed in the articles and such quorum remains the same even though there may be vacancies. A director who is disqualified by reason of personal interest (see Sees. 32, 33.) in the matter before a director's meeting, loses, pro hac vice, his capacity as a director and he cannot be counted for the purpose of making a quorum, nor can the vote of such director be counted for the purpose of determining whether passed by a majority vote. (SEC Opinion, July 21,1994.) (2) Number required for approval of corporate acts. — As a gen-

eral rule, a majority of the quorum of the board (as distinguished from majority of the fuel board) will be sufficient to adopt a proposal where the Code requires approval of certain corporate acts

Sec. 25

TITLE in. BOARD OF DIRECTORS / TRUSTEES / OFFICERS

279

such as the declaration of dividends (Sec. 43.), or entering into a management contract (Sec. 44.) without stating that it shall be by majority vote of the board, but if the word "majority" is used, the number of votes required to approve such acts shall be at least one-half plus one of the entire membership. (3) Number provided greater than majority. — Unlike the old

law which sets the quorum at "a majority of directors" without giving the corporation the power to provide otherwise, the Code gives the corporation the power to require a number greater than the majority of the board members to constitute the quorum necessary to transact business. So that, given a corporation with nine (9) directors, the presence of five (5) members will be sufficient to hold a board meeting and a vote of three (3) will be enough to pass a board resolution. However, the same corporation can provide in its articles of incorporation or by-laws, that the required quorum shall be seven (7) members. In this case, a vote of at least four (4) members is necessary for the approval of any board resolution. But the vote of a majority of all the members of the board or at least five (5) members of the board with nine (9) directors shall be required for the election of officers, (see Sec. 97, par. 1[3].) Less than the number to constitute the required quorum cannot meet and bind the corporation by any act or resolution. All that the directors or trustees present can do is to adjourn. (Ballantine, p. 130.) ILLUSTRATIONS: (1) The by-laws of X Corporation provide for 11 directors. Only nine directors were elected with two seats remaining vacant. During a special meeting of the board where only five directors were present (no quorum), the board passed a resolution. Under the law, the required quorum of the board is a majority of the entire board as it would be constituted if all the vacancies were rilled, i.e., six directors. Consequently, the resolution is irregular. Suppose the absent director subsequently signed the minutes of the meeting. Will the signature cure the defect of the first meeting? No.


260

Sec. 25

But if the board subsequently met with six directors present and all of them voted unanimously to approve and ratify said resolution, such action would have the effect of curing the defect and giving effect to the resolution. (2) The by-laws of X Corporation provide for seven (7) directors and that the required number of directors to constitute a quorum as well as to carry a vote or approve any resolution in all its meetings shall be at least 3/4 of all the directors. Is the presence of five (5) directors sufficient compliance with the by-laws? Yes. By mathematical computation, 3/4 of all the directors would require the presence and concurrent votes of at least 5.25 directors. Under the rule on rounding numbers, the decimal figure or figures to the right are dropped after increasing the final remaining figure by 1, if the first digit is 0.5 or greater, (see Webster, 3rd Int. Dictionary, p. 1979 [1976].) Considering that 0.25 cannot be rounded off into one, the same should be treated as negligible and need not be considered in the computation of the required number to constitute a quorum. Hence, five (5) directors would substantially comply with the by-laws, (see SEC Opinion, Nov. 7,1989.) In short, 0.5 or greater is considered 1, and 0.49 or less is disregarded. Proxy and constructive p r e s e n c e not allowed.

(1) On account of their responsibility to the corporation (see Sec. 23.) and their being voted into office presumably because of their personal qualifications, directors or trustees cannot validly act by proxy, (as to meaning of "proxy," see comments under Sec. 58.) They must attend the meetings of the board of directors or trustees and act in person (Sec. 25, last par.) and as a body. Each 23

A by-law provision allowing the director, who happens to be elected as the chairman of the board or presiding officer, to vote only in case of tie or to create one would defeat the very purpose for which a director is elected. A director cannot be deprived of the right to vote as he is elected as such purposely to participate in the management of the corporation. He will not be able to participate in major corporate decisions unless he is given the right to vote. (SEC Opinion, Aug. 4,1995.) 23

Sec. 25

TITLE in. BOARD OF DIRECTORS / TRUSTEES / OFFICERS

281

director or trustee is required by law to exercise his personal judgment and discretion in running the affairs of the corporation and he cannot delegate his powers or assign his duties to another director, or to a corporate officer, or to any person. 24

(2) Section 25 says "every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act. x x x." (par. 2.) Constructive or electronic presence (including telephone) is not a substitute for actual presence required under Section 25, which does not mention the same. Furthermore, participation or voting by electronic presence is quite hard to prove by admissible evidence because electronic voices and messages can easily be dissimulated. (SEC Opinions, March 25,1981 and Sept. 10,1993.) A n o t h e r corporation a s director or trustee.

(1) General rule. — A corporation is not qualified to occupy the position of director (or trustee) because, being a juridical person, it cannot act by itself but only through its officers and agents and such being the case, it cannot attend personally board meetings as a director and whoever represents it as a director is doing so in his capacity as the "proxy" of the director or trustee. (SEC Opinion, June 26,1969, citing 19 C.J.S. 96.) (2) Through a receiver. — Where the corporation is under receivership, the appointment of a receiver for a corporation "The members of the board of directors are required to exercise their judgment and discretion in running the affairs of the corporation and they cannot be substituted by others. No one can be elected to take the place of an incumbent director, even as an alternate in the absence of any vacancy. To allow such alternate would be to have two directors for the same position, one permanent and the other temporary, a situation that the law does not permit. (SEC Opinion, May 27,1970.) Unless allowed by statute, the by-laws cannot provide for the position of "ex-officio director." The term means a person who becomes a director of the corporation because of his title to an office, and not because of an election by the stockholders or members. The Corporation Code does not provide for the office. Since an "ex-officio director" will have the rights and privileges of a director except the manner of coming to office, such position cannot be provided for in the by-laws. (SEC Opinioa Sept. 1, 1987.) The Commission, however, allows as an exception, a provision in the by-laws appointing an "ex-officio" member of the board, provided there is an express provision that the appointee shall have no voting right. The status of an "ex-officio" member of the board, therefore, is only for an honorary member whose role would be to act as adviser during board meetings. (SEC Opinion, Dec. 19,1994.)


282

Sec. 26

terminates at least, for the most part, the powers of the corporate officers as to the property in possession of the receiver where the receivership is a general one, and not merely for the preservation of the company's property pending a suit in reference to it. A general receiver succeeds to all the rights of the board of directors and officers of the corporation. Where a corporation is under a general receivership, it may be represented in the board of directors/trustees of another corporation through its receiver. (3) Through an authorized representative. — Only members of a

non-stock corporation can be elected to sit in its board. (Sec. 23, par. 2; Sec. 92, par. 2.) A candidate should meet the qualification for membership of the corporation as prescribed in its by-laws. While a corporation is not qualified to occupy the position of a trustee, its authorized representative may be elected as a member of the board if, under the by-laws, such representative is also considered as a member of the corporation for purposes of qualifying him as a trustee. (SEC Opinion, Sept. 2,1991.) In such case, the trustee is not the corporation but the representative. Sec. 26. Report of election of directors, trustees and officers. — Within thirty (30) days after the election of the directors, trustees and officers of the corporation, the secretary, or any other officer of the corporation, shall submit to the Securities and Exchange Commission, the names, nationalities and residences of the directors, trustees and officers elected. Should a director, trustee or officer die, resign or in any manner cease to hold office, his heirs in case of his death, the secretary, or any other officer of the corporation or the director, trustee or officer himself, shall immediately report such fact to the Securities and Exchange Commission, (n) Report of elections a n d v a c a n c i e s .

Section 2D requires the following: 25

The Securities and Exchange Commission has issued the following rules: (1) All domestic corporations shall keep proper books of the minutes of the elections of the members of the board of directors and officers showing the date of the election, the names of the stockholders or members present and the number of shares owned or represented who have voted therein, and in case of the election of officers, the names of the directors who were present and have voted. 25

Sec. 26


283

(1) The secretary or any other officer of the corporation shall submit to the Securities and Exchange Commission the names, nationalities, and residences of the directors /trustees (see Sec. 14[7].) and officers elected, which must be done within 30 days after the meeting in which they were elected; and (2) The heirs of the director /trustee or officer in case of the latter's death, the secretary, or any other officer of the corporation, or the director/trustee or officer himself, shall immediately report to the Commission any death, resignation, or cessation in any manner of holding office of a director/trustee or officer. The objective sought to be achieved by Section 26 is to give the public information, under sanction of oath of responsible officers, of the nature of the business, financial condition, and operational status of the corporation together with information on its key officers or managers so that those dealing with it and those who intend to do business with it may know or have the means of knowing facts concerning the corporation's financial resources and business responsibility. (Premium Marble Resources, Inc. vs. Court of Appeals, 264 SCRA 1 [1996]; Monfort Hermanos Agricultural Development Corp. vs. Monfort III, 434 SCRA27 [2004].) (2) A general information sheet shall be filed with the Commission within thirty (30) days following the date of the annual stockholders' meeting. No extension of said period shall be allowed, except for very justifiable reasons stated in writing by the president, secretary, treasurer or other officers, upon which the Commission may grant an extension for not more than ten (10) days. The general information sheet shall state, among others, the names of the elected directors and officers, together with their corresponding position, title, and capital structure of the corporation, its line of business, business address and telephone number, if any, and such other data as the Commission, in a form, may prescribe. (3) Should a director, trustee or officer die, resign or in any manner, cease to hold office, the corporation shall report such fact to the Commission within fifteen (15) days after such death, resignation or cessation of office. (4) If for any justifiable reason the annual meeting has to be postponed, the company should notify the Commission in writing of such postponement within ten (10) days from date of such postponement. Corporations which have ceased to operate although still existing, are (likewise) not required to comply with these rules provided that a signed resolution of the board of directors stating the cessation of business has been previously filed with the Commission. If there be no board of directors in office, a statement as to the cessation of business signed and swom to by the president, manager, secretary, treasurer or duly authorized representative of the corporation shall be filed in lieu of the resolution of the board of directors.

284

Sec. 27


The filling of vacancies in the office of director or trustee is governed by Section 29. Sec. 27. Disqualification of directors, trustees or officers. — No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code, committed within five (5) years prior to the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation, (n) Disqualification of directors/trustees or officers.

The above provision disqualifies any one convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years or a violation of the Code, as a director/ trustee or officer of any corporation. The obvious purpose is to avoid the election or appointment of unworthy officers in view of the fiduciary character of their positions. The offense need not involve moral turpitude. The rule applies regardless of the nature or classification of the offense as long as it is punishable by imprisonment for a period exceeding six (6) years. If the disqualification is based on a violation of the Code (see Sec. 144.), the duration of the imprisonment is immaterial, but the commission (not conviction) of the violation must have taken place within the five (5) years prior to the date of the election or appointment. 26

De facto directors/trustees or officers.

A person is an officer or director de facto where he is in possession of the office and is exercising the duties thereof under color or appearance of right, but is not an officer or director de jure on account of irregularity in his election; or ineligibility; or

In the exercise of its power of suspension, regulation and control over all corporations, the Securities and Exchange Commission may require certificates of good moral character for directors/trustees and officers of corporations.

Sec. 27


285

disqualification resulting from a non-residence or not being a stockholder; or failure to take an oath of office or file a written acceptance of the trust when required by statute or charter (19 C.J.S. 78.) or corporate by-laws. (1) Where, for example, the directors are elected before the amendment increasing the number of directors had become effective upon its approval by the Securities and Exchange Commission (see Sec. 16.) and they act as such without objection, they are de facto directors, (see SEC Opinion, Oct. 21,1974.) (2) Directors elected through voting by the government of shares sequestered by it and who in good faith assumed their duties as such are de facto officers. Only the owners of the shares or their duly authorized representatives or proxies may vote the sequestered shares. Sequestration does not divest the owners of their ownership of said shares, and the election of the board of directors is distinctly and unqualifiedly an act of ownership. (Cojuangco, Jr. vs. Roxas, 195 SCRA 797 [1991].) (3) Conversely, a person is not a de facto officer or director where he is not holding office under some appearance or color of right, or where he is not in actual possession of the office, or where he is not exercising the functions and performing the duties thereof generally as distinguished from the single instance in which his authority is questioned. While the term "de facto officer" is commonly applied to directors and officers of a private corporation, yet, technically speaking, it applies to a public officer only. Generally, there cannot be a de facto office, nor can there be a de facto officer, where there is no corresponding legally constituted office. (19 C.J.S. 78.) Powers an d rights of de facto officers, in general. (1) All powers of dejure official. — De facto directors and officers

may exercise all powers of dejure officials so as to bind all persons who acquiesce in their management and direction, and they may continue to exercise these powers in such binding manner until they are, through proper legal steps, removed from office and replaced by other legally constituted directors and officers. (In re

286


Sec. 27

Pearl Coal Co., 30 F. Supp. 964 aff'd. 115 F [2d] 158; 2 Fletcher, p. 214, cited in SEC Opinions, Oct. 21,1974 and July 4,1975.) (2) Powers or acts within the scope of corporate business. — A de facto board of directors may legally perform such acts as are within the scope of the business of the corporation; and a de facto president

may do such acts pending a determination of who are the lawful officers of the company, as are necessary to keep its machinery in motion. Thus, a de facto board of directors may call a special meeting of the stockholders to consider and act upon any matter pertaining to the corporation, as to which, under the law, the stockholders may act at a special meeting. If stock is registered in one's name on the books of the corporation, de facto directors have power to issue a certificate of such stock to the owner. A de facto board of directors may, by the weight of authority, make a call on unpaid subscriptions on capital stock. (3) Right to possess office and to salary. — While de facto officers

have the same powers as de jure officers, they do not have the same rights since they may be ousted from office in a proper proceeding and they cannot recover the salary of the office. In the Cojuangco case (supra.), however, the Supreme Court held that the private respondents who were declared de facto officers in good faith "are thereby legally entitled to the emoluments of the office including salary, fees and other compensation attached to the office until they vacate the same" (2 Fletcher, pp. 213-214.) or are removed in an action for quo warranto or replaced by the election of other persons. Validity of contracts a n d acts of de facto officers.

(1) As to third persons. — In general, the contracts and acts of de facto officers, when acting within the scope of their authority, are just as binding as the acts of the officers de jure, at least so far as third persons are concerned. (Consumers Alt. Co. vs. Riggings, 208 Cal. 537, 282 Pac. 954; 2 Fletcher, p. 214.) (a) Inasmuch as de facto officers are held out to the world by the corporation as its representatives and the corporation has it within its power to oust a de facto officer and prevents

Sec. 28


287

him from acting as its officer, it is unquestionably the rule that a corporation is bound by the acts of its de facto officers. (b) Furthermore, so far as third persons are concerned, the rule that the acts of de facto officers are binding in their favor is ordinarily merely another way of stating that the corporation is bound; and if a contract between de facto officers and third persons is binding on the latter, then, of course, it cannot be attacked by the corporation as the act of de facto officers. This rule seems to be based on the principle of estoppel. Thus, it is no defense to the foreclosure of a corporate mortgage that the directors authorizing the mortgage were not legally elected as such, (see 2 Fletcher, pp. 217-220; 19 C.J.S. 76-78.) (2) Where de facto officers ousted from office. — Acts of de facto

officers cannot be collaterally attacked for it is only through direct attack (quo warranto proceedings) can the election or appointment of a de facto officer be questioned, (see Board of Directors of the PCSO vs. Alandy, 109 Phil. 1058 [I960]; Silen vs. Vera, 64 Phil. 868 [1937]; see also Sec. 20.) And the fact that a de facto officer is subsequently, in a direct attack, ousted from office, cannot be set up as a defense by a corporation to escape liability for the acts of its ostensible officer. Sec. 28. Removal of directors or trustees. — Any director or trustee of a corporation may be removed from office by a vote of the stockholders holding or representing two-thirds (2/3) of the outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of two-thirds (2/3) of the members entitled to vote: Provided, That such removal shall take place either at a regular meeting of the corporation or at a special meeting called for the purpose, and in either case, after previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting. A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or, if it be a non-stock corporation, on the written demand

288


Sec. 28

of a majority of the members entitled to vote. Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to the stockholders or members by any stockholder or member of the corporation signing the demand. Notice of the time and place of such meeting, as well as of the intention to propose such removal, must be given by publication or by written notice as prescribed in this Code. The vacancy resulting from removal pursuant to this section may be filed by election at the same meeting without further notice, or at any regular or at any special meeting called for the purpose, after giving notice as prescribed in this Code. Removal may be with or without cause: Provided, That removal without cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled under Section 24 of this Code. (34a) Power of stockholders or m e m b e r s to remove directors or trustees .

(1) Generally. — The law does not specify cases for removal of a director or trustee nor even require that removal should be for sufficient cause or reason. The legislative policy is that the stockholders shall be the ultimate masters, not the directors, "to make the corporate government responsible to the owners." If the directors have a right to continue in office to the completion of their term, in spite of a change in controlling stockholders, those who acquire control will have to wait or else make some bargain with the existing directors to resign in order that they may put in office a new board of directors representing their views or policy. (Ballantine, pp. 434-435.) The non-election of a director or trustee after serving for one (1) year is not a case of dismissal or removal but expiration of his term. (2) Where director or trustee elected by cumulative voting. — A

director or trustee may be removed by the prescribed vote without cause subject to the limitation that a director or trustee cannot be removed without cause if the effect of such removal is to deprive

Sec. 28

TITLE m. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

289

minority stockholders or members who united in cumulative voting to elect such director, of right of representation to which they may be entitled under Section 24. This proviso is necessary to protect the minority against any abuse by the majority since there is no cumulative voting in the removal of directors. The rule does not apply where the removal is initiated by the minority stockholders or members themselves. (3) Where removal done by electing replacement. — The incum-

bent directors or trustees cannot be removed merely by electing a new set of directors or trustees. The reason is that the directors or trustees can only be removed by at least 2 / 3 of the outstanding capital stock or of the members entitled to vote (Sec. 28.), while vacancies in the board, when they exist, can be filled by mere majority (or plurality) vote. (Sec. 24.) Furthermore, the Code requires that the removal "shall take place either at a regular or special meeting called for the purpose," and "after previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting." (Sec. 28; Roxas vs. De la Rosa, 49 Phil. 609 [1926].) (4) Where removal done for disqualification. — A director or

trustee can be removed by following the procedure set forth in Section 28. In case of disqualification by operation of law, there is no need to follow the said procedure. A mere declaration of such disqualification is sufficient to remove him from office. (SEC Opinion, Oct. 6,1994.) (5) Where replacement elected not qualified. — It has been held

that a director who has been removed by the stockholders who elected another person in his place cannot be compelled to vacate his office, where it is shown that the successor is not qualified not being the owner of any share in the corporation and because under the by-laws of said corporation, "directors shall serve until the election and qualification of their duly qualified successors." (Detective and Protective Bureau, Inc. vs. Cloribel, 26 SCRA 255 [1968]; see Sec. 23.) Under the clear provisions of Section 28, however, the removal of a director does not depend upon the qualification of his successors as long as the removal has been duly made.

290


Sec. 28

Power of the board to remove a member.

The board of directors (or trustees) has no power to remove one of its members as director (or trustee). (Bruch vs. National Guarantee Credit Corp., 116 A. 738.) Neither can it replace the vacancy caused by removal effected by the stockholders or members of the corporation. The reason is that as officers deriving their title from the stockholders (or members), they can be removed only by the power that appointed them. (Ibid.) Since the law expressly confers the authority to stockholders or members, the board cannot indirectly usurp or disregard the same. (SEC Opinion, May 23, 1985.) Power of court to r e m o v e directors or trustees.

(1) General rule. — The Corporation Code does not confer expressly upon the courts the power to remove a director or trustee or any appointed officer of a corporation on the ground of mismanagement of its affairs, neglect, or other cause. The power of removal is in the corporation itself. (2 Fletcher, p. 166.) "The reason for this rule is that if the courts were given such power then there should be no reason why the courts should not also be given the power to designate the one to fill the office, which should be substituting the judgment of the court for that of the stockholders" or members. (C.G. Alvendia, op. cit, p. 307.) (2) Appointment of receiver. — There are abundant authorities, however, which hold that if the court has acquired jurisdiction to appoint a receiver (see Sec. 122.) because of the mismanagement of the directors (or trustees), these may thereafter be removed and others appointed in their place by the court in the exercise of its equity jurisdiction. (2 Fletcher, pp. 189-190.) But where the properties and assets of the corporation are amply protected by the appointment of a receiver, such removal is unnecessary and unwarranted in view of the provisions of Section 28 prescribing the manner of removal of directors or trustees, (see Angeles vs. Santos, 64 Phil. 697 [1937].)

Sec. 28


291

(3) Institution of quo warranto proceedings. — Under the Rules

of Court, a quo warranto proceeding may be brought against "a person who usurps, intrudes into, or unlawfully holds or exercises x x x an office in a corporation created by authority of law." (Rule 66, Sec. 1 thereof; see also Rule 66, Sec. 11.) Requisites for r e m o v a l of directors or trustees.

Section 28 specifies the following requisites for the removal of directors or trustees: (1) The removal must "take place either at a regular meeting of the corporation or at a special meeting called for the purpose"; (2) There must be "previous notice to the stockholders or members of the corporation of the intention to propose such removal at the meeting"; and (3) The removal must be "by a vote of the stockholders holding or representing two-thirds (2/3) of the outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of two-thirds ( 2 / 3) of the members entitled to vote." While a director or trustee can be removed from office as provided in Section 28, he cannot be removed as stockholder of the corporation, depriving him of his ownership of shares of stock therein, without due process of law. Requirement of notice of m e e t i n g .

(1) For removal. — Section 28 requires that the notice of the meeting called for the removal of any director or trustee must expressly state "the intention to propose such removal." A notice of a special meeting to consider amendments of the by-laws and "reorganization of the board of directors" cannot be considered as a notice contemplated under Section 28 as it is couched in general terms and, therefore, the action of the members which passed a resolution declaring vacant all the seats in the board and thereupon nominated and elected a new set of directors, is not proper and may be questioned by the directors who did not attend the meeting as this is tantamount to their unjust removal from office. (SEC Opinion, Dec. 3,1971.)

292


Sec. 28

"Previous notice x x x of the intention to propose such removal" is not required where the meeting is a regular annual meeting. There is no removal involved when a director or trustee is re-elected, (supra.)

(2) For choosing replacements. — In case of removal on the vote of stockholders or members, as the case may be, the vacancy so created may be filled by election at the same meeting without further notice, or at any regular or at any special meeting called for the purpose after giving the prescribed notice. (Sec. 28.) Thus, the stockholders or members who have removed a director or trustee are also given the power to choose his replacement at the same meeting. Resignation of directors or trustees. (1) Right to resign at any time. — The fact that the law requires

directors or trustees unless removed to continue in office until their successors are elected and qualified (Sec. 23.) does not prevent a director or trustee from resigning at any time. A corporation, however, continues to exist despite the resignation of the directors or trustees. It can be dissolved only in the manner provided for by the Corporation Code, particularly under Title XIV thereof. (2) Liability for wrongful resignation. — By reason, however, of

the fiduciary nature of the position they occupy, a director cannot resign, as part of fraudulent scheme to prejudice the corporation or its stockholders and make profit to his own advantage or at an unreasonable time if the immediate consequence would be to leave the interest of the corporation without proper care and protection. (Ballantine, p. 217.) If a director quits under circumstances which occasioned a deprivation of profits to the corporation, it is but right that he should repair and make good such loss. (3) Form and report of resignation. — In the absence of express

provision, a resignation need not be in any particular form. It may be either oral or in writing, but it must clearly show an intent to resign. (2 Fletcher, p. 140.) The Code requires the resignation of a director or trustee to

Sec. 28

TITLE ID. BOARD OF DIRECTORS/TRUSTEES/OFFICERS

293

be immediately reported to the Securities and Exchange Commission. (Sec. 26.) (4) Effectivity of resignation. — As a general rule, unless a future date of acceptance by the corporation is required by the by-laws, the resignation of a corporate official becomes complete and his office becomes vacant the moment the resignation is made to the proper officer or body, and it is not necessary that the resignation be accepted, or that someone be elected to take his place, in order to make the resignation effective. This is the rule, notwithstanding a provision in the statute, charter, or bylaws that the officers shall hold office until their successors are duly elected. The basis of the rule is that where a director (or trustee) thus resigns, the inaction or refusal of the board of directors should not impose upon him a future liability or responsibility which he does not undertake. (SEC Opinion, Jan. 23,1963, citing 2 Fletcher, pp. 105-106.) Abandonment of office and failure to attend meetings. (1) Acceptance of incompatible office. — Where a director (or trustee) in a corporation accepts a position in which his duties are incompatible with those as such director (or trustee), it is presumed that he has abandoned his office as director (or trustee) of the corporation. (Mead vs. McCullough, 21 Phil. 95 [1991].) (2) Absence for an unreasonable length of time. — Similarly,

where a director absented himself from all meetings for nearly a year and announced his refusal to act as an officer and stockholder, there is an abandonment of his position as director. (Dodge vs. Kenwood Ice Co., 204 Fed. 577.) Abandonment by a director of all his duties for a number of years must be regarded as an implied resignation of his office as director. (Bartholomew vs. Bentley, 1 Ohio St. 37.) (3) Mere absence or continued failure to attend meetings. —

However, mere absence of a director from the country, or continued failure to attend meetings, etc. where there has been no resignation, does not have the effect of vacating his seat or


294

Sec. 29

terminating his term of office unless there is some express provision to such effect. (2 Fletcher, p. 132.) (4) Specified number of unjustified absences as ground for automatic disqualification. — Where the general authority to remove

directors or trustees rests with the stockholders or members, a corporation, to protect its interests, is empowered to prescribe in the by-laws (see Sec. 47[5].) attendance in board meetings as a qualification device, such that a specified number of unjustified absences may be a ground for automatic disqualification which need not be approved again by the stockholders or members as required under Section 28. The by-laws are, in effect, written into the charter of the corporation and the corporation, directors/ trustees, officers, and stockholders/members are bound by and must comply with them. (SEC Opinion, May 19,1992.) Sec. 29. Vacancies in the office of director or trustee. — Any vacancy occurring in the board of directors or trustees other than by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in office. 27

Any directorship or trusteeship to be filled by reason of an increase in the number of directors or trustees shall be filled only by an election at a regular or at a special meeting of stockholders or members duly called for the purpose, or in the same meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting, (n) Vacancies in the office of director or trustee. (1) Grounds for replacement during term. — A director or

trustee can only be replaced during his term upon his resignation or removal (see Sec. 28.) or when his position is otherwise law27

or members.

Sec. 29


295

fully vacated. Temporary absence does not result in vacancy as contemplated in Section 29. (SEC Opinion, April 25,1985.) (2) Tenure of successor. — The person elected to fill a vacancy holds office only for the unexpired term of his predecessor. (SEC Opinion, Oct. 5,1960.) (3) Prohibition against election of alternate in case of temporary

vacancy. — In the absence of a vacancy, no one can be elected, even as an alternate, to take the place of an incumbent director who is temporarily absent only. To allow such an alternate would be to have two directors for the same position, one permanent and the other temporary, a situation that finds no sanction in the law and is irregular. (Ibid.) Filling of v a c a n c i e s . (1) By the stockholders or members. — In a vacancy in the office

of director or trustee may be filled by the stockholders or members in any of the following cases: (a) If the vacancy results from the removal by the stockholders or members or the expiration of term; (b) If the vacancy occurs other than by removal or by expiration of term (see Sec. 23, par. 1.), such as death, resignation, abandonment, or disqualification, if the remaining directors or trustees do not constitute a quorum for the purpose of filling the vacancy; (c) If the vacancy may be filled by the remaining directors or trustees (infra.) but the board refers the matter to the stockholders or members; or (d) If the vacancy is created by reason of an increase in the number of directors or trustees. (2) By the members of the board. — If still constituting a

quorum, at least a majority of the members are empowered to fill any vacancy occurring in the board other than by removal by the stockholders or members or by expiration of term. (a) Allowing the remaining directors or trustees to fill up vacancies avoid the expenses and inconveniences attending the calling of stockholders' or members' meeting, especially where there are many of them. (SEC Opinion Jan. 3,1986.)


Sec. 29

(b) The power of the board of directors or trustees is not suspended by vacancies in the board unless the number is reduced below a quorum. (c) The board has no power to fill any directorship or trusteeship by reason of an increase in the number of directors or trustees. The amendment increasing the number of directors or trustees which results in a vacancy becomes effective upon its approval. This is deducible from the last clause of Section 29 which authorizes the filling of the vacancy "in the same meeting authorizing the increase of directors or trustees in the notice of meeting." ILLUSTRATION: If four (4) of nine (9) directors died, the remaining five (5) directors still constitute a quorum, and a majority of the five (5) or three (3) may fill the four (4) vacancies. But if five (5) of the directors died, the vacancies will have to be filled by the stockholders in a regular or special meeting duly called for the purpose. 28

(d) The phrase "may be filled" in Section 29 indicates that the filling of vacancies in the board by the remaining directors constituting a quorum is merely permissive. Corporations may choose how vacancies in their boards may be filled up, either by the remaining directors or trustees constituting a quorum or by all stockholderes or members in a meeting called for the purpose. However, if the by-laws prescribe the specific mode of filling up existing vacancies, the provisions of the by-laws should be followed. It is well-settled that the by-laws are part of the fundamental law of the corporation and its directors, officers, and members are bound to comply with them, (see Sec. 46.) (3) Where vacancy caused by resignation of a holdover director. —

The stockholders, and not the remaining members of the board, have the power to elect a director to fill the vacancy. The hold-

Note that the election of corporate officers other than directors or trustees requires the vote of majority of all the members of the board. (Sec. 25, par. 2.) Such election may be made after the vacancies in the board have been filled.

Sec. 30


297

over period — that time from the lapse of one year after a member's election to the board and until his successor's election and qualification — is not a part of the director's original term of office, nor is it a new term. The theory of delegated power of the board of directors explains why, under Section 29, in cases where the vacancy in the corporation's board of directors is caused not by the expiration of a member's term, the successor so elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in office. The law has authorized the remaining members of the board to fill a vacancy only in specified instances, so as not to retard or impair the corporation's operations; yet, in recognition of the stockholders' right to elect the members of the board, it limited the period during which the successor shall serve only to the unexpired term of his predecessor in office. The vacancy referred to in Section 29 contemplates a vacancy occurring within the director's term of office. When a vacancy is created by the expiration of a term, there is no more unexpired term to speak of. Hence, Section 29 declares that it shall be the corporation's stockholders who shall possess the authority to fill a vacancy caused by the expiration of a member's term. (Valle Verde Country Club, Inc. vs. Africa, 598 SCRA 202 [2009].) Sec. 30. Compensation of directors. — In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors, except for reasonable per diems: Provided, however, That any such compensation (otherthan perdiems) may be granted to directors by the vote of the stockholder representing at least a majority of the outstanding capital stock at a regular or special stockholders' meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten percent (10%) of the net income before income tax of the corporation during the preceding year, (n) Compensation of directors or trustees.

Under the law, a private corporation is authorized to provide in its by-laws for the compensation of directors or trustees. (Sec.


298

Sec. 30

47[5].) In the absence of any provision in the by-laws fixing their compensation, the directors or trustees, as such, shall not receive any compensation, unless authorized by a vote of the stockholders representing at least a majority of the outstanding capital stock or a majority of the members entitled to vote. Any compensation to the officers of a corporation without proper authorization in the by-laws or by the vote of the stockholders may be recovered in a stockholders' suit. The amount of compensation of directors must be fixed either in the by-laws or in the resolution of the stockholders; hence, the stockholders cannot delegate to the board of directors the authority to fix the amount of their own compensation. Section 30 also applies to non-stock corporations, (see Sec. 87, par. 2.) Directors without authority to grant themselves c o m p e n s a t i o n .

(1) The directors have no authority to grant compensation to themselves. 29

(a) For usual and ordinary services as such. — As a general

rule, when directors perform nothing more than the usual and ordinary duties of their office, they are not entitled to salary or other compensation. The reason is that directors render services gratuitously and that the return upon their shares adequately furnishes the motives for services without compensation. (SEC Opinion, Sept. 8,1975.) (b) For services outside their regular duties. — In view of the

clear wording of Section 30, it is doubtful whether a direc-

"There is a radical difference when a stockholder is voting strictly as a stockholder and when voting as a director. When voting as a stockholder he has the legal right to vote with a view of his own benefits and is representing himself only; but a director represents all the stockholders in the capacity of trustee for them and he cannot use his office as a director for his personal benefit at the expense of the stockholders. (Haldeman vs. Haldeman, 176 Ky. 635,197 S.W. 376 [1917], cited in Sulpicio Guevara, The Phil. Corp. Law, 1967 ed., p. 145.) A stockholder attending a corporate meeting as such is not entitled to per diems for such attendance; he is acting for himself as an owner of stocks of the corporation. (SEC Opinion, September 1971.)

Sec. 30


299

tor may be entitled to compensation even when they render extraordinary or unusual services, i.e., services which are not properly incidental to their office and are rendered outside of their regular duties, (see SEC Opinion, June 10, 1974.) Corporate directors presumptively serve without compensation. While they may assign themselves additional duties, they are without power to vote for themselves compensation for such additional duties. (Central Cooperative Exchange, Inc. vs. Enciso, 162 SCRA 706 [1978].) (2) A stockholders' resolution or agreement for the payment of compensation for such services would be valid. (SEC Opinion, Dec. 29, 1975.) But the stockholders cannot ratify a board of directors' action fixing their own salaries. Such action being contrary to law, cannot be ratified. The stockholders themselves, by the requisite vote, must fix the compensation, (supra.) Limit to c o m p e n s a t i o n .

Where compensation is granted either in the by-laws or by the vote of stockholders, the total yearly compensation of directors, as such, shall in no case exceed 10% of the net income before income tax of the corporation during the preceding year. This limitation seeks to curb the practice particularly of close corporations to grant excessive bonuses to their directors to reduce the taxable income of such corporations. It is also intended for the protection of the stockholders as well as the corporate creditors and prospective investors. The Insurance Code (Pres. Decree No. 1460.) does not contain any prohibition as against the board of directors of a corporation securing insurance policy on the life of its members and making the directors the beneficiaries instead of the corporation. However, the premium paid thereon is analogous to a continuing bonus and gift and thus falls within the context of additional compensation. A corporation may not be used by its officers or stockholders as a means of diverting profits or proceeds to the payment of premium on insurance policies to the enrichment of its beneficiaries at the expense of, or to the detriment of, its creditors. (SEC Opinion, Dec. 8,1987.)


300

Sec. 30

Per diems of directors.

The power of the board of directors to fix per diems*> for themselves is conferred by the law itself. (1) Whether or not authorized by the by-laws or by the stockholders, directors are entitled to receive reasonable per diems. In view of the real distinction between per diems and compensation, the per diems granted to directors should not be included in their total yearly compensation for purposes of the 10% limitation. 31

(2) The phrase "as such directors" in Section 30 is not without significance for it delimits the scope of the prohibition to compensation given to them for services performed purely in their capacity as directors or trustees. The implication is that members of the board may receive compensation in addition to reasonable per diems, when they render services to the corporation in a capacity other than as directors or trustees. (Western Institute of Technology vs. Salas, 278 SCRA 216 [1997].) (3) Section 30 does not specify, however, who is to set the amount of the per diems and what amounts shall be considered "reasonable" under the circumstances. If normal corporate practice were to be followed, the matter shall be decided by the directors themselves. Thus, they may easily circumvent the 10% limitation. The stockholders, however, may review a board resolution fixing or increasing the per diems of its members to inquire into its reasonableness. (4) Per diems received without proper authorization or found to be unreasonably excessive may ordinarily be recoverable in a stockholders' or members' suit.

I t is a daily allowance "given for each day an officer or employee was away from his home base or permanent station." (Lexal Laboratories vs. National Industries Workers' Union-PAFLU, 25 SCRA 668 [1968].) It is limited to pay for a day's service. (32 Words and Phrases 17.) Per diems are paid per attendance in board meetings. Other benefits and emoluments of directors fall within the term "compensation." It is any remuneration given for services rendered, like salary which is a compensation paid regularly, as by the month. It does not imply an immediate payment, or direct return, nor the payment of cash fare or its equivalent. (15 C.J.S. 652.) Compensation and salary are used interchangeably. While salary connotes a fixed compensation, per diem relates to expense reimbursement. (SEC Opinion, June 13,1991.) Fare refers to money paid for transportation of persons or goods. w

Sec. 30


301

C o m p e n s a t i o n of corporate officers. (1) Corporate officers who are not directors. — The reason for

the general rule that directors of a corporation are not entitled to compensation does not apply to corporate officers who are not directors. Such officers, not being directors and having no control over the funds and property of the corporation, even though they may be stockholders, do not occupy the relation of trustees to the corporation. (Cheeney vs. Lafayette, B.O.R. Co., 61 111. 570.) Accordingly, if they are elected or appointed to perform valuable services for the corporation under circumstances indicating an intention and expectation of payment, there arises an implied promise on the part of the corporation to pay a reasonable compensation for services rendered, even in the absence of an express contract. (5 Fletcher, p. 378.) This principle applies as well to employees hired by the corporation. (2) Corporate officers who are directors. — Directors who are

also corporate officers are entitled, in addition to reasonable per diems as directors, to compensation as such corporate officers, and the amount thereof may be fixed by mere board resolution in the absence of provision to the contrary in the by-laws and subject to the provision of Section 32. (infra.) It must appear that the intention is to give them salaries as such officers. Considering that the board of directors and officers have different functions, the 10% limitation excludes salaries for services rendered by officers. (SEC Opinion, Aug. 19,1992.) Compensation may take the form of salary and fringe benefits, such as housing, membership in clubs, company cars, stock options, etc. Needless to say, the compensation must not be excessive. ILLUSTRATION: The by-laws of the corporation are silent as to the salary of the president. While resolutions of the incorporators and stockholders provide salaries for the general manager, secretary, treasurer, and other employees, there was no provision for the President's salary. On the other hand, other resolutions provide for per diems to be paid to the President and the directors for each meeting attended. This leads to the conclusion that the president and the


302

Sec. 31

board of directors were expected to serve without salary, and that the per diems paid to them were sufficient compensation for their services. (Lingayen Gulf Electric Power Co., Inc. vs. Baltazar, 93 Phil. 404 [1953].) Sec. 31. Liability of directors, trustees, or officers. — Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. When a director, trustee, or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation, (n) Nature of directors'/trustees' position. (1) Agents or trustees for the corporation. — The directors of

a corporation are its agents. They also occupy a fiduciary relation to the corporation. By numerous authorities they have been called "trustees" (McEwen vs. Kelly, 79 S.E. 777.), with certain powers and subject to certain duties in the management of its property, and each stockholder a cestui que trust according to his

interest and shares. In the performance of their official duties, they are under obligations of trust and confidence to the corporation

and its stockholders and must act in good faith and for the interest of the corporation or its stockholders with due care and diligence and within the scope of their authority. (Jackson vs. Ludeling, 21 Wall. [U.S.] 616.) It is settled that in the absence of malice, bad 32

Art. 1173. x x x If the law or contract does not state the diligence which is to be observed in the performance, that which is expected of a good father of a family shall be required. 32

Art. 1887. In the execution of the agency, the agent shall act in accordance with the instructions of the principal. In default thereof, he shall do all that a good father of a family would do, as required by the nature of the business. (Civil Code)

Sec. 31


303

faith, or specific provision of law, a director or officer of a corporation cannot be made personally liable for corporate liabilities. (Lowe, Inc. vs. Court of Appeals, 596 SCRA 140 [2009].) The ordinary trust relationship of directors of a corporation and stockholders is not a matter of statutory or technical law. It springs from the fact that directors have the control and guidance of corporate affairs and property and, hence, of the property interest of the stockholders. Equity recognizes that stockholders are the proprietors of the corporate interest and are ultimately the only beneficiaries thereof. (Gokongwei, Jr. vs. Securities and Exchange Commission, 89 SCRA 336 [1979], citing Ashaman vs. Miller, 101 Fed. 2d 85.) The standard of fiduciary obligation of the directors of corporations has been emphatically restated, thus: "A director is a fiduciary, x x x Their powers are powers in trust. He who is in such fiduciary position cannot serve himself first and his cestuis second, x x x He cannot manipulate the affairs of his corporation to their detriment and in disregard of the standards of common decency. He cannot by the intervention of a corporate entity violate the ancient precept against serving two masters, x x x He cannot utilize his inside information and strategic position for his own preferment. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do so directly. He cannot use his power for his personal advantage and to the detriment of the stockholders and creditors no matter how absolute in terms that power may be and no matter how meticulous he is to satisfy technical requirements. For that power is at all times subject to the equitable limitation that it may not be exercised for the aggrandizement, preference, or advantage of the fiduciary to the exclusion or detriment of the cestuis." (Ibid., citing Pepper vs. Litton, 308 U.S. 309, 84 L. ed. 281, 289-291.) "The law will not tolerate the passive attitude . . . without active and conscientious participation in the managerial functions

of the company. As directors, it is their duty to control and supervise the day-to-day business activities of the company or to promulgate definite policies and rules of guidance with

304


Sec. 31

vigilant eye toward seeing to it that these policies are carried out. It is only then that directors may be said to have fulfilled their duty of fealty to the corporation." (Gokongwei, Jr. vs. Securities and Exchange Commission, supra, citing Olek, Modern Corp. Law, Vol. 2, Sec. 960.) Thus, in the cited case, the Supreme Court held that "the offer and assurance of petitioner," a candidate for board membership in San Miguel Corporation, under whose by-laws he was disqualified for being engaged in any business which competes with or is antagonistic to that of the corporation, "that to avoid any possibility of his taking unfair advantage of his position as director of San Miguel Corporation, he would absent himself from meetings at which confidential matters would be discussed, would not detract from the validity and reasonableness of the by-laws here involved. Apart from the impractical results that would ensue from such arrangement, it would be inconsistent with petitioner's primary motive in running for board membership — which is to protect his investments in San Miguel Corporation. More important, such a proposed norm of conduct would be against all accepted principles underlying a director's duty of fidelity to the corporation, for the policy of the law is to encourage and enforce responsible corporate management." (2) Agents or trustees for the stockholders or members/creditors.

— So long as a purely private corporation remain solvent, its directors are agents or trustees for the stockholders or members. They owe no duties to others. But the moment such a corporation becomes insolvent, its directors are trustees of all the creditors, whether they are members of the corporation or not, and must manage its property and assets with strict regard to their interest and if they are themselves creditors while the insolvent corporation is under their management, they will not be permitted to secure to themselves by purchasing the corporate property or otherwise acquiring any personal advantage over other creditors. (Mead vs. McCullough, 21 Phil. 952 [1911].) Cases w h e n directors/trustees or officers liable for d a m a g e s .

The general rule is that officers of a corporation are not personally liable for their official acts unless it is shown that they

Sec. 31

TITLE m. BOARD OF DIRECTORS /TRUSTEES / OFFICERS

305

exceeded their authority. Section 31 enumerates the occasions when a director or trustee may be held liable for damages and thus, the veil of corporate fiction may be pierced, as follows: (1) He willfully and knowingly votes or assents to patently unlawful acts of the corporation; (2) He is guilty of gross negligence (not mere "want of ordinary prudence" as held in Steinberg vs. Veloso, supra.) or bad faith in directing the affairs of the corporation; and (3) He acquires any personal or pecuniary interest in conflict with his duty as such director or trustee. In the above instances, the erring board members or officers shall be held jointly and severally (or solidarily) liable for all damages resulting therefrom suffered by the corporation, its stockholders or members, or other persons, (see Sec. 65.) 33

Personal liability of a corporate director/trustee or officer along (although not necessarily) with the corporation may also validly attach, as a rule, when he consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto (see Sec. 65.); when he is made, by a specific provision of law, to personally answer for his corporate action (see Sec. 144; Pres. Decree No. 115 [Trust Receipts Law], Sec. 13.); and when he agrees to hold himself personally and solidarily liable with the corporation. (Tramat Mercantile, Inc. vs. Court of Appeals, 238 SCRA 14 [1994]; Santos vs. National Labor Relations Commission, 20 SCRA 987 [1967]; National Food Authority vs. Court of Appeals, 311 SCRA 700 [1999]; FCY Corporation Group, Inc. vs. Court of Appeals, 323 SCRA 270 [2000]; Malayang Samahan vs. Ramos, 357 SCRA 77 [2001]; Doroton Conglomerate, Inc. vs. Agcolicol, 400 SCRA 523 [2003].) In a case, the treasurer of a corporation who was authorized to issue checks for the corporation was held negligent for signing

"Art. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected. (Civil Code)

306


Sec. 31

the confirmations letter requested by the indorsee and the payee (indorser) of four (4) crossed checks issued by said treasurer in favor of the payee for the rediscounting of the crossed checks when the treasurer was aware that the checks were strictly endorsed for deposit only to the payee's account and not to be further negotiated, and made personally liable to the resulting damage to the corporation. (Atrium Management Corporation vs. Court of Appeals, 353 SCRA 23 [2001].) Liability of directors/trustees or officers for bad faith or gross negligence.

(1) Directors or trustees are personally liable for any wrongful disposition of corporate assets and for any loss or injury to the corporation arising from their gross negligence or unauthorized acts or violation of their duties, (see Steinberg vs. Velasco, 52 Phil. 953 [1929].) But they are not liable for business losses incurred because of honest bad judgment not amounting to bad faith or gross negligence, (see Ballantine, p. 160; see also Board of Liquidators vs. Heirs of Maximo Kalaw, 20 SCRA 987 [1967].) No one can guarantee the success of a business because there is always that element of risk. The officers of a corporation are not insurers of its success. (2) Neither can a corporate officer be made personally liable for the money claims of discharged corporate employees where no malice or bad faith can be attributed to him in terminating their employment. (Midas Touch Food Corp. vs. National Labor Relations Commission, 259 SCRA 652 [1996].) Corporate directors and officers are solidarily liable with the corporation for the termination of employment of employees if the termination is done with malice or in bad faith. (Progress Homes vs. National Labor Relations Commission, 269 SCRA 274 [1997]; Mandaue Dinghow Dimsum House Co., Inc. vs. National Labor Relations Commission, 547 SCRA 402 [2008].) Bad faith or negligence is, of course, a question of fact. It has been said that "bad faith does not simply mean bad judgment or negligence; it imparts a dishonest purpose or some moral obliquity and conscious doing of wrong. It means breach of a known

Sec. 32


307

duty through some motive or interest or ill-will; it partakes of the nature of fraud." (Ibid.) It is never presumed. In order to pierce the veil of corporate fiction, for reasons of negligence by the director, trustee or officer in the conduct of the transactions of the corporation, such negligence must be gross. (Magalang vs. Ong, 562 SCRA 152 [2008].) Liability of directors/trustees or officers for secret profits.

Furthermore, in the case mentioned in the second paragraph, the director /trustee or officer guilty of violation of duty shall be held accountable for the profits which otherwise would have accrued to the corporation. Private or secret profits obtained must be accounted for, even though the transaction on which they are made is advantageous or is not harmful to the corporation, or even though the director/trustee or officer acted without intent to injure the corporation. The fact that the agreement whereby a person is to receive a secret profit is made prior to the time he becomes an officer does not change the rule. And the fact that the profits were derived from transactions ultra vires (see Sec. 45.) does not relieve the director/trustee or officer from liability. (19 Am. Jur. 2d 688-689.) Similarly, a director guilty of disloyal act against the corporation is required by Section 34 to account to the corporation for the profits obtained by him from a business opportunity which should belong to the corporation. Sec. 32. Dealings of directors, trustees or officers with the corporation. — A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all the following conditions are present: 1. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; 2. That the vote of such director or trustee was not necessary for the approval of the contract;


308

Sec. 32

3. That the contract is fair and reasonable under the circumstances; and 4. That in the case of an officer, the contract with the officer has been previously authorized by the board of directors. 34

Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least twothirds (273) of the outstanding capital stock or of two-thirds (2/3) of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, That the contract is fair and reasonable under the circumstances, (n) Self-dealing directors/trustees or officers. (1) Generally, contract void. — Section 32 renders voidable

at the option of the corporation a contract of such corporation with one or more of its directors/trustees or officers. Being its agents and entrusted with the management of its affairs, the directors or trustees and other officers of a corporation occupy a fiduciary relation towards it, and cannot be allowed to contract with the corporation, directly or indirectly, or to sell property to it, or purchase property from it, where they act both for the corporation and for themselves. (3 Fletcher, p. 387.) Section 32 does not require that the corporation suffers injury or damage as a result of the contract. (2) Exceptions. — In any of the following cases, the contract

shall be valid and cannot be set aside merely because of the relationship of the parties: (a) All the conditions enumerated in Section 32 are present;

"or trustees.

Sec. 33


309

(b) Not all the conditions set forth are present but the corporation (through the board) elects not to question the validity of the contract without prejudice to the liability of the consenting directors or trustees for damages under Section 31. In such case, a dissenting stockholder or member may file a derivative suit in behalf of the corporation (see comments under Sec. 64.); or (c) In the case of a contract with a director or trustee, only the third condition is present, i.e., the contract is fair and reasonable under the circumstances, if the contract is ratified by the required vote of the stockholders or members in a meeting called for the purpose, provided that full disclosure of the adverse interest of the directors or trustees involved is made at such meeting. If the contract is with an officer of the corporation, it must have been previously authorized by the board, i.e., there is a prior board resolution authorizing the contract. Section 32 fails to specify whether the vote of the self-dealing director or trustee shall be counted in the meeting for the ratification of the contract. Sec. 33. Contracts between corporations with interlocking directors. — Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the interlocking director in one corporation or corporations is merely nominal, he shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned. Stockholdings exceeding twenty percent (20%) of the outstanding capital stock shall be considered substantial for purposes of interlocking directors, (n) Contracts between corporations with interlocking directors.

(1) Section 33 recognizes as valid a contract between two or more corporations which have interlocking directors (i.e., one,

310


Sec. 33

some, or all of the directors in one corporation is / are also director / directors in another corporation) as long as there is no fraud and the contract is fair and reasonable under the circumstances, (see Sec. 44.) However, if the interest of the interlocking director in one corporation is substantial, i.e., his stockholdings exceed 20% of the outstanding capital stock and in the other merely nominal, i.e., his stockholdings do not exceed 20%, the rules of Section 32 on self-dealing directors shall apply insofar as the latter corporation is concerned. (2) Section 32 pertains to transactions between corporations with interlocking directors resulting in the prejudice to one of the corporations. It does not apply where the corporation allegedly prejudiced is a third party, not one of the corporations with interlocking directors. (Development Bank of the Phils, vs. Court of Appeals, 363 SCRA 307 [2001].) ILLUSTRATION: X Corporation sold a parcel of land worth P500,000.00 to Y Corporation for only P300,000.00. Z is a board member of both corporations. Evidently, the contract is not fair and reasonable and is, therefore, voidable on that ground. But if the contract is fair and reasonable under the circumstances and Z's interest in X Corporation is merely nominal and in Y Corporation substantial, the conditions in Section 32 must be present insofar as X Corporation is concerned, on the theory that the contract of X Corporation is with Z. However, if Z's interest in both corporations is nominal or is substantial, the provisions of Section 32 do not apply but the contract shall be valid only if there is no fraud and the contract is fair and reasonable under the circumstances. The corporation which seeks to uphold the contract has the burden to show that it is fair and reasonable. Evils of interlocking directorates. (1) Validity of by-laws prohibiting interlocking directorates. —

By-laws which prohibit a director of a corporation from serving at the same time as a director of a competing corporation, have

Sec. 33


311

been upheld as valid and reasonable. (Gokongwei, Jr. vs. Securities and Exchange Commission, 89 SCRA 336 [1979].) The reason has been aptly explained, thus: "The argument for prohibiting competing corporations from sharing even one director is that the interlock permits the coordination of policies between nominally independent firms to an extent that competition between them may be completely eliminated. Indeed, if a director, for example, is to be faithful to both corporations, some accommodation may result. Suppose X is a director of both Corporation A and Corporation B. X could hardly vote for a policy by A that would injure B without violating his duty of loyalty to B; at the same time he could hardly abstain from voting without depriving A of his best judgment. If the firms really do compete — in the sense of vying for economic advantage at the expense of the other — there can hardly be any reason for an interlock between competitors other than the suppression of competition." (Ibid., citing Travers, Interlock in Corporate Management and the Anti-Trust Law, 46 L. Rev., 819, 840 [1968].) According to the Report of the House Judiciary Committee of the U.S. Congress on Section 9 of the Clayton Act, it was established that "By means of the interlocking directorates one man or group of men have been able to dominate and control a great number of corporations . . . to the detriment of the small ones dependent upon them and to the injury of the public." (Ibid., citing 51 Cong. Rec. 9091.) Where two competing firms control a substantial segment of the market, this could lead to collusion and combination in restraint of trade. Reason and experience show that the inherent tendency of interlocking directorates between companies that are related to each other as competitors is to blunt the edge of rivalry between the corporations, to seek out ways of compromising opposing interests, and thus, eliminate competition. (Ibid.) (2) No absolute prohibition of interlocking directorates. — Be it

noted that under Section 33, contracts between corporations having directors in common are not rendered void or voidable on


312

Sec. 34

that ground alone. The law recognizes that interlocking directorates are very common in today's business world and to absolutely prohibit such contracts would be impractical and unwise. But transactions between such corporations should be "subjected to close judicial scrutiny to determine the absence or presence of fraud or unfairness." For example, where the circumstances show that the transaction would be of great advantage to one corporation at the expense of the other, especially where, in addition to this, the personal interests of the directors or any of them would be enhanced at the expense of the stockholders, the transaction is voidable by the stockholders within a reasonable time after discovery of the fraud. (19 Am. Jur. 2d 714.) 35

An individual may be a stockholder in different corporations and it is not unusual to find a director or corporate officer occupying the same position in another corporation not only because he has investments therein but also because his services may have been proven to be valuable. However, while such situation is allowable, dealings of interlocking directors are subject to Sections 31, 33, and 34. (SEC Opinion, May 4,1994.) Sec. 34. Disloyalty of a director. — Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall be applicable, notwithstanding the fact that the director risked his own funds in the venture, (n) Doctrine of "corporate opportunity."

Under this doctrine, a director who, by virtue of his office, acquires for himself a business opportunity which should belong These transactions usually occur in a parent-subsidiary relationship between corporations. Hence, in some cases, the contract between two corporations may require representatives of one corporation to sit in the board of the other. To prohibit business transactions of one corporation with another corporation controlled by the former would discourage formation of business subsidiaries and investments and thus, hamper capital market formation in the country. (SEC Opinion, Dec. 21,1992.) 35

Sec. 34


313

to the corporation, thereby obtaining profits to the prejudice of such corporation, is guilty of disloyalty and should, therefore, account to the latter for all such profits by refunding the same, notwithstanding that he risked his funds in the venture. This doctrine rests fundamentally on the unfairness, in particular circumstances, of an officer or director taking advantage of an opportunity for his own personal profit when the interest of the corporation justly calls for protection. (Paulman vs. Kritzer, 291 N.E. 2d 541.) And, if, in such circumstances, the interests of the corporation are betrayed, the corporation may elect to claim all of the benefits of the transaction for itself and the law will impress a trust in favor of the corporation upon the property interest and profits acquired. (Guth vs. Loft, Inc., 23 Del. Ch. 255; Ontjes vs. MacNilan, 5 N.W. 2d 860.) (1) In a case where the directors of a corporation cancelled a contract of the corporation for exclusive sale of a foreign firm's products and after establishing a rival business the directors entered into a new contract themselves with the foreign firm for exclusive sale of its products, the court held that equity would regard the new contract as an offshoot of the old contract and, therefore, for the benefit of the corporation, as a "faultless fiduciary may not reap the fruits of his misconduct to the exclusion of his principal." (Gokongwei, Jr. vs. Securities and Exchange Commission, 89 SCRA 336 [1979], citing Silakot Importing Corp. vs. Berlin, 68 N.E. 2d 501, 503.) (2) An amendment to the by-laws of a corporation requiring that a director shall not be an officer, manager or controlling person of, or the owner (either of record or beneficially) of 10% or more of any outstanding class of shares, of any other corporation or entity engaged in any line of business competitive or antagonistic to that of the former, was sustained as valid and reasonable, as "it is obviously to prevent the creation of an opportunity for an officer or director of San Miguel Corporation, who is also the officer or owner of a competing corporation, from taking advantage of the information which he acquires as director to promote his individual or corporate interests to the prejudice of San Miguel Corporation and its stockholders. Certainly, where two corporations are competitive in a substantial sense, it would

314


Sec. 34

seem improbable, if not impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty to both corporations and place the performance of his corporation duties above his personal concerns." (Gokongwei, Jr. vs. Securities and Exchange Commission, supra.) Section 34 applies to directors. If the disloyalty is committed by an officer, he is liable under the second paragraph of Section 31. When doctrine not applicable. A "corporate opportunity" of which corporate directors cannot take advantage for their personal benefit is a business opportunity which has an inherent aptitude of being integrated into the existing business of the corporation. (1) The doctrine which is but one phase of the rule of undivided loyalty on the part of corporate fiduciaries does not preclude a director from engaging in a distinct enterprise of the same general class of business as that which his corporation is engaged in, so long as he acts in good faith. (2) Neither is the doctrine applicable where the opportunity is one which is not essential to the corporation's business, or where the director or officer does not exploit opportunity by employment of company's resources, or where the director or officer embracing opportunity personally is not brought into direct competition with the corporation, (see 9-A Words and Phrases 393-394.) Note that under Section 34, the profits must have been obtained by the director to the prejudice of the corporation. (3) The doctrine is pursuant to jurisprudence which rules that one who occupies a fiduciary relationship to a corporation may not acquire, in opposition to the corporation, property in which the corporation has an interest or tangible expectancy or which is essential to its existence. (SEC Opinion, March 4,1982, citing 11 Fletcher, Cy. Corp. 227.) However, this property or business opportunity ceases to be a "corporate opportunity" and transforms into a "personal opportunity" where the corporation is definitely no longer able to avail itself of the opportunity, which may "arise from financial insolvency, or from legal restrictions, or from any


315

other factor which prevents it from acting upon the opportunity for its own advantage." (Ibid., citing 11 Fletcher, p. 241.) Ratification by s t o c k h o l d e r s of disloyal act. Under Section 34, the guilty director will only be exempt from liability to the corporation to account for the profits he realized if his disloyal act is ratified by the vote of the stockholders owning or representing at least 2 / 3 of the outstanding capital stock. There is no similar provision in Section 31. Section 34 is silent on whether the disloyal director shall be allowed to vote his shares in ratification of his act. ILLUSTRATIONS: (1) A is a director of both X Corporation and Y Corporation which have similar lines of business. If A delivers a "corporate opportunity" to X and not to Y, considering that Y's chances of gain from said business opportunity are dim, A cannot be said guilty of disloyalty to Y. (Ibid.) (2) In the same illustration above, suppose that a business opportunity is presented to A, to whom does it belong? It belongs to both X and Y, and if A takes advantage of that business opportunity to the prejudice of either X or Y or to both, then, he has to account to either one or both for the profits that have been obtained by him to the prejudice of the corporation. If A presents to X, he would be disloyal as far as Y is concerned and vice versa. However, if A did not profit because he gave it to either X or Y, he does not come under one or both for the profits that have been obtained by him to the prejudice of the corporation of which he is a director. Of course, A will ultimately profit from the opportunity, being a director and stockholder of the corporation to which it was given. But in such case, it is not a profit that accrues to A as an individual person who happens to be a director of both corporations. It is a profit that accrues to the entire corporation. Section 34 applies only where a business opportunity belongs to the corporation and the director takes advantage of that business opportunity for his own profit, (see Ibid., citing Proceedings of the Batasang Pambansa on the proposed Corporation Code, Dec. 11,1979.)

316


Sec. 35

Sec. 35. Executive committee. — The by-laws of a corporation may create an executive committee, composed of not less than three members of the board to be appointed by the board. Said committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the board, except with respect to: (1) approval of any action for which shareholders' approval is also required; (2) the filling of vacancies in the board; (3) the amendment or repeal of by-laws or the adoption of new by-laws; (4) the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and (5) a distribution of cash dividends to the shareholders. Executive committee. (1) Need for an executive committee. — Section 35 recognizes

an already existing corporate practice in the Philippines dictated by necessity owing to the growing complexities of modern business, whereby the board of directors delegates to an executive committee composed of some members of the board corporate powers to assure prompt and speedy action and solution to important matters without the need for a board meeting, especially where such meetings cannot readily be held. Thus, the committee directly manages the operations of the corporation between meetings of the board, thereby reducing the work load of the latter. (2) Express provision in the by-laws. — Under Section 35, the

executive committee must be provided for in the by-laws and composed of not less than three (3) members of the board. Where the by-laws contain an express provision creating an executive committee, the same may be properly vested by resolution of the board of directors. (SEC Opinion, Aug. 19,1980.) The board cannot create or appoint an "executive committee" to perform some of its functions in the absence of authority in the by-laws. In such case, the principle on de facto officers may be applied insofar as third persons are concerned. However, insofar as the corporation is concerned, the unauthorized act of appointment of an executive committee may be subject to Section 144, which provides for

Sec. 35


317

penalties in case of violation of any of the provisions of the Code. (SEC Opinion, Sept. 21,1993.) (3) Committee contemplated. — The "executive committee"

referred to in Section 35 should be distinguished from other committees which are within the competence of the board to create at any time and whose actions require confirmation by the board itself. It is as powerful as the board, as it actually performs certain duties of the board, and, in effect, it is acting for the board itself. And so, because of the nature of the functions of the executive committee, the authority to appoint such body should be expressly provided in the by-laws, and a provision in the by-laws which states that "authorizing the board to create such committees as the board may deem necessary," is not a sufficient reason for its creation and appointment. (SEC Opinion, Sept. 27, 1993; Filipinas Port Services, Inc. vs. Go, 518 SCRA 453 [2007].) 36

(4) Matters excepted from delegation by board. — The committee

may act on specific matters within the competence of the board, as may be delegated to it by the board or in the by-laws, including those involving the exercise of judgment and discretion, except those matters enumerated with respect to which only the board duly called and assembled as such can act upon. Thus, the executive committee can function as the board itself in all matters delegated to it other than the excepted matters. However, the board cannot validly delegate to the executive committee blanket or general authority to act for the board if the delegation constitutes in effect an abdication of the corporate powers and duties vested in it by law. The board cannot delegate entire supervision and control of the corporation to an executive committee for this will be violative of Section 23. (5) Enlargement by board of restrictions. — The restrictions on

the power of the executive committee as provided in Section 35 may be enlarged by the board to cover other matters. Note that "The board of directors may create an advisory committee under a provision of the corporate by-laws authorizing it "from time to time to create special committees for special purposes" but the functions thereof should be purely advisory and should not in any manner be granted authority to participate in the management and control of the affairs of the corporation since these powers belong exclusively to the board. (SEC Opinion, July 7, 1988.)

318


Sec. 35

under No. (4), the executive committee may amend or repeal any resolution of the board unless "by its express terms [it] is not so amendable or repealable." (6) Authority to function as the board itself — As a matter of

business practice, the use of an executive committee in many companies may reduce the directors to little more than a supervising and ratifying body. (SEC Opinion, July 29, 1985, citing

Ballantine, p. 135.) Subject to the statutory limitations, a properly constituted committee composed of directors has all the authority of the board to the extent provided in the resolution of the board or by-laws. (SEC Opinion, Sept. 16, 1986.) (7) Membership. — Non-members of the board may be appointed as members of the executive committee provided that there are at least three (3) members of the board who are members of the committee. (Ibid.) An earlier opinion of the Securities and Exchange Commission states that all members of an executive committee must be directors of the corporation. However, if all the acts of the committee will be merely recommendatory in nature and shall not be carried out without the formal approval of the board of directors acting through a majority of the quorum, alternate representation may be allowed in the committee such that some members thereof may not be directors of the corporation. (SEC Opinion, July 5,1974.) (8) Ultimate control by the board. — Where the committee

is made up of, or includes persons who are not directors, such committee shall be subject to the normal restrictions and requirements relating to undue abdication of authority by the board. Thus, while the executive committee may manage the day to day operation of the business of the corporation, the business affairs thereof shall be controlled and all corporate powers shall be exercised under the ultimate discretion of the board as provided in Section 23. (SEC Opinion, Aug. 29,1988.) (9) Quorum and voting. — The general rule for quorum requirements is the same as that for board of directors. A majority of the committee members (regardless of the classification of membership into directors/members or non-directors/ members) constitute a quorum.

Sec. 35


319

To bind the corporation, it is essential that the executive committee acts "by a majority vote of all its members." From this, it can be inferred that the committee cannot delegate its authority even to one of its number, (see 18 Am. Jur. 2d 588.) (10) Membership of a foreigner. — While "foreigners" are disqualified from being elected / appointed as "corporate officers" in wholly or partially nationalized business activities, they are allowed representation in the "board of directors" or "governing body" of said entities in proportion to their shareholdings. (Sec. 2-A, Anti-Dummy Law; Sec. 11, Art. XII, Constitution.)

The reason for the exception is that the board of directors/ governing body performs specific duties as a "body." Unlike corporate officers, each member of the board of directors/governing body has no individual power or authority to perform management functions. The powers delegated to the board of directors/governing body can only be exercised by it acting as a body when a quorum is present. Hence, there can be no intervention in the management, operation, administration, and control of the corporation by the members thereof in their individual capacity. An "Executive Committee" is a "governing body" which functions as the board itself. Thus, membership therein shall be governed by the same law/rules applicable to the board of directors as provided in Section 35. (SEC Opinion, June 3,1998.)

— oOo —

Title IV POWERS OF CORPORATION Sec. 36. Corporate powers and capacity. — Every corporation incorporated under this Code has the power and capacity: 1.

To sue and be sued in its corporate name;

2. Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation; 3.

To adopt and use a corporate seal;

4. To amend its articles of incorporation in accordance with the provisions of this Code; 5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code; 6. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a non-stock corporation; 1

7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution; 8. To enter into with other corporations merger or consolidation as provided In this Code; 9. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, 'See Section 60. 320

Sec. 36

TITLE IV. POWERS OF CORPORATION

321

scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity; 10. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and 11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in its articles of incorporation. (13a) M e a n i n g of p o w e r s of a c o r p o r a t i o n .

The term powers of a corporation has reference to the corporation's capacity or right under its charter and laws to do certain things. (6 Fletcher, p. 230.) Distinguished f r o m its franchis e a n d objects.

(1) The powers of a corporation must be distinguished from its primary franchise, which is its right to exist as an entity for the purpose of doing the things embraced within its powers and from its secondary franchise, which is the right granted to an existing corporation to use public property for a public use, but with private profit. (6-A Fletcher, p. 431.) (2) Neither must its powers be confused with its objects or business. A corporation exercises its powers for the purpose of attaining its objects. Thus, for example, the power to issue promissory notes, being obviously consistent with and reasonably conducive to the furtherance of the objects of the corporation, is a mere power and not an object or business of the corporation. (6 Fletcher, p. 231.) Relative powers of natural persons/partnerships and corporations.

(1) Any act not prohibited. — An individual has absolute right to fully use, enjoy and dispose of his properties, to perform all acts and to make all contracts without any control except when they are forbidden by the law. The same is true of an ordinary partnership. Since a natural person and an ordinary partnership

322


Sec. 36

do not owe their existence to the State, they can perform any act not prohibited by law. (2) Only powers granted. — On the other hand, the civil rights of a corporation are widely different. Under the doctrine of limited capacity adopted by our corporation law (Sec. 2.), a corporation has only such powers as are expressly granted and those that are necessarily implied from those expressly granted or those which are incidental to its existence. It is, therefore, not correct to say that a corporation has the power to do all acts not expressly or impliedly prohibited. In other words, the enumeration of corporate powers implies the exclusion of all other powers except when they are incidental or implied in conformity with the generally accepted principle of statutory construction "expressio unius est exclusio alterius."

The reason for the doctrine is that a corporation owes its existence to the State and, therefore, it has only such powers as are expressly and impliedly granted by law. A corporation, as an artificial person, created by or under authority of law, is without natural rights, (see also Sees. 36[1], 45.) Classification of corporate p o w e r s .

The three classes of powers of a corporation are: (1) Those expressly granted or authorized by law (Sec. 2.), i.e., those conferred by the Corporation Code and its articles of incorporation (Sec. 45.); (2) Those that are necessary to the exercise of the express or incidental powers (Sees. 236[11], 45.); and (3) Those incidental to its existence. (Sees. 2, 45.) The powers of a corporation, however, frequently cut across lines of the above classification. A corporation exercises its powers through its board of directors (or trustees) and /or its duly authorized officers and agents. Physical acts, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate by-laws or by a specific act of the board of directors. The certificate of non-forum shopping may be signed for and on behalf of a corporation by a lawyer who must be "specifically autho-

Sec. 36

TITLE TV. POWERS OF CORPORATION

323

rized" by the board of directors in order to validly sign the certification. (BA Savings Bank vs. Sia, 336 SCRA 484 [2000]; Shipside Incorporated vs. Court of Appeals, 352 SCRA 334 [2001]; BPI Leasing Corp. vs. Court of Appeals, 416 SCRA 4 [2003]; San Pablo Manufacturing Corp. vs. Comm. of Internal Revenue, 492 SCRA 192 [2006]; Athena Computers, Inc. vs. Reyes, 532 SCRA 343 [2007].) The requirement for signing the certificate applies even to corporations. The mandatory directions of the Rules of Court make no distinction between natural and juridical persons. (Zulueta vs. Asia Brewery, Inc., 354 SCRA 100 [2001].) Note that Section 36 speaks of "every corporation incorporated under this Code." Acts or contracts of a corporation outside the scope of its express, implied, and incidental powers are ultra vires, (see Sec. 45.) An ordinary association cannot exercise the powers, rights, and privileges granted by the Corporation Code to organizations registered with the Securities and Exchange Commission. D e t e r m i n i n g w h e t h e r an act or contract within s c o p e of corporat e p o w e r s .

(1) Sources of powers. — In determining whether a corporation has power to do an act, it is necessary to: (a) first, refer to its special charter or its articles of incorporation to see whether it is within the express, implied, or incidental powers conferred; (b) then, to examine the statutes relating to corporations to see if the act is prohibited (see Sec. 16.); and (c) then, in some cases, to consult the general statutes to see if the act is illegal even in case of natural persons, (see 6 Fletcher, pp. 233-246; also Clark on Corporations, p. 412.) (2) Express or implied grant of powers. — Unless the power to

carry on a particular business is either expressly or impliedly conferred thereby, it does not exist. It is illegal for a corporation to apply either its capital or profits to business for purposes not contemplated by its charter. (SEC Opinions, Jan. 13 and 25,1988.) Thus, it is important that the corporation's intended purposes are stated with sufficient clarity in the articles of incorporation so as to define with certainty the scope of its business.

324


Sec. 36

Express powers explained.

Express powers are the powers expressly conferred upon the corporation by law. These powers can be ascertained from the special law creating the corporation, or in case the corporation is formed under the general incorporation law, from such law, the general laws of the land applicable to corporations, and its articles of incorporation. Section 36 contains an enumeration of powers expressly given to corporations created under the general incorporation law. The express powers may be exercised by the corporation whether or not any such powers are stated in the articles of incorporation or by-laws, for they are deemed vested in any corporation organized under the Code. Unless otherwise provided by the Code, the general powers conferred by Section 36 are to be exercised by the board of directors, (see Sec. 23.) Other express powers of the corporation are specifically provided in Sections 37 to 44, which also lay down the conditions under which they are to be exercised. The express powers mentioned in Nos. (2), (4), (5), (6), and (8) of Section 36 are discussed under Sections 11 and 37, 16, 46-48, 62, and 76-81, respectively. Implied powers explained .

Implied powers are those powers which are reasonably necessary to execute the express powers and to accomplish or carry out the purposes for which the corporation was formed. These implied powers are expressly recognized by Section 36(11). Powers merely convenient or useful (e.g., giving of interestfree loans) are not implied if they are not essential, having in view the purposes or objects of the corporation. The purpose or purposes for which the corporation was created, as stated in its articles of incorporation, by defining the scope of corporate business or enterprise, in effect, delimit its implied powers. Implied powers classified.

Sometimes it is difficult to determine whether a certain activity is an implied power or not. However, the following rough classification embraces most of the implied powers:

Sec. 36


325

(1) Acts in the usual course of business. — This includes such

acts as borrowing money; making ordinary contracts; executing promissory notes, checks or bills of exchange; taking notes or other securities; acquiring personal property for use in connection with the business; acquiring lands and buildings to be used as places of business or in connection therewith; and selling, leasing, mortgaging or other transfers of property of the corporation in connection with the mnning of the business. It is evident that all of such acts, under ordinary circumstances, are necessary in order to run a business; (2) Acts to protect debts owing to a corporation. — If a corpora-

tion is a creditor, it may do such acts as may be necessary to protect its right as such creditor. Thus, a corporation may purchase property, act as a guarantor or sometimes even run a business temporarily to collect a debt, where otherwise it would have no power to do so; (3) Embarking in different business. — A corporation may not

engage in a business different from that for which it was created as a regular and a permanent part of its business, (see, however, Sec. 42.) This is especially true with respect to those particular kinds of corporate activities which are governed by special laws, (see comments under Sec. 14[2].) Thus, a corporation not organized for that purpose cannot go into the banking or insurance business but it may do any isolated act of banking or insurance in connection with some express power. So, it is generally held that a corporation may temporarily conduct an outside business to collect a debt out of its profits; 2

(4) Acts in part or wholly to protect or aid employees. — While

the cases are divided, the better view favors such acts as building homes, places of amusement, hospitals, etc. for employees, as within the corporate powers, (see Sec. 36[10].)

Under Section 36(11), a corporation, when necessary in the pursuit of its business, may borrow money. In corporations other than those formed to engage in the business of loaning money, this activity is but incidental, and cannot be extended to purposes foreign to the business and objects for which the corporation was related. However, they may temporarily loan corporate funds provided certain conditions are complied with. (SEC Opinion, Jan. 22,1991; see note 2 under Sec. 42.) 2

326


Sec. 36

In a case where the opening of a post office branch of the Bureau of Posts at a mining camp of a corporation was undertaken at the request of the corporation to promote the convenience and benefit of its employees and their families who have settled at the mining camp, and after a resolution of the board of directors was passed wherein the corporation assumed full responsibility for all cash received by the Postmaster, it was held that the resolution adopted by the board is not an ultra vires act (see Sec. 45.), although it is outside the object for which the corporation was created since the resolution covers a subject which concerns the benefit, convenience, and welfare of the corporation's employees and their families (Republic vs. Acoje Mining Co., Inc., 7 SCRA 361 [1963].); and (5) Acts to increase business. — Thus, a corporation may con-

duct contests or sponsor radio or television programs, or promote fairs and other gatherings to advertise and increase its business, (see 6 Fletcher, pp. 276-277.) No fixed rules, however, can be laid down which could be applied mechanically in determining cases of implied powers. The question must necessarily depend upon the facts and circumstances of each case. For other illustrations of implied powers, see Section 2. Express powers distinguished from implied p o w e r s .

(1) The express powers have to do largely with the main business, objects and purposes of the corporation; the implied powers, largely with the means and methods of attaining those objects and purposes. (2) The former are determined once and for all by the language of the corporate charter and the applicable law; the latter may change according to time, place, and surrounding circumstances. (3) The test of the former is whether they are found in the words of the charter or the law; the test of the latter is whether they are fairly incidental to the former and reasonably necessary

Sec. 36


327

to carry them out (6 Fletcher, p. 234.) in furtherance of the corporation's business. Incidental or inherent p o w e r s e x p l a i n e d . Incidental or inherent powers are powers which a corporation

can exercise by the mere fact of its being a corporation or powers which are necessary to corporate existence and are, therefore, impliedly granted. (Sec. 36[11].) As powers inherent in the corporation as a legal entity, they exist independently of the express powers, (see Sec. 45.) These incidental powers are expressly recognized by Sections 2 and 45. Some of the powers enumerated in Section 36 are incidental powers which can be exercised by a corporation even in the absence of an express grant. Examples of incidental powers are: the power of succession; to sue and be sued; to have a corporate name; to purchase and hold real and personal property; to adopt and use a corporate seal; to contract; to make by-laws; etc. Every corporation has the implied or incidental power to establish branch offices here or abroad as the need or exigency of the business of the corporation may require. (SEC Opinion, May 17, 1990.) If "fund raising activity" is not embodied among the corporation's authorized purposes in its articles of incorporation or is neither necessary nor incidental in the furtherance of its corporate objectives, the same cannot legally be undertaken by the corporation. (SEC Opinion, Jan. 17,1995.) Construction of p o w e rs granted.

(1) In construing charters to determine the powers of corporations, it is well-settled, as in other cases of legislative grants, that they are to be construed strictly; any ambiguity in the terms of the corporate charter must operate against the corporation and in favor of the public. (2) In the determination of what powers have been conferred, the whole instrument is to be taken together, including provisos as

expressing the final intention and purposes of the parties. (3) On the other hand, since grants of corporate franchises are intended not only for the purposes of private gain but also

328


Sec. 36

to subserve public interest, they should be so construed as not to defeat the purpose of their creation. The intention of the legisla-

ture should always control, it being the general rule that a thing which is within the intention of the legislature is as much within the statute as if it were within the letter. (4) Charters are also to be construed in view of the circumstances, usages, and practices existing at the time they were granted and it

is not the province of the court to enlarge the powers of a corporation beyond its charter limitations because circumstances have changed. (5) If the charter is susceptible of two meanings, the one restricting and the other extending the powers of the corporation, that construction is to he adopted which works the least harm to the State. (6) The provisions of a general incorporation law may apply to

corporations operating under special statutes with respect to the conduct or government of such corporations as to which no specific provision has been made. (19 Am. Jur. 2d 433-434.) Ratification of corporate acts.

(1) By stockholders (or members). — They may ratify and render valid acts done or authorized by the board of directors (or trustees) but which were beyond the powers of the directors, or acts done or authorized by the directors at an illegal meeting, or unauthorized acts of others than the directors, provided the acts done are such as may be done or authorized by the stockholders. (2 Fletcher, p. 1103.) (2) By board of directors (or trustees). — Similarly, a transaction,

if within the powers of a corporation, may be consented to, ratified, or acquiesced in by the board of directors (or trustees) if it could be authorized by them. If it is consented to or ratified with full knowledge of the facts, it is finally and absolutely binding, and neither the corporation nor individual stockholders (or members) nor strangers can afterwards sue to set it aside or otherwise attack its validity. (3 Fletcher, p. 361.) Donations for political purposes are beyond the power of a corporation and cannot be ratified, as they are expressly prohi-

bited by the law. (Sec. 36[9]; see Sec. 92[c], National Internal Revenue Code [R.A. No. 1158, as amended].) Effect of ratification retroactive.

Except as to intervening rights of strangers, ratification by a corporation of an unauthorized act or contract by its officers or others relates back to the time of the act or contract ratified, and is equivalent to original authority. Omnis ratihabitio retrotrahitur

(2 Fletcher, pp. 1185-1188.) Thus, assuming that a corporation has been empowered, as a secondary purpose, to purchase stocks in other corporations by its articles of incorporation, although the investment was made sans the prior consent and imprimatur of the stockholders pursuant to Section 42 of the Code, this legal infirmity is cured by the subsequent ratification of the required vote of the board of directors and stockholders. (SEC Opinion, Dec. 5,1963.) M o d e o f exercising p o w e r s . (1) No particular mode prescribed by charter. — If the charter

of a corporation prescribes no particular mode for the exercise of its powers, they may be exercised in any mode, provided it is not contrary to law, which the stockholders or officers may deem best. So it has been well said that corporations "may exercise all the powers within the fair intent and purpose of their creation, which are reasonably proper to give effect to powers expressly granted. In doing this, they must have a choice of means adapted to ends, and are not to be confined to any one mode of operation." (2) Particular mode prescribed by charter. — It the charter

requires its powers to be exercised in any particular way by officers or agents, they cannot be properly exercised in any other way, for the powers of a corporation are measured by its charter, not only as to the things which it may lawfully do, but also as to the mode of doing them. However, as will be noticed in treating of the effect of ultra vires transactions, the fact that a corporation exercises a power in a mode different from that prescribed by its charter will not necessarily prevent it from acquiring rights or incurring liabilities by reason thereof, (see 6 Fletcher, pp. 284286.)

330


Sec. 36

(3) Corporation organized under a special law. — Where a cor-

poration is organized under a special law, the rules governing corporations organized under the general law have no application where the special statutes provide methods for the regulation and control of said corporation. (19 Am. Jur. 2d 439.) Power to sue and be s u e d .

This power (Sec. 36[1].) is an incident to corporate existence. As a rule, suits are to be brought by or against the corporation in its own name. (1) Dissolved corporation. — Corporations de facto (Sec. 20.)

may sue or be sued but a corporation which has been dissolved after the expiration of the three (3)-year winding-up period (Sec. 122.) ceases to exist de jure or de facto.

(2) Unregistered corporation. — A corporation not duly registered in accordance with law has no legal capacity to sue as such. (3) Foreign corporation. — Neither can a foreign corporation which transacts business in the Philippines without the necessary license from the Securities and Exchange Commission sue in the Philippine courts. (Sec. 133.) (4) Right to claim moral damages. — Obviously, an artificial

person like a corporation cannot experience physical suffering, mental anguish, besmirched reputation, wounded feelings, moral shock, social humiliation and similar injury, (see Art. 2217, Civil Code.) Nevertheless, a corporation may have a good reputation or business standing which, if besmirched or debased, may be a ground for the award of moral damages (Mambulao vs. Phil. National Bank, 22 SCRA 359 [1968].) under the Civil Code. (Art. 2217 thereof.) But in such case, it is imperative for the claimant to present proof to justisfy the award by showing the existence of the factual basis of the damage and its causal relation to the defendant's acts. (Development Bank of the Phils, vs. Court of Appeals, 403 SCRA 460 [2005]; Manila Electric Co. vs. TEAM Electronics Corp., 540 SCRA 62 [2007].) (5) Real party in interest. - As a general rule, the right and

power of a corporation to sue in any court must be brought by the board of directors or trustees that exercises its corporate

Sec. 36


331

powers (Sec. 23.) on behalf of the corporation or by any of its duly authorized officer or agent. (see Premium Marble Resources, Inc. vs. Court of Appeals, 264 SCRA 11 [1996]; Shipside Incorporated vs. Court of Appeals, 352 SCRA 334 [2001]; Philippine Rabbit Bus Lines, Inc. vs. Aladdin Transit Corp., 493 SCRA 358 [2006]; Munoz vs. People, 548 SCRA 473 [2008].) 3

(a) Under Section 36(1), read in relation to Section 23, it is clear that where a corporation is the injured party, its power to sue is lodged with its board of directors or trustees. A minority stockholder and member of the board of directors has no such power or authority to sue on the corporations behalf. (Tana Wing Tak vs. Makasiar, 350 SCRA 475 [2001].) (b) Under Section 3, Rule 46 of the Rules of Court, a petitioner is required to submit together with the petition, a sworn certification of non-forum shopping and failure to comply with the requirement is sufficient ground for dismissal of the petition. The requirement applies even to corporations, the Rules of Court making no distinction between natural and juridical persons. A certification not signed by a person not duly authorized by board resolution renders the petition subject to dismissal. (Gonzales vs. Climax Mining Ltd., 452 SCRA 607 [2005]; MC Engineering, Inc. vs. National Labor Relations Commission, 360 SCRA 183 [2001].) (c) Since the signing of verifications and certifications against forum shopping is not integral to the act of filing cases in behalf of a corporation, the signing may not be deemed as necessarily included in an authorization merely to file cases. There must be a specific authorization to sign the verification and certification in behalf of the corporation. (Metropolitan Cebu Water District vs. Adala, 562 SCRA 465 [2007].) The Supreme Court, however, has held that the following officials

In a case, the corporate officer initially failed to show that she had the capacity to sign the verification and institute the ejectment case on behalf of the lessor company. It was held that "her act of immediately presenting the Secretary's Certificate confirming her authority to represent the company may be considered as substantial compliance and call for the relaxation of the rules of procedure in the interest of justice. (Parichia vs. Don Luis Dison Realty, Inc., 548 SCRA 273 [2008]; see Asean Pacific Planners vs. City of Urdaneta, 566 SCRA 219 [2008].) 3

332


Sec. 36

or employees of the company can sign the verification and certification without need of a board resolution: 1) Chairperson of the Board of Directors; 2) President of the Corporation; 3) General Manager or Acting General Manager; 4) Personnel Officer; and 5) an Employment Specialist in a labor case. The above cases do not provide a complete listing, the determination of the sufficiency of the authority being on a case to case basis. The rationale for justifying the authority of the above corporate officers or representatives to sign the verification or certificate against forum shopping is that they are "in a position to verify the truthfulness and correctness of the allegations in the petition." (Cagayan Valley Drug Corp. vs. Comm. of Internal Revenue, 545 SCRA 10 [2008].) (d) A government-owned or -controlled corporation, can act only through its duly authorized representatives. In a case in view of the absence of a board resolution authorizing petitioner's Officer-in-Charge to represent it in the petition for review, the Supreme Court ruled the verification of nonforum shopping executed by said officer failed to satisfy the requirement of the Rules of Court. (Public Estates Authority vs. Uy, 372 SCRA 180 [2001].) Where the corporate officer's power as an agent of the corporation did not derive from such a resolution, it would nonetheless be necessary to show a clear source of authority from the charter, the by-laws, or the implied acts of the governing body. (Premium Marble Resources vs. Court of Appeals, supra; Social Security System vs. Commission on Audit, 384 SCRA 548 [2002].) (e) Applying the rule that every action must be brought or defended in the name of the real party-in-interest (Rules of Court, Rule 3, Sec. 2.), where a voting trust agreement was executed by certain stockholders of a corporation which was not a signatory thereto, the corporation is not the real partyin-interest in the suit to enforce the agreement. The action should be filed by the stockholders. (National Investment & Development Corporation vs. Aquino, 163 SCRA 153 [1988].) (f) In a derivative suit, however, the minority stockholder or stockholders may bring an action against erring corporate officers in the name of the corporation with the corpora-

Sec. 36


333

tion as the real party in interest, (see Comments under Sec. 64.) (g) While it is true that a criminal case can only be filed against the officers of a corporation and not against the corporation itself, it does not follow from this, however, that the corporation cannot be a real party-in-interest for the purpose of bringing a civil action for malicious prosecution. (Cometa vs. Court of Appeals, 301 SCRA 459 [1999].) (h) While the power to sue and be sued is lodged with the board of directors, the physical acts of the corporation like the signing of documents can be performed only by natural persons duly authorized for the purpose by corporate bylaws or by a specific act of the board of directors. (Shipside Incorporated vs. Court of Appeals, supra.; United Paragon Mining Corp. vs. Court of Appeals, 497 SCRA 638 [2006].) A resolution of the board of directors may authorize a particular officer to represent the corporation in all suits brought for or against it. (Grand Boulevard Hotel vs. Genuine Labor Organization, 406 SCRA 688 [2003].) The Supreme Court has ruled that the subsequent submission of proof of authority to act on behalf a corporation justifies the relaxation of the Rules for the purpose of allowing its petition for review on certiorari to be given due course. (Pascual and Santos, Inc. vs. Members of Tramo Wakas Neighborhood Assoc., Inc., 442 SCRA 438 [2004].) (i) Where piercing the veil of corporate entity is justified, a stockholder or corporate officer may be sued along with the corporation, (see Comments under Sec. 2.) (6) Right of shareholders to intervene. — Shareholders are, in

no legal sense, the owners of corporate property which is owned by the corporation as a distinct legal person, their interest being inchoate or beneficial in nature, not direct and immediate in character (see Rules of Court, Rule 12, Sec. 2.); hence, they have no right to intervene in an action for or against a corporation. (Saw vs. Court of Appeals, 195 SCRA 740 [1991].) In a case, however, a stockholder who was one of the largest individual stockholders of the corporation and was, until it was

334


Sec. 36

placed under receivership, exercising control of the company, and was the one who asked for the appointment of the receiver and pledged his own property to the extent of P4,000,000 (in 1927) to assist in the rehabilitation of the corporation was allowed to intervene in an action by a creditor to foreclose the mortgage executed by its officers, for "he is injuriously affected by the mortgage" and "is more virtually interested in the outcome of this case than [the corporation]." (Phil. National Bank vs. Phil. Vegetable Oil Co., 49 Phil. 857 [1927].) (7) Service of summons. — The rationale of all rules with respect to service of summons on a corporation is that such service must be to an agent or a representative, in contemplation of Rule 14, Rules of Court, so integrated with the corporation sued as to make it, a priori supposable that he will realize his responsibilities and know what he should do with any legal papers served on him; one who performs vital functions in the corporation that it would be reasonable to presume that he would be able to discuss the importance of paper delivered to him, and be responsible enough to transmit the same to the corporation. (Villa Rey Transit, Inc. vs. Rapacon, 81 SCRA 298 [1978]; Vlason Enterprises Corp. vs. Court of Appeals, 310 SCRA 26 [1999].) The job of a bookkeeper is so integrated with the corporation that his regular recording of the corporations' "business accounts" and "essential facts about the transaction of a business or enterprise" safeguards the corporation from possible fraud being committed adverse to its own corporate interest. The rules on service of process make service on an "agent" sufficient whether the agent be general or special. As such, it does not necessarily connote an officer of the corporation and may include employees but not those whose duties are not so integrated to the business that their absence or presence will not toll the entire operation of the business. Thus, service of summons was held properly made to a corporation through a bookkeeper or a clerk who was not even authorized to receive the same on behalf of the corporation, since what is of paramount importance is that the purpose of the rule on summons has been attained, thereby, the interest of speedy justice has been sub-served. (Pabon vs. National Labor Relations Commission, 296 SCRA 7 [1998].)

Sec. 36


335

Similarly, summons was held properly served on a corporation through a claim employee who does not belong to the managerial staff, but whose role in the corporation is that of a representative in relation to cases involving it, i.e., regularly indorsing summons and complaints against the corporation, following-up, and attending cases filed by and against it. (Weena Express, Inc. vs. Rapacon, 534 SCRA 288 [2007].) P o w e r to a d o pt a n d u s e a corporate s e a l .

A seal is a device (as an emblem, symbol, or word) used to identify or replace the signature of an individual or organization and to authenticate (as under common law) written matter purportedly emanating from such individual or organization. It may refer also to the impression of such a device on documents like certificates of stocks, (see Webster's 3rd New Int. Diet., p. 2046.) 4

(1) Any seal adopted and used by the corporation (Sec. 36[4].) may be altered by it at pleasure. Where a corporation adopts a seal for a special occasion, different from its corporate seal, the seal adopted is the corporate seal only for that time and occasion. (9-A Words and Phrases 407.) (2) A seal is not required for the validity of any corporate act. Under Section 63, certificates of stock issued by corporations are required to be sealed with the seal of the corporation. Nevertheless, the use of a corporate seal in certificates of stock must be deemed merely directory rather than mandatory, (see Sec. 22.) A corporation may exist even without a seal. (3) At common law, the rule prevailed for sometime that a corporation could not make a parol contract and could speak and act only by its common seal. This technical rule of the common law soon gave way, however, and today in the transaction of its business, a seal is no more necessary to render valid the acts and contracts of a purely business corporation than of an individual,

But a "corporate seal" is not the same thing as a signature nor is it equivalent to a signature, but the seal forms a part of the formality of execution, and where an affidavit is filed on behalf of a corporation denying its signature on a note, under seal, the execution of the note is not admitted and the plaintiff is put to formal proof of execution. (9-A Words and Phrases 407.) 4

336


Sec. 36

and in all such cases where a natural person will be bound without a seal, a corporation will also be bound. But although it may not be necessary, the reason it is desirable to attest all contracts and other acts of the corporation with its seal, when this is possible, is that the presence of such seal establishes, prima facie, that the instrument to which it is affixed is the act of the corporation. (18 Am. Jur. 2d 689-698.) Power to acquire a n d c o n v e y property. (1) As an incident to every corporation. — This power (Sec.

36[7].) which is also expressly conferred under the law has always been regarded as an incident to every corporation. A corporation needs properties or assets to carry on its business. While a corporation may appoint agents to negotiate for the purchase of real property needed by the corporation, the final say will have to be with the board of directors whose approval will finalize the transaction. (Firme vs. Bukal Enterprises & Dev. Corp., 414 SCRA 190 [2003].) It has been held by the Supreme Court: "The owning of a business lot upon which to construct and maintain its offices is reasonably necessary to a corporation which has developed to such an extent that its prospects of the future are such as to justify its directors in making such acquisition. A different rule would compel important enterprises to conduct their business exclusively in leased offices — a result which would retard industrial growth and be inimical to the best interests of society. The corporation acquiring such property is entitled to the full beneficial use thereof. Thus, a corporation whose business may acquire an appropriate lot and construct thereon an edifice with facilities in excess of its own immediate requirement. If it has the power to acquire such lot, construct an edifice and hold it beneficially, the beneficial administration by it of such parts of the building as are let to others must necessarily be lawful." (Government vs. El Hogar Filipino, 50 Phil. 399 [1927].) (2) As necessary to the transaction of its lawful business. — The

power under Section 36(7) is qualified by the phrase "as the transaction of the lawful business of the corporation may reasonably and necessarily require."

Sec. 36


337

(a) Property obtained by a corporation which is foreign to the purposes for which it was organized is an unlawful acquisition. For example, it is not within the power of a corporation engaged in general shipping business to buy a provincial parcel of land purposely for redistribution to its stockholders, as the acquisition is neither necessary nor incidental to the furtherance of its business. (SEC Opinion, Aug. 1,1989.) A corporation may not validly purchase, sell, mortgage, etc. assets if it is not in the legitimate furtherance of its purposes. Accordingly, the exercise of such power cannot be validated thru the inclusion of such purpose in the articles of incorporation if the corporation has no interest whatsoever in the subject transaction. (SEC Opinion, Sept. 25,1991.) (b) A corporation can legally enter into or form a joint venture corporation to be owned by it and others as stockholders. An act is held within corporate powers, if possible, where it is clearly beneficial to the company, as where the act leads to increase its business. (SEC Opinion, Nov. 11,1987.) 5

(c) The transfer or sale of shares owned by a corporation in another corporation requires approval by the board of directors of the seller corporation (Sec. 25.) and while a corporation is expressly empowered by Section 36(7) to dispose corporate assets, such power is subject to the provisions of Section 40. (SEC Opinion, Aug. 21, 1995.) In the ordinary course of business, a corporation can borrow funds or dispose of assets of the corporation only on authority of the board of directors which normally designates one or more corporate officers to sign loan documents or deeds of assignment for the corporation. (Great Asian Sales Center Corporation vs. Court of Appeals, 381 SCRA 557 [2002].) (d) To enable a corporation to engage in any of its secondary purposes, Section 42 must be complied with. Similarly, if the act has the effect of incurring, creating, or increasing bonded indebtedness under Section 38, or involves the selling or disposition of all or substantially all the property and

5

See note 8 under Section 2.

338


Sec. 36

assets of the corporation under Section 40, the corporation must comply with the requirements prescribed. (3) As subject to limitations or restrictions. — The right or

power of private corporations to deal in real as well as personal property is also subject to limitations or restrictions prescribed by special laws and the Constitution. Thus: (a) Under the Constitution, no private corporation or association may hold alienable lands of the public domain except by lease for a period not exceeding 25 years, renewable for not more than 25 years, and not to exceed 1,000 hectares in area, (see Art. XII, Sec. 3 thereof.) Natural resources such as coal, petroleum and other mineral oils belong to the State and cannot be alienated. Their exploration, development and utilization shall be under the full control and supervision of the State. (Ibid., Sec. 2 thereof.) (b) Under the General Banking Law of 2000, any real property acquired by a bank by way of satisfaction of claims under the circumstances enumerated in the law shall be disposed of by it within a period of five (5) years or as may be prescribed by the Monetary Board. The bank may, after said period, continue to hold the property for its own use, subject to limitations with respect to ceiling on investments in certain assets, (see Sees. 51, 52, R.A. No. 8791.) Power to acquire shares or securities. (1) Shares of other corporations. — Section 36(7) authorizes a

private corporation to acquire shares or securities of other corporations. (a) Such an act does not need the approval of the stockholders if done in pursuance of the purpose or purposes of the corporation as stated in its articles of incorporation but when the purpose is done solely for investment, the approval of the stockholders as required by Section 42 is necessary. (De la Rama vs. Ma-ao Sugar Central Co., Inc., 27 SCRA 247 [1969].) The prevailing view is that a corporation has no power to purchase or hold stock in another corporation unless it

Sec. 36


339

is one of the activities permitted by its articles of incorporation. (7 R.C.L. Corp., par. 535; see SEC Opinion, Nov. 20, 1961.) (b) In any case, the power to acquire shares in other corporations is subject to specific limitations established by the Code, special laws, and the Constitution. The shares must be limited to shares of existing corporations because only natural persons can be incorporators. (Sec. 10.) The exercise of the power is also subject to the provisions of Section 140. Under the new Civil Code (Art. 2112.), the pledgee may appropriate the thing pledged only if, after the second auction, the thing pledged is not sold. (c) When a corporation subscribes to the capital stock of another corporation, it is required, as a rule, to pay its subscription in full. This is based upon the fact that while a corporation has an unlimited capacity to contract obligations, it has only a limited capacity to pay. (SEC Opinion, July 13, 1961.) (2) Shares of the acquiring corporation. — The Corporation

Code expressly authorizes a corporation subject to limitations stated therein to acquire its own stocks, (see Sees. 40, 41, 42, 68, last par., 77, 81,105.) A corporation may purchase its own stock, however, only when it has "unrestricted retained earnings" to cover the shares to be purchased or acquired, (see Sec. 41.) Corporation as stockholder or member.

The Corporation Code contains no express provision prohibiting the organization of a corporation composed of other corporations. Our statutes are silent on this point and our courts have not as yet passed upon the matter. However, the decided weight of authority in the United States supports the view that a corporation may become a member of another corporation. (SEC Opinion, Oct. 12,1970.) (1) A private corporation may, either by original subscription or by purchase, become a stockholder and member of another corporation with all the rights and liabilities attaching to such relation, either when it is expressly authorized by statute or its charter to do so, or when such subscription or purchase is within

340


Sec. 36

its implied powers as a necessary or proper means of exercising the other powers conferred on it. (Ibid., citing 18 C.J.S., Sec. 35.) (2) Under the older statutes, corporations were composed entirely of persons, but it is true now in most States that a corporation need not be composed entirely of natural persons, but other corporations may be either incorporators (in practical effect) or stockholders. The most notable examples are the great universities of Oxford and Cambridge which are themselves distinct and separate corporations. (Ibid., citing Oleck, Modern Corporation Law, Sec. 226.) Thus, it is legally feasible to organize an incorporated national federation of distinct corporations or associations. (SEC Opinion, Oct. 23,1970.) Power to contribute to charity. (1) Existence of power formerly unsettled. — Section 36(9)

expressly vests in business corporations the authority to contribute for purely charitable purposes. Before, the existence of such authority was not settled. While donations to charities by business corporations have been sustained by various courts in the United States, they were justified by the presence of some benefit or advantage accruing to the corporations. The reason for this judicial attitude against such power is most strongly 6

'The uncertainty resulted from the absence of any provision in the former Corporation Law vesting the power, although such authority was impliedly recognized by the National Internal Revenue Code of 1939 (C.A. No. 466, as amended.) in Section 30(h), thereof which provision is also found in the National Internal Revenue Code of 1986. (Pres. Decree No. 1158, as amended.) Said Section 30(h) allows deduction of: "Charitable and other contributions. — Contributions or gifts actually paid or made within the taxable year to or for the use of the Government of the Philippines or any political subdivision thereof for exclusively public purposes, or to domestic corporations or associations organized and operated exclusively for religious, charitable, scientific, athletic, cultural, or educational purposes or for the rehabilitation of veterans, or to societies for the prevention of cruelty to children or animals, no part of the net income of which inures to the benefit of any private stockholder or individual to an amount not in excess of six per centum in the case of an individual and three per centum in the case of a corporation, of the taxpayer's taxable income as computed without the benefit of this paragraph, x x x." Still, it was not clear whether purely charitable gifts, unconnected with the corporation's business, could be considered valid as constituting a proper use of corporate funds if made without stockholders' authorization. Section 30(h) is now Section 34(H) of the National Internal Revenue Code of 1997. (Pres. Decree No. 1158, as amended by R.A. No. 8424.)

Sec. 36


341

expressed in a case as follows: "A business corporation is organized and carried on primarily for the profit of stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end and does not extend to a change in the end itself, to the reduction of or to the non-distribution of profits among stockholders in order to devote them to other purposes." (Dodge vs. Ford Motor Co., 204 Mich. 459, 507, cited by Emiliano R. Navarro, "Corporate authority to contribute to charity," 26 Phil. Law Journal 188-189 [Oct. 1951].) (2) Basis of power now expressly granted. — Section 36(9) gives

recognition to the growing tendency to regard charitable gifts as within the scope of corporate authority. It is based on the modern view that business corporations are not organized solely as profitmaking enterprises but also as economic and social institutions with corresponding public responsibility to aid in the betterment of economic and social conditions in the community in which such corporations are doing business. As has been better stated: "Many business have advocated social responsibility of business corporations. This is important if business corporations and capitalistic society are to survive, x x x. The inability of business corporations to contribute to purely charitable purposes may not only impair their public patronage, but may create an unfavorable reaction against private enterprise. In the last analysis, corporate donations, unless amounting to piracy of the corporate treasury, redound to the benefit of the corporation, the shareholder, the creditors, and the public." (E.R. Navarro, op. cit, supra, pp. 191-192.) "As business is chiefly conducted through the medium of corporations, it is the corporation, its shareholders, directors, and officers, who are being made to realize their social obligations to employees and customers. Consistent with this development is the changing attitude toward corporate contributions to charities In times when so much wealth is concentrated in the hands of incorporated associations, it is clearly in the public interest to permit such associations to make contributions to charity." (Ibid., p. 191, citing Stevens on Corporations [1949], p. 252.)

342


Sec. 36

(3) Limitations on power. — Under the Code, the only limitations imposed on the authority of a corporation to make donations are: (a) the amount thereof must be reasonable; and (b) the donations must not be in aid of any political party or candidate or for purposes of partisan political activity, (see Sec. 95, B.P. Big. 881 [Omnibus Election Code].) It is not required by law that the donation should inure to the direct financial benefit of the corporation, nor that the donation be taken from corporate earnings as long as it is "reasonable" under the circumstances, taking into account the corporation's financial condition; hence, it may be paid out of capital, although stockholders and creditors who may feel aggrieved are not denied the right to question the exercise of the power, and if found excessive, to seek adequate relief therefrom. The limitation that the donations must be "reasonable" provides a check against scheming directors and officers who may use the authority as a screen to appropriate corporate funds for personal ends. Power to establish p e n s i o n , retirement and other plans. (1) Such plans promote corporate purpose or purposes. — The

authority granted to every corporation by Section 36(10) to establish pension, retirement, and other plans for the benefit of its officers and employees is a statutory recognition that disbursement of corporate funds in pursuance of such plans likewise promotes the purpose or purposes for which the corporation was formed. Courts have been liberal in finding as a responsibility of business the comfort, health, and well-being of its employees. Thus, it has been repeatedly held that the granting of bonus, gratuity, and incentive compensation to employees as a reward for work is within the implied powers of a corporation. Indeed, it is a well-established practice of corporations. The implied power to build houses, schools, churches, and libraries for the use of employees has also been sustained, (see Wyatt & Wyatt, Business Law: Principles and Cases [1963], p. 708; Lopez Realty, Inc. vs. Fontecha, 247 SCRA 183 [1995].)

Sec. 36


343

(2) Such plans promote better relations with corporate employees.

— For a corporation, like an individual employer, is not limited to payment of wages to its employees but may extend to them other benefits, such as paid vacations, sick benefits and medical treatment, and pensions, which are not necessarily charitable acts but actually part of the employment contract. Contributions by a corporation to programs directly benefiting employees apart from the benefits granted under the Social Security Act (R.A. No. 1161, as amended.) are expressly permitted by the Code on the theory that such activities promote better relations between the corporation and its employees. (19 Am. Jur. 2d 508-509.) Under the National Internal Revenue Code (Pres. Decree No. 1158, as amended.), such contributions to pension trusts are deductible from gross income (Sec. 34Q] thereof.) and all income of the funds of such trusts are exempt from income tax, including the retirement benefits granted thereunder. (Sec. 60[B] thereof.) Power to act as guarantor. (1) Power generally withheld. — The general rule is that no corporation has the power, by any form of contract or endorsement, to become a guarantor or surety or otherwise lend its credit to another person or corporation. A corporation is without implied power to guarantee for accommodation the contract of its customers with third persons on the ground that it may thus stimulate its own business. Such use of its credit is clearly beyond the power of an ordinary business corporation. (Brinson vs. Mill Supply Co., Inc., 14 S.E. 2d 505.) (2) Where corporate business will be advanced. — However,

the general rule will not apply and the court will allow an accommodation indorsement under an implied authorization where the guarantee "tends directly to promote the business authorized by its articles" or "is an appropriate means by which it may reasonably be expected that the business in which the corporation is engaged will be advanced." (Woods Lumber Co. vs. Moore, 191 P. 905.) Thus, a corporation which acquired the bonds of another corporation in the legitimate transaction of its business (i.e., payment of debt due it) may sell them, and to make them more readily marketable, guarantee their payment. (Carlos vs. Mindoro Sugar Co., 57 Phil. 343 [1932].)

344


Sec. 37

(3) Where risk considerable and benefit remote or disproportionate.

Xhe issue is whether the legitimate business activities of the corporation guarantor were so enhanced as to create an implied power under the charter. But even where there is a possible benefit to the corporation (e.g., a guarantee to third persons of the raw material commitments of the corporate guarantor's supplier), the risk can be considerable and the benefit can be remote, intangible, and difficult to evaluate. Where they have been sufficiently remote and incidental or disproportionate to the risks, courts have held the guarantee unenforceable. (W.L. Cary, Cases and Materials on Corporations, pp. 59-60 [1969 ed.].) 7

Sec. 37. Power to extend or shorten corporate term. — A private corporation may extend or shorten its term as stated in the articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members in case of nonstock corporations. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That in case of extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code, (n)

'The SEC has allowed mortgage of corporate assets to secure obligations of another corporation (a) when the mortgage is in furtherance of the interest of the corporation, and in the usual and regular course of business, or (b) when it is made to secure the debt of a subsidiary. (SEC Opinion, April 15, 1987.) Even if the third party mortgage does not fall under either of the two instances, the mortgage may be allowed, subject to the strict observance of certain conditions, to wit: (a) there is no express restriction in the articles of incorporation or by-laws; (b) the purpose of the mortgage is not illegal; (c) the consent of all corporate creditors and stockholders has been secured; (d) the transaction is not used as a scheme to defraud or prejudice corporate creditors or result in the infringement of the Trust Fund Doctrine; (e) the mortgage will not hamper the continuous business operations of the corporation; and (f) the accumulated third party involved in the mortgage is financially solvent and capable of paying the mortgagee/ creditor. (SEC Opinion, Dec. 10,1991.)

Sec. 37


345

P o w e r to e x t e n d or s h o r t e n corporate term.

The corporate term of a private corporation may be extended or shortened by an amendment of the articles of incorporation approved by the majority vote of the board of directors or trustees and ratified at a meeting of the stockholders representing at least 2 / 3 of the outstanding capital stock or by at least 2 / 3 of the members in case of non-stock corporations. (1) Unlike in Section 16 which governs the amendment in general of articles of incorporation, the amendment under Section 37 must be taken at a meeting of the stockholders or members and upon a vote. "Mere written assent" would not be sufficient. However, the formal requirements in the second paragraph of Section 16 must be complied with. (2) The provision on the taking effect of the amendment in the third paragraph of Section 16 upon its approval by the Securities and Exchange Commission is not applicable because the date of approval by the Commission may be before the effectivity date of the extension or reduction of the corporate term. The effectivity of the amendment relates back to the date of its filing with the Commission in case the latter fails to act within six (6) months from such date for a cause not attributable to the corporation. (3) A voluntary dissolution of a corporation may be effected by amending the articles of incorporation to shorten the corporate term. (Sec. 120.) (4) The extension of the corporate term as originally stated in the articles of incorporation is subject to the limitations or conditions provided in Section 11. Appraisal right of dissenting stockholders.

Section 37 grants appraisal right to a dissenting stockholder (right of stockholder in the cases provided by law to demand payment of the fair value of his shares) "in case of extension of corporate term." Such right should also be available to a dissenting stockholder if the corporate term is shortened as it is expressly recognized in Section 81(1).

346


Sec. 38

Note that the appraisal right applies only to a stockholder of a stock corporation. Sec. 38. Power to increase or decrease capital stock; incur, create or increase bonded indebtedness. — No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholders' meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholders' meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered, must be addressed to each stockholder at his place of residences as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholders' meeting, setting forth: (1) That the requirements of this section have been complied with; (2) The amount of the increase or diminution of the capital stock; (3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of shares of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stockholder if such increase is for the purpose of making effective stock dividend therefor authorized;

Sec. 38


(4) Any bonded indebtedness to be incurred, created or increased; (5) The actual indebtedness of the corporation on the day of the meeting; (6) The amount of stock represented at the meeting; and (7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commission. One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by the Securities and Exchange Commission and the issuance by the Commission of its certificate of filing, the capital stock shall stand increased or decreased and the incurring, creating or increasing of any bonded indebtedness authorized, as the certificate of filing may declare: Provided, That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five percent (25%) of such increased capital stock has been subscribed and that at least twenty-five percent (25%) of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to twenty-five percent (25%) of the subscription: Provided, further, That no decrease of the capital stock shall be approved by the Commission, if its effect shall prejudice the rights of corporate creditors. Nonstock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and of at least twothirds (2/3) of the members in a meeting duly called for the purpose.

347

348


Sec. 38

Bonds issued by a corporation shall be registered with the Securities and Exchange Commission which shall have the authority to determine the sufficiency of the terms thereof. (17a) Power to increase or decrease capital stock.

An increase or reduction in the capital stock of the corporation is a fundamental change in the corporation. The authority of the corporation to take such action is not to be implied but exists only when expressly conferred. (Peck vs. Elliot, 79 F. 10; 38 L.R. A. 616; 44 A.L.R. 1315.) The power is expressly granted by Section 38. Section 38 prescribes the procedure to be complied with to effect a legal increase or decrease of the capital stock (not capital) which is now subject to prior approval of the Securities and Exchange Commission. (par. 4.) Even holders of non-voting shares are entitled to vote on the matter, (see Sec. 6, par. 6[5].) 6

The notice requirement (par. 1.) is mandatory and is obviously designed to protect the interests of minority stockholders. The Corporation Code contains no prohibition for a corporation to increase its authorized capital stock even if the same has not yet been fully subscribed. Limitations on the power.

(1) As a general rale, a corporation cannot lawfully decrease its capital stock if such decrease will have the effect of relieving existing subscribers from the obligation of paying for their unpaid subscriptions without a valuable consideration for such release, as such an act of the corporation constitutes an attempted withdrawal of so much capital upon which corporate creditors are entitled to rely. (Phil. Trust Co. vs. Rivera, 44 Phil. 649 [1923].)

"An amended articles of incorporation is not required to be filed with the SEC to reflect an increase in the contributed capital of a non-stock/non-profit corporation. Such requirement applies only to stock corporations. It is sufficient for purposes of updating the SEC records, that such fact is reflected in the financial statements. (SEC Opinion, April 2,1998.) V

V

Sec. 38


349

The corporation must submit proof to the SEC that such decrease will not prejudice the rights of creditors. (SEC Opinion No. 05-10 July 12, 2005.) (2) A corporation cannot issue stock in excess of the amount limited by its articles of incorporation; such issue is ultra vires and the stock so issued is void even in the hands of a bona fide purchaser for value; and (3) A reduction or increase of the capital stock can take place only in the manner and under the conditions prescribed by law. (see Sec. 38.) The Corporation Code contains no prohibition for a corporation to increase its authorized capital stocks even if the same has not yet been fully subscribed. Necessity for increasing capital stock. (1) Increase of corporate assets. — An increase of the amount of the capital stock may be for the purpose of effecting an increase in the corporate assets by authorizing: (a) the creation of new shares to be offered and issued at a fixed valuation; or (b) the increase of the par value shares authorized to be issued. (2) Issuance of stock dividends. — The capital stock may also be increased without any corresponding increase in the corporate assets by the issuance of stock dividends. (18 Am. Jur. 2d 753755.) 9

I t is considered as a cardinal rule in accounting that any business entity has to reflect at all times the actual business transactions and/or events in its books as they happen. For this reason, the corporation can already enter the increase in its authorized capital stock as well as the stock dividends declared in its books as soon as the same has been approved by the stockholders of the corporation. As to the increase of its authorized capital stock, however, such increase becomes effective only after its approval and issuance of the certificate of filing of the increase by the Securities and Exchange Commission, and it retroacts to the day of the approval of such increase by the Commission thereby making valid the entries made in the books. The stock certificates corresponding to the stock dividends should bear the date of actual issuance, which must be after the increase in the authorized capital stock has been approved by the Commission. (SEC Opinion, July 28,1972.)

350


Sec. 38

Necessity of new subscription for increase.

(1) An increase in the authorized capital stock cannot be lawfully accomplished without an actual increase in the assets of the corporation and additional subscriptions except when such increase is for the purpose of effecting a stock dividend (Sec. 38, par.

2[3]; see Sec. 43.) previously authorized. If the actual capital is increased by accumulated profits and such profits are distributed to the stockholders in the form of stock dividends, the capital stock is increased, for the profits are reinvested in the corporation by transferring the same from surplus account to a capital account. The amount corresponding to the stock dividends declared may be used to cover the required 25% subscription to increase the authorized capital stock and, if sufficient, will obviate the necessity of taking in new subscription. (2) If the increase of the authorized capital stock is not for the purpose of making effective stock dividends previously authorized, the

law requires to be stated in the certificate the matters mentioned in paragraph 2(3). It is, therefore, clear that stock dividends once declared and issued are fully paid, and this rule admits of no exception. (SEC Opinion, Sept. 9,1977.) Effectivity of increase or d e c r e a s e . (1) From and after approval by SEC. — Under Section 38

(par. 4.), the capital stock of a corporation stands increased or decreased only from and after approval and the issuance by the Securities and Exchange Commission of its certificate of filing of increase or decrease of capital stock. Before the issuance of the certificate of filing of increase of capital stock, the subscribers to the proposed increase cannot be considered as stockholders and be accorded the rights as such for the shares subscribed by each. (2) Use of amount of increase during pendency of application.

— Where the corporation, however, is already a going concern, "in need of steady supply of funds for its business operations," it is the policy of the Securities and Exchange Commission to allow the use of the amount representing the paid-up capital received on account of the proposed increase of capital stock so

as not to disrupt its operations even during the pendency of the application for increase of the capital stock with the Commission. (SEC Opinion, Jan. 30, 1975.) The funds must be utilized purely for business operations and duly accounted for or recorded in the books of the corporation, and further, no loans or cash advances must be extended to any of the subscribers to the proposed increase in the capital stock. (SEC Opinion, Dec. 9,1981.) O v e r - i s s u e of s h a r e s .

(1) An issue of stock by a corporation in excess of the amount prescribed or limited by its articles of incorporation is ultra vires and the stock so issued is void even in the hands of a bona fide purchaser for value. (18 Am. Jur. 2d 757.) An over-issued stock is also known as spurious stock.

(2) An over-issue of stock does not avoid the original issue. Moreover, where the corporation is permitted by law to increase its capital stock, mere irregularities in effecting such increase will not necessarily invalidate the increased issue. (Ibid., 758.) (3) There is no over-issue where shares have been surrendered and new shares issued in their stead. The new issue in such case merely takes the place of the shares surrendered nor is there an over-issue where the corporate structure provides for conversion of one class of stock into another at the option of a stockholder, or where stock is issued to replace certificates which have been lost. (Ibid.) Unauthorized increase of capital stock.

An attempted unauthorized increase of capital stock amounts to an over-issue and such stock is, therefore, absolutely void and cannot be validated by application of the doctrine of estoppel. The same is true, as a rule, of an increase which is, in effect, wholly unauthorized because attempted under such conditions or in such a manner that is not within statutory authority to make the increase. It necessarily follows that: (1) Subscriptions for such stock are likewise void both on the ground of illegality and for want of consideration;

352


Sec. 38

(2) Subscribers for or purchasers of such stock acquire none of the rights of stockholders, although bona fide purchasers of certificates therefor may have a right of action against the corporation for damages; (3) Subscribers for or purchasers of such shares do not become liable to creditors of the corporation or on a winding up as stockholders for unpaid subscriptions, and are not subject to a statutory liability to creditors imposed upon stockholders; and (4) Subscribers for or purchasers of such shares from the corporation may recover from it money paid to it under their subscription or purchase as upon a failure of consideration, or breach of warranty of the existence of the thing sold, unless they are precluded from such relief as parties in pari delicto. Failure to make a specific offer to return dividends received has no material bearing upon the subscriber's right of action. Where the corporation cancels the illegal shares and repays to the subscribers the money paid by them therefor, they are not liable to or for creditors for the amount so repaid. (18 C.J.S. 750.) Subscription r e q u i r e m e n t in case

of increase of capital stock. (1) Subscriptions and payments based on capital stock as increased.

— A recognized authority gave the opinion that the proviso in Section 17 (par. 4.) in the old law (now Sec. 38 [par. 4].) "requires subscriptions and payments on account of subscriptions to the increased capital of the corporation in the same proportion to the new authorized capital or new non-par shares as such subscriptions and payments must bear to the original authorized capital or shares. So, before the Securities and Exchange Commission files [accepts] any amendment increasing the capital stock, the treasurer of the corporation must file an affidavit showing that at least 20% [now 25%] of the increase in capital stock is subscribed and 25% of the subscription is paid. 10

'"Where the stockholders authorized the increase of the capital stock of a corporation but the minimum legal requirement of 25% subscription and 25% payment could not be met so that no certificate of increase in capital stock was filed with the Securities and Exchange Commission, the board of directors, acting in good faith, may authorize the refund to the subscribers of subscription payments to the proposed increase. (SEC Opinion, Feb. 3,1971, p. 262.)

(a) New subscriptions necessary. — Thus, if the corporation

has an authorized capital stock of P20,000.00 and it is proposed to increase it to P50,000.00, an increase of P30,000.00, subscriptions must be obtained for not less than P6,000.00 [now P7,500.00] and payments in cash or in property amounting to not less than Pl,500.00 [now Pl,875.00] must be made on account of such subscriptions. (Fisher, op. cit, p. 61.) This assumes that the total subscriptions and payments to the original capital stock are in the same proportion. (b) No new subscriptions necessary. — Without the proviso,

it is quite clear that the pre-incorporation subscription requirements under Section 13 can easily be circumvented. But where at the time of the increase, in the same example, at least P12,500.00 worth of shares, which represent 25% of P50,000.00, the amount of the capital stock as increased, had already been subscribed and P3,125.00 (now minimum of P5,000.00) or 25% thereof paid, it would seem that no new subscriptions are necessary. In such case, the reason for requiring new subscriptions no longer exists. It is to be noted that Section 38 (par. 4.) requires "at least twenty-five percent (25%) of such increased capital stock has been subscribed x x x,"

or, in other words, "such capital stock as increased," and not "such increase in capital stock." (2) Subscriptions and payments based on additional amount by which capital stock is increased. — The SEC has construed the

phrase to mean the additional amount by which the capital stock is increased. A contrary rule may defeat the intention to infuse capital. Furthermore, the proceedings of the Batasang Pambansa [now Congress] show that the intention is to require at least 25% of the proposed increase. (SEC Opinion, July 29, 1993.) Subsequently, it opined that the phrase "of such increased capital stock" refers to the total subscription (not to individual subscriptions) and regardless of class. Thus, when the corporation has several classes of shares, the 25% subscription requirement may 11

"Where the increase in capital stock consists of two (2) or more classes of shares, the SEC allows either of the following ways of applying the 25%-25% rule: to be applied on each of the classes of shares representing the increase in capital stock; or to be applied on the total amount representing the increase in capital stock. (SEC Opinion, Aug. 4,1992.)

354


Sec. 38

be applied only to one class of shares or it may distribute it to all classes of shares, equally or unevenly. (SEC Opinion, April 11, 1995.) No treasurer's affidavit is required to be attached in case of decrease of capital stock. Ways of increasing (decreasing) authorized capital stock.

There are at least three (3) ways by which the authorized capital stock may be increased (decreased): (1) By increasing (decreasing) the number of shares authorized to be issued without increasing (decreasing) the par value thereof; (2) By increasing (decreasing) the par value of each share without increasing (decreasing) the number thereof; and (3) By increasing (decreasing) both the number of shares authorized to be issued and the par value thereof. ILLUSTRATION:

Assume that the authorized capital stock of X Corporation is fixed at P1,000,000.00 divided into 100,000 shares with a par value of P10.00 per share. The capital stock may be increased (or decreased) as follows: The number of shares is increased (decreased) to 150,000 (75,000) shares with the same par value of P10.00 each share; or the par value per share is increased (decreased) to P15.00 (P5.00) without increasing (decreasing) the number of authorized shares; or the number of shares is increased (decreased) to 150,000 (75,000) and at the same time increasing (decreasing) the par value of each share to P15.00 (P5.00). Increase by w a y of stock d i v i d e n d s.

Stock dividends (see Sec. 43.) are ordinarily declared out of the authorized but unissued shares of the corporation. A corporation, however, may also increase its capital stock by way of stock dividends without touching its unissued shares as long as there are sufficient retained earnings to cover

Sec. 38


355

the increase, (see Sec. 62[5].) If the proposed stock dividend would result in the issuance of shares of stock in excess of the corporation's authorized capital stock, the over-issue is null and void. Such dividend declaration may be validly done provided that the corporation simultaneously increases its capital stock and applies the proposed stock dividends as full payment of the subscriptions to the capital stock increase. (SEC Opinion, July 30, 1969.) Par v a l u e or no par v a l u e s h a r e s for t h e authorized increase.

Under the authority granted under Section 38 and under Section 6, the increased capital stock may be divided into par value shares and no par value shares. In other words, the increase in capital stock could belong to any of these two classes of shares or to both. The issue of no par value shares for the authorized increase affords a means by which the corporation may attract investors. In the course of its business, the corporation may meet reverses. Its assets are thereby reduced and the true money value of the issued shares may be below their par value. Under the prohibition contained in Section 62 (par. 1.), the unissued shares cannot be sold for less than their par value. Buyers, however, will be reluctant to pay par value because the outstanding shares have a book value or actual value which is below par. All the while the corporation is in need of more capital. So in this particular case, it may decide to issue no-par value shares, the selling price of which may be fixed in the manner provided for in Section 62 (last par.) of the Code. (C.G. Alvendia, op. ext., p. 199.) Reduction of capital stock. (1) By decrease of number of authorized shares. — When a corpo-

ration is authorized to reduce its capital stock, it may do so also by redeeming redeemable shares (see Sec. 8.) or purchasing its snares (see Sec. 41.) and cancelling or retiring the same, including treasury shares, (see Sec. 9.) Or it may accept a surrender of shares and give the holders in exchange therefor a proportionate amount of its assets, provided no rights of creditors are involved,

356


Sec. 38

or issue bonds for that purpose or exchange another class of stock for that retired, or exchange its outstanding shares for a smaller number of shares. Or it may do so by cancelling shares which have not yet been issued. A statute providing that a corporation, "at any meeting called for the purpose, may increase or reduce its capital stock and the number of shares therein," does not authorize a corporation to reduce its capital stock by purchasing the shares of a particular stockholder, unless all consent. In order that such reduction may operate justly to all the stockholders, each stockholder should be allowed to surrender such proportion of his stock as the amount of the proposed reduction bears to the whole amount of the capital stock. (6-A Fletcher, p. 385.) (2) By decrease of par value of authorized shares. — When a

corporation lawfully reduces its capital stock pursuant to Section 38, the shares which are retired or reduced no longer exist for any purpose. If the shares acquired are not retired or cancelled, no decrease in capital stock is effected, for the shares exist as treasury shares, (see Sec. 9.) The capital stock may be decreased, however, without decreasing the number of authorized shares into which it is divided as indicated in the articles of incorporation by decreasing the par value of such shares. The par value of shares of stocks of a corporation may be reduced for the purpose of eliminating its deficit. The reduction or decrease surplus or surplus arising from the

reduction of capital stock pursuant to Section 38 in excess of the deficit may only be declared as stock dividends since it partakes of the nature of paid-in capital in excess of par value, (see SEC Opinion, Aug. 8,1991; see Sec. 122.) Effect of reduction on liability for unpaid subscription. (1) As against corporate creditors. — A corporation has no

power to release an original subscriber to its capital stock from the obligation of paying for his shares without a valuable consideration for such release, and as against creditors, a reduction of the capital stock can take place only in the manner and under the conditions prescribed by the statute. (18 C.J.S.

Sec. 38


357

746, 873-874.) Under Section 38 (par. 4.), it is expressly provided "that no decrease of the capital stock shall be approved by the Commission, if its effect shall prejudice the rights of corporate creditors." Hence, "a resolution adopted at a meeting of stockholders to the effect that the capital should be reduced by 50% and the subscribers released from their obligation to pay the unpaid balance of their subscription in excess of 50% of the same, was an attempted withdrawal of so much capital from the fund which the company's creditors were entitled ultimately to rely and having been effected without complying with the statutory requirements, was wholly ineffective." (Phil. Trust Co. vs. Rivera, 44 Phil. 470 [1925].) (2) As between the corporation and the stockholders. — One object

of requiring capital stock to be diminished only at corporate meetings formally called is to insure publicity and to warn the public dealing with the corporation of the intended change. This is incompatible with secret arrangements and contrivances reducing capital stock by buying in the shares or by other devices, so as to release stockholders from their obligations to creditors. But failure to give the prescribed notice will not invalidate the reduction, if it is otherwise valid as between the corporation and the stockholders where all the stockholders consent (18 C.J.S. 747.), subject to the rights of corporate creditors. Distribution of surplus on reduction. (1) Where there is no impairment of capital. — Upon a reduction

of capital stock, if capital has not been impaired by losses, there necessarily occurs a surplus of assets to the extent of the reduction. Unless the rights of creditors will be affected or the capital impaired, the directors may make an equitable distribution of such surplus or so much thereof as may not be required in carrying on the business for the best interests of the stockholders. (2) Where reduction is made to meet impairment. — In other

words, there can be a distribution of only those assets over and above the amount equal to the par value of the outstanding reduced capital and the amount necessary to discharge the existing corporate indebtedness. Thus, as a general rule, where capital stock is impaired and a reduction is made merely to meet


358

Sec. 38

that impairment, there will be no distribution of assets among the shareholders. (18 Am. Jur. 2d 764-765.) (3) Distribution not mandatory. — The distribution to stockholders of surplus remaining after a reduction of capital stock is authorized by the Code (Sec. 122, last par.) but cannot be compelled. It must be borne in mind that the funds resulting from such reduction represent capital and not profits. ILLUSTRATIONS: (1) X Corporation has an authorized capital stock of P1,000,000.00 divided into 100,000 shares with a par value of P10.00 each. Only 60,000 shares with a par value of P600,000.00 were subscribed and fully paid for. X Corporation can reduce its authorized capital stock only after complying with the formalities prescribed by Section 38. If X Corporation reduces its authorized capital stock to P600,000.00, the unissued 40,000 shares are considered retired and no longer exist for any purpose. Here, there is no reduction of the legal capital of P600,000.00. (2) If, in the same example, there is an unpaid subscription of P100,000.00 representing 10,000 shares, X Corporation can reduce its authorized capital stock provided that it does not work to prejudice the right of corporate creditors, (par. 4.) The reduction of capital stock to, say, P500,000.00 will, in effect, release the subscribers from liability on their unpaid subscriptions. It will also reduce the legal capital by P100,000.00. If the net assets of X Corporation are less than P500,000.00, the corporation cannot reduce its capital stock to said amount if it will adversely affect corporate creditors. (3) Suppose all the 100,000 shares were subscribed and fully paid for. If the authorized capital stock is reduced to P600,000.00, the surplus of P400,000.00 may be distributed unless the rights of corporate creditors are affected. Thus, if at the time of reduction, the net assets of the corporation amount only to P700,000.00, then only the reduction surplus of P100,000.00 may be distributed. It is in the nature of a liquidating dividend. 12

(4) Suppose, in the preceding example, the authorized capital stock was reduced to P700,000.00 or to 70,000 shares ,2

See definition under Section 6.

Sec. 38


359

merely to meet the impairment of the corporation's capital. In this case, no distribution of assets can be made among the stockholders. P e r s o n s entitled to q u e s t i o n increase or d e c r e a s e of capital stock.

(1) An unauthorized increase or reduction of capital stock may be attacked and avoided by the corporation itself or by dissenting stockholders in the absence of an estoppel; or by creditors of the corporation, or by a receiver or assignee representing them, insofar as the transaction affects their rights. (2) And, as we have seen, an unauthorized increase of stock may be attacked by subscribers for or purchasers of such stock in avoidance of their subscriptions, or for the purpose of recovering what they have paid, unless precluded as being in pari delicto. (18 C.J.S. 753; see National Exchange Co. vs. Dexter, 51 Phil. 610 [1928]; Salmon Dexter Co. vs. Unson, 47 Phil. 649 [1925].) P o w e r to incur, create, or increase bonded indebtedness.

A corporate bond is an obligation to pay a definite sum of money at a future time at fixed rate of interest. The power of a corporation to incur, create, or increase bonded indebtedness or indebtedness secured by its notes or bonds is likewise expressly conferred by Section 38. But it is also a power implied from the express powers. (1) Stock and non-stock corporation. — A business corporation,

in the absence of restriction, may borrow money whenever the necessity of its business so requires and issue security or customary evidence of debt such as notes, bonds or mortgages. (19 Am. Jur. 2d 496.) Under Section 38 (par. 5.), non-stock corporations are now expressly authorized to incur, create, or increase bonded indebtedness. (2) Procedure and formalities. — The procedure prescribed in

Section 38 for incurring bonded indebtedness is the same as the procedure for increasing or decreasing the capital stock except that the certificate need not state the matters set forth in Nos. (2) and (3) and is not required to be accompanied by the sworn state-

360


Sec. 38

ment of the treasurer of the corporation concerning the amount of the increased capital stock subscribed and paid. The prescription of the formalities with respect to "bonded indebtedness" only, implies of necessity a distinction between debts which are "bonded" and all other debts. (Fisher, op. cit., p. 312.) (3) Shares and members entitled to vote. — Even holders of non-

voting shares or non-voting members, as the case may be, are entitled to vote on the matter. (Sec. 6, par. 6[4].) (4) Prior approval of, and registration of bonds with, SEC. — Any

incurring, creating, or increasing by the corporation of any bonded indebtedness is subject to prior approval of the Securities and Exchange Commission. (Sec. 38, par. 4.) The bonds issued by the corporation have to be registered with the Commission which is given the authority to determine the sufficiency of the terms thereof. (Ibid., last par.) The same considerations for stocks as provided in Section 62 insofar as they may be applicable may be used for the issuance of bonds by a corporation. (Sec. 62, par. 3.) W h e n obligations constitute b o n d e d indebtedness.

(1) Notes and bonds. — When a corporation borrows money, its indebtedness may be evidenced by notes or bonds as its primary security. (a) If the amount borrowed is small and if it is borrowed in a single sum, or from a few persons, or for a short time, notes are usually given. (b) If, however, the amount is large and obtained from a number of people and extends over a period of years, the corporate obligation is preferably and usually evidenced by bonds. (2) Distinctions. — The difference between a corporate note and a bond is not always clearly marked. Both are promises to pay money. (a) The phrasing of the bond is usually more formal than that of the note. (b) Also, payment of bonds is usually, though not invariably, secured as to both principal and interest by certain

Sec. 38


361

specified property held for the purpose under a formal deed or trust. (c) A bond issue consists of a number of bonds which, while they may vary as to denomination, some may be registered and some unregistered, are all of like general tenor and, if secured, are all secured. (3) Other characteristics of bonds. — The two principal

elements of distinction are time duration and the division of the whole debt into like aliquot part units of round number denominations, represented by negotiable or assignable certificates of indebtedness. (a) Such certificates are generally called "bonds," the purpose being to enable the corporation to make use of the borrowed money for long period of years, to obtain it from a large number of people, and to facilitate the transfer of the certificate of indebtedness from hand to hand during the term of the collective obligation. (b) Such bond issues are usually secured by the transfer to a trustee of specific property to secure payment of the debt. (c) The bonds usually, but not necessarily, run to bearer and are transferable by delivery. (d) The effect of the creation and issuance of such obligations is a borrowing from the general public. Whenever a corporation resorts to this method of borrowing funds, the resulting obligations constitute a "bonded indebtedness," subject to the requirements of Section 38 of the Corporation Code as to creation or increase. (H.C. Bentley, Corporation Finance and Accounting, cited in Fisher, pp. 315-316.) Other bonds issued by a corporation against its general credit are not covered by the provisions of Section 38, but the SEC Rules require their submission to the Commission for approval before they can be issued to the public. (SEC Opinion, April 6,1990.) ILLUSTRATIONS: (1) A Mortgage Trust Indenture was executed by X Corporation under the following facts: X Corporation will obtain credit/loan accommodations from three of four creditors, each evidenced by a promissory note. As security for the payment of

362


Sec. 38

the promissory note, X Corporation constituted a mortgage on its fixed assets. Instead of constituting individual mortgage in favor of each creditor, Z, a bank, was appointed by X Corporation with the consent of the creditors as common Trustee-Mortgagee. The mortgage is covered by an agreement denominated as Mortgage Trust Indenture executed by X Corporation to Z. In addition to the mortgage contract, Mortgage Participation Certificates (MPC) were issued by Z to creditors to evidence the extent of their interest in the mortgaged property. As each promissory note or amortization is paid, the corresponding MPC covering the same is cancelled. This process enables X Corporation to borrow again, using the same mortgaged property via MPC as security with the same or a new creditor protected by a first lien on the mortgaged property to the extent of his interest. Is the issuance of the MPC subject to the requirements of bonded indebtedness under Section 38? No. When a corporation secures its indebtedness whether by notes or bonds, such notes or bonds, being the primary security on the principal obligations, are created under Section 38. From the features of the MPC, it is clear, however, that they are issued by Z (trustee-mortgagee) merely to evidence the undivided interests of the creditors in the mortgaged property covered by the Mortgage Trust Indenture. They strengthen the claim of the creditors to the mortgaged property and in case of default of X Corporation (debtor-trustor), the creditor will have recourse to the mortgaged property in the hands of Z. (SEC Opinion, Sept. 6,1977.) (2) X Corporation will borrow from a few lenders the amount of P50 million to be evidenced by interest-bearing promissory notes, for the purpose of financing its subdivision/ housing development projects. The credit transaction will be for a term of ten (10) years payable in periodic installments and the principal, interest and premium due on outstanding balance, will be secured by a guaranty to be executed by Y Corporation, in its capacity as parent company of X Corporation, and a real estate mortgage over certain properties of Y Corporation. Z Corporation, an affiliate of X Corporation, will underwrite the mortgage note issue for X Corporation. Is the mortgage note issue an ordinary term loan or a bond issue?

Sec. 38


363

The features of the transaction characterize a term loan, as distinguished from a bond issue. (SEC Opinion, Nov. 18,1977.) T h e corporate b o n d contract.

(1) Parties. — There are three (3) parties to a corporation bond contract: the borrowing corporation, the bondholders, and the trustee. The trustee is a bank or trust company, which is chosen and paid by the corporation but serves mainly to protect the bondholders. (2) Trustee's functions. — They usually include: (a) countersigning the bonds to assure authenticity; (b) collecting interest and principal payments from the debtor-corporation and distributing them to those entitled; (c) acting as mortgagee or collateral holder if the bonds are secured; (d) verifying the performance of the debtor corporation's promises on behalf of the bondholders; and (e) taking legal action on behalf of the bondholders if necessary. Obviously, the bondholders cannot usually be parties to the framing of the bond contract, but they adopt its provisions when they choose to acquire bonds. (3) Bond indenture. — The contract itself, known as the "bond indenture," is a complete, lengthy legal document which constitutes the agreement between the parties. The bonds themselves are certificates of participation in their contract. In the indenture, the corporation promises to pay principal and interest, promises to pay the trustee, promises to pay its taxes and other debts, and promises to maintain its property and conduct its business prudently. (4) Usual provisions. — The bond indenture will contain many other provisions, including: (a) the total amount of the bonds authorized to be issued under the indenture or a statement that the amount is unlimited;


364

Sec. 38

(b) a statement that additional bonds may be issued in the future (open indenture) or that the first issue will be the only one permitted (closed indenture);

(c) statement of the purposes for which additional bonds may be issued, such as for construction or acquisition of property; (d) stipulation that all bonds must be identical in terms or that a series of issues, possibly having different interest rates, maturity dates, and call prices, may be sold under the basic indenture (in the latter case, each series would have a supplemental indenture detailing its special features); (e) details of the collateral or mortgage security to be provided; (f) mechanics of interest payments, registration of bonds, and principal repayments; and (g) terms of special features such as sinking funds, call provisions, and conversion options. (G.A. Christy & J.C. Clendenin, "Introduction to Investments," 7th ed. [1978], pp. 138-139.) Bond terminology.

Corporate bond issues are commonly given titles which undertake to describe the terms of the contract. Thus: (1) Promissory instruments running five (5) years or longer are "bonds" or "debentures"; shorter maturities are "notes." 13

(2) An equipment obligation (Philadelphia plan) may be a "trust certificate." (3) To identify the type of lien, the word "mortgage," "leasehold mortgage," "collateral trust," and "secured" are used. (4) For further clarification, adjectives such as "first," "secThe normal distinction between a corporate "bond" (bonded indebtedness) and a corporate "debenture" or "note" is that the former is usually secured by a mortgage on corporate property while the latter usually is not. (5-A Words and Phrases, p. 128.) Debentures are serial obligations or notes issued on the basis of the general credit of the corporation and since they are not secured by corporate property, they are not bonded indebtedness as contemplated in Section 38. 13

Sec. 38


365

ond," "refunding," "consolidated," "general," "divisional," "prior," and "adjustment" may be used singly or in combination. (5) To describe the pledged property, such words as "bridge," "terminal," or "equipment" may be included. (6) Additionally, such descriptive terms as "income sinking fund," "purchase money," "extended," "series," "serial," "participating," and "convertible," are used. (Ibid., op. cit., p. 154.) Types of b o n d s .

(1) Common types. — They may be secured or unsecured. The major types of secured bonds are: (a) Mortgage bonds or debt instruments of financing secured by a lien on specifically named property. Land, building, equipment, and other fixed assets are the kinds of property most commonly pledged as security; (b) Collateral trust bonds or debt instruments secured by a

pledge of either stocks or bonds, or both which are deposited with a trustee; and (c) Equipment obligations or debt instruments to secure financing loans on locomotives, railway cars, buses, large trucks, and similar equipment. The most outstanding characteristics of an equipment obligation is the railroad equipment trust certificate secured by title to rolling stock, such as cars and locomotives. Under the Philadelphia (or equipment lease) plan, a manufactur-

er builds equipment to a railroad's specifications and then sells the equipment to the trustee who leases the equipment to the railroad. Equipment trust certificates are sold by the trustee to investors to pay the manufacturer. The annual installment payments over a period of 15 years or less are at rates calculated to be well within the economic life of the equipment, and there is a substantial downpayment as further protection. (Soldofsky & Olive, "Financial Management," 1974 ed., pp. 62-65.) Under the New York (conditional sale) plan, the trustee receives

the equipment from the manufacturer and sells it to the purchasing corporation in return for a series of equipment trust notes.

366


Sec. 38

These notes are interest-bearing and of serial maturities; when sold to investors, they provide the money to pay the manufacturer. When the notes are paid off by the purchasing corporation, the conditional sale becomes final and complete. (Christy & Clendenin, op. cit., p. 144.) Examples of unsecured bonds are: (a) Straight debenture bonds or general credit bonds not

secured by any specific property. The earning of the issuing corporation provides the protection to the debenture bondholders; (b) Guaranteed bonds or that type for which one or more individuals or corporations other than the issuer guarantees the payment of interest or principal or both; and (c) Subordinated debenture bonds or debt instruments

specifying that the holder's rights are inferior in the event of liquidation or reorganization to any existing and future debt defined in the indenture as senior debt. (Soldofsky & Olive, op. cit., pp. 64-65.) (2) Special types. — Besides the common types of bonds, there are hybrid securities or bonds which have features similar to those characteristics of common stock or preferred stock. These are: (a) Convertible

debentures

or

bonds

which

may

be

exchanged for the common stock of the issuing corporation at a fixed price by a predetermined redemption rate at the option of the bondholder; (b) Income bonds, sometimes referred to as adjustment

bonds, or debt instruments with a fixed rate of interest payable only if earned and declared by the board of directors. They are hybrid securities combining some of the characteristics of preferred and straight bonds; and (c) Bonds with warrant or stock purchase warrant, or an

option or a right, exercisable by its holder, to purchase stock at a stated price during a stipulated period of time. Bond warrant issues are usually debentures, and the warrants are detachable or non-detachable. Detachable warrants are

Sec. 39


367

preferred by investors because such warrants may be sold or exercised apart from the bond, whereas non-detachable warrants cannot be sold or exercised separately from the bond. {Ibid., op. cit., 65-69.) Sec. 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 twothirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt. Right of p r e - e m p t i on of stockholders.

Whenever the capital stock of a corporation is increased and new shares of stock are issued, the new issue must be offered first to the stockholders who are such at the time the increase was made in proportion to their existing shareholdings and on equal terms with other holders of the original stocks before subscriptions are received from the general public. For example, if a stockholder with pre-emptive right owns 20% of the outstanding shares of the corporation, he may subscribe 20% of any shares of stock issued by the corporation. This principle is known as the 14

right of pre-emption or pre-emptive right of stockholders.

15

The mere fact that the subscriber is entitled by right of pre-emption to only a portion of the total shares subscribed for does not militate against nor vitiate the validity of a subscription contract (see Sec. 60.) partially paid for and duly recorded in the books of the corporation. (SEC Opinion, Dec. 14,1964.) The corporation may still allow its stockholders who failed to exercise their preemptive rights within the prescribed period, to subscribe at a later time especially when fault is not attributable to the latter and provided all previous non-subscribing stockholders are given the opportunity again. (SEC Opinion, Oct. 9,1990.) ""Pre-emptive rights" to subscribe to shares are considered "securities" within the contemplation of Section 2(a) of the Revised Securities Act. (SEC Opinion, April 19,1994.) 14

368


Sec. 39

(1) Availability of right to new issues of shares and unissued

shares. — The right extends only to new issues of shares arising from any increase of capital stock effected under Section 38, but may also be available with respect to "issues or disposition" of unissued shares belonging to the original stock of the corporation, (infra.) Hence, it extends to the unsubscribed portion of the capital stock and even to treasury shares. (2) Acquisition by transferor of right. — When shares of stock

are sold by the holder after an increase of the capital stock has been voted, the purchaser acquires, as an incident to the stock, the same right of preference in subscribing for or purchasing the new stock as was possessed by the transferor. (Hogg vs. Eckhardt, 175 N.E. 382.) This principle, however, does not apply to transfers where the assignors have previously exercised their pre-emptive rights to subscribe to new issues. To rule otherwise would allow the pre-emptive right attached to the original stock to be exercised twice. (SEC Opinion, Nov. 28,1990.) (3) Right subject to exceptions. — The application of the right

of pre-emption in a stock corporation depends on a consideration of all the surrounding circumstances of each case. In other words, the right is not absolute as it admits of certain exceptions. Reason for the grant of right.

The rule aims to safeguard the right of a stockholder to preserve unaltered and unimpaired his proportionate influence and interest in the corporation and the relative value of his holdings. In other words, the purpose of the right is to protect from impairment and dilution the basic rights of the existing stockholders in the corporation, i.e., to voting control, to dividend payments, and to the net assets of the corporation. However, a stockholder may waive such right. The waiver should be given individually by the stockholder concerned or by another by way of a special power of attorney. Being a personal right, the waiver cannot be made by the corporation itself through a stockholders' resolution. (SEC Opinion, Dec. 12,1994.) A stockholder cannot be forced to waive the right even if majority of the other stockholders opt to waive it. (SEC Opinion No. 08-08, Mar. 31, 2008.)

Sec. 39


369

ILLUSTRATION: X Corporation has an original capital stock of P100,000.00 divided into 1,000 shares with a par value of P100.00 per share. A owns 500 shares. Subsequently, the capital stock is increased to P200,000.00 (to 1,000 more shares). Both the old and new shares are voting shares. (1) Right to vote. — A must be given a right to subscribe to 500 of the new shares before they are offered to others. If A is allowed to subscribe to only 100 shares of the increased stock, his voting control would be reduced from 50% (500/1,000) to only 30% (600/2,000). (2) Right to net earnings as dividends. — Suppose the

corporation made a net earnings of P50,000.00. Had this entire amount been distributed as cash dividends before the increase, each stockholder, including A, would have received P50.00 (P50,000.00/1,000) per share. After the increase, the dividend would be reduced to P25.00 (P50,000.00/2,000) per share. (3) Right to net corporate assets after liquidation. — Assume

now that the total assets of the corporation amount to PI70,000.00, with liabilities of P20,000.00 and surplus of P50,000.00. Thus, its net assets or net worth is P150,000.00. Therefore, the actual value per share is P150.00 (P150,000.00/1,000). If the new shares were to be issued at their par value of P100.00, the actual value of the original shares would be reduced to P125.00 (P250,000.00/2,000). If the rule of pre-emption will not be observed, it is evident that existing stockholders who are allowed to subscribe to more than their pro rata shares in the increase of the capital stock and new stockholders will unjustly benefit by P25.00 per share at the expense of the stockholders whose pre-emptive right is violated. In the event of liquidation, each stockholder, old and new, will participate in the net assets of the corporation at the rate of P125.00 per share. Power to deny pre-emptive right.

The pre-emptive right of stockholders of a stock corporation "to subscribe to all issues or disposition of shares of any class in proportion to their respective shareholdings" may be "denied by the articles of incorporation or an amendment thereto"

Sec. 39


370

or may fall under any of the exceptions." (Sec. 39.) Unless so denied or excepted, the right should be granted to a holder of shares although they are of a class different from those issued or disposed of. For example, holders of Common "A" shares are entitled to subscribe to Common " B " shares in proportion to their interest, but they cannot be required to subscribe to the Common " B " shares, especially since the latter are of a class different from the class they are holding. 17

A stockholder whose pre-emptive right is violated may maintain an action to compel the corporation to give him that right. If the denial is by an amendment to the articles of incorporation, he may exercise his appraisal right under Section 81(1). Shares to w h i c h right not available.

Under Section 39, the pre-emptive right of stockholders to subscribe to all issues or disposition of shares in proportion to their respective shareholdings extends "to all issues or disposition of shares of any class" (such as treasury shares) unless denied by the articles of incorporation or an amendment thereto (in which case they are deemed to have waived the right), and except to the following: 18

(1) Shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; (2) Shares to be issued in good faith with the approval of stockholders representing 2 / 3 of the outstanding capital stock in exchange for property needed for corporate purposes; and (3) Shares to be issued in good faith with the approval of the stockholders representing 2 / 3 of the outstanding capital stock in payment of previously contracted debt. The pre-emptive right does not extend to the issue of shares in No. (1) in view of the need to comply with a legal requirement The SEC requires an explicit written waiver of the right of pre-emption from the non-subscribing stockholders every time it processes an application for increase in capital stock. 16

It is not clear whether common stockholders have a pre-emptive right to acquire preferred shares and preferred stockholders to acquire common shares. But if the preferred stock is convertible to common, holders of common shares must be given the right. As commonly the practice in an initial public offering of new issues in the stock exchange. 17

18

Sec. 39


371

which is paramount to the exercise of the right; and in Nos. (2) and (3) for reasons based upon practical convenience and necessity and the exercise of discretion of the board of directors in making new issues of shares to enable the corporation to carry on the corporate business. Offering of r e m a i n i n g u n s u b s c r i b e d shares. (1) To public or any person acceptable to corporation. — If the

unissued shares, whether from the original or increased capital stock, corresponding to one stockholder are not subscribed or purchased by him within the period fixed for the exercise of his pre-emptive right, he is deemed to have impliedly waived his right to subscribe to the same or to the balance if he subscribes only to a portion. It does not follow that said shares should again be offered on a pro rata basis to stockholders who took advantage of their right of pre-emption. This is because as long as they exercise their pre-emptive rights, their relative and proportionate voting strength in the corporation will not be affected adversely. (SEC Opinion, Sept. 24, 1974, citing C.G. Alvendia, The Law of Private Corporations, pp. 172-173.) Thus, the remaining unsubscribed shares may be offered to the public on first-come, first-served basis or to any person acceptable to the corporation without violating the pre-emptive rights of such stockholders. (2) To stockholders of record. — As a matter of policy, the Securities and Exchange Commission considers it a sound corporate practice to offer always the remaining shares to the stockholders of record whenever practical and feasible before offering them to the public (Ibid.; May 14, 1990, Dec. 6, 1994, March 23, 1998.), although this "right of first refusal" is not provided for in the articles of incorporation. ILLUSTRATION: A owns 20% of the capital stock of Corporation X. He exercised his pre-emptive right to new shares issued by the corporation. B, another stockholder, did not exercise his right with respect to the shares corresponding to him. His shares were offered to and purchased by stockholder C.

372


Sec. 39

In this case, A still maintains his 20% interest in the corporation although C's proportionate holdings increased. A has no cause for complaint as long as his 20% interest is not reduced. Time within which the right may be exercised.

The time within which a stockholder must exercise his preemptive right is generally fixed in the resolution authorizing the increase of capital stock. A majority of the stockholders have a right to fix the time to suit themselves and the interests of the corporation. The only limitation upon the exercise of the prerogative is that every stockholder shall be treated alike and shall be afforded a reasonable opportunity to subscribe. (Hayt vs. Great American Ins. Co., 200 Pa. 516, 50 A. 154.) Parenthetically, such resolution may also require the stockholders desiring to exercise his preemptive right to pay a deposit on the new stock at the time of subscribing. (SEC Opinion, Dec. 29,1976.) Pre-emptive right as to treasury s h a r e s .

(1) In close corporations, the pre-emptive right of stockholders extends to all stock to be issued (i.e., old or new) including reissuance of treasury shares, whether for money or for property or personal services, or in payment of corporate debts, unless the articles of incorporation provide otherwise. (Sec. 102.) (2) In widely held corporations, it would seem that existing stockholders have also a pre-emptive right as to treasury shares (Sec. 9.) in view of the use of the phrase "disposition of shares of any class" in Section 39. Note, however, that sale or disposition of the treasury stock is not considered a new issue. Furthermore, since the funds used in reacquiring the treasury shares come from the surplus profits of the corporation, which could have been declared instead as dividends, it is a desirable policy to recognize the pre-emptive rights of stockholders over treasury shares. Price of new stock offerings. (1) Interests of the corporation and all stockholders to be consid-

ered. — The concept of pre-emptive rights is given by law to safeguard two distinct interests of stockholders — protection against dilution of their equity in the corporation and protection against dilution of their proportionate voting control. The law, however, gives no indication regarding the price that a corporation must receive for new shares. Obviously, the power to determine the price must be exercised for the benefit of the corporation and in the interests of all stockholders. (2) Where price far below fair market value. — When new shares

are issued at prices far below their fair value in a corporation with only a limited market for its shares, existing stockholders who do not want to invest or do not have the capacity to invest additional funds can have their equity interest in the corporation diluted to the vanishing point. (3) Right of stockholders to maintain proportionate equity and at the same time not to acquire additional shares. — One part of the

stockholders' right to maintain proportionate equity in a corporation by purchasing additional shares is the right not to acquire additional shares without being confronted with dilution of his existing equity if there is no valid business justification for the dilution. This right not to acquire is seriously undermined if the stock offered is worth substantially more than the offering price. Any share subscribed or purchased at this price dilutes his interest and impairs the value of his original holdings. (4) Right of stockholders to insist on legally adequate price. —

A corporation is not permitted to dispose its stock for a legally inadequate price at least where there is objection. While a stockholder has no right to block a disposition of new shares for a fair price merely because he disagreed with the wisdom of the plan, he has the right to insist that the price be fixed in accordance with legal requirements. (Katzowitz vs. Sidler, 249 N.E. 2d 359 [Ct. Apps. N.Y. 1969].) Availability of right to additional issue of originally authorized shares.

A shareholder's pre-emptive right is his option to subscribe to allotment of shares, in proportion to his holdings of outstanding shares, before new shares are offered to others. This doctrine

374


Sec. 39

applies when a corporation increases its capital stock by declaring a stock dividend, in which case it cannot discriminate between stockholders. The shareholders' pre-emptive rights do not generally apply where the shares belong to the original (or increased) capital stock of the corporation unsubscribed or undisposed of, inasmuch as such shares constitute a part of the assets, and may be sold either to stockholders or to strangers as the corporation may deem best even without notice to stockholders." They are not new issues. (1) All originally authorized shares initially offered for subs-

cription. — When one subscribes for shares in a corporation, he realizes that his position is fixed on the basis of the proportion between the number of shares subscribed by him and the total number of shares which the corporation is authorized to issue. This presupposes, however, that the corporation at its inception offered all its originally authorized shares, although such should be the presumption, (see Datu Tagoranao Benito vs. Securities and Exchange Commission, 123 SCRA 722 [1983]; Dee vs. Securities and Exchange Commission, 199 SCRA 238 [1991].) The subscriber cannot claim dilution of interest in case additional issues of originally authorized shares are purchased by others. (2) Number of such shares initially offered specified. — Where the

number of shares initially offered for subscription was specified, such that the original subscribers could not have insisted on subscribing for more, the corporation must first offer the additional issue of shares from the unsubscribed portion of the authorized capital stock pre-emptively to stockholders before the same is offered to third parties. In this case, the original subscriber is deemed to have taken his shares in relation to the number of shares then initially alloted for subscription rather than to the total number of authorized shares at the time of his subscription. The subscriber cannot claim a dilution of interest in case additional issues of originally authorized shares are purchased by others.

"The issuance of shares out of the unsubscribed shares of the authorized capital stock of the corporation may be authorized by the board of directors thru a board resolution without need of stockholders' approval. (SEC Opinion No. 05-03, April 27, 2005.)

Sec. 40


ILLUSTRATION: X, Inc. has an original capital stock of P1,000,000.00 divided into 100,000 shares with a par value of P10.00 each. At its inception, Corporation X offered for subscription all the 100,000 shares but only 40,000 shares were subscribed and fully paid. Z's subscription covers 4,000 shares. In this case, Z is not entitled to pre-emption with respect to the remaining unissued 60,000 shares if they are later reoffered. He cannot claim a dilution of interest. Where the number of shares initially offered for subscription was only 40,000, then Z may exercise his pre-emptive right in case the remaining 60,000 shares are subsequently offered for subscription to the extent of 1 /10, or 6,000 snares. Sec. 40. Sale or other disposition of assets. — Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders or representing at least two-thirds (2/3) of the outstanding capital stock, or in case of nonstock corporation, by the vote of at least two-thirds (2/3) of the members, in a stockholders' or members' meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code. A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated.

375

376


Sec. 40

After such authorization or approval by the stockholders or members, the board of directors or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of property and assets, subject to the rights of third parties under any contract relating thereto, without further action or approval by the stockholders or members. Nothing in this section is intended to restrict the power of any corporation, without the authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property and assets if the same is necessary in the usual and regular course of business of said corporation or if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its remaining business. In non-stock corporations, where there are no members with voting rights, the vote of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by this section. (28 1/2a) Power to sell, lease, etc. all or substantially all corporate assets. (1) Requisites. — A corporation by the action of its board of directors or trustees supported by the vote of shareholders or members may sell, lease, exchange, mortgage, pledge, or otherwise dispose of all or substantially all of its property, and assets including its goodwill, (see Title IX [Merger and Consolidation].) The requisites for the validity of such sale, etc. are as follows: (a) The sale, etc., must be approved by the board of directors or trustees; (b) The action of the board of directors or trustees must be authorized by the vote of stockholders representing 2 / 3 of the outstanding capital stock including holders of nonvoting shares (see Sec. 6, par. 6[3].) or 2 / 3 of the members, as the case may be; and (c) The authorization must be done at a stockholders' or members' meeting duly called for that purpose after written notice.

Sec. 40


377

(2) Other legal limitations. — As a safeguard against abuse

of power, Section 40 provides that the sale, etc., shall be subject to the provisions of existing laws on illegal combinations and monopolies, (see Sec. 140.) Furthermore, under the Bulk Sales Law (Act No. 3952, Sees. 3, 4, 5.), the sale, etc. of all or any portion of a stock of goods, merchandise, provisions or materials otherwise than in the ordinary course of business is declared fraudulent and void as to creditors of the vendor unless specified formalities are observed such as the giving by the vendor to the vendee of a list of creditors to whom said vendor may be indebted. (3) Sale of all assets without dissolution. — Subject to the above

legal limitations, a corporation may sell all its assets without necessarily dissolving or terminating its existence. If such sale is made to another corporation and there is no intent to combine, the selling corporation may continue in a state of suspended animation (Ballantine, p. 666.), subject to the effect of non-use of corporate powers and continued inoperation of a corporation provided in Section 22. (SEC Opinion, July 8,191387.) The rights of creditors must not be overlooked or disregarded when a corporation sells its entire assets and turns over its business to another. (Ballantine, p. 676.) The only way the transfer can proceed without prejudice to the creditor is to make the assignee assume the liabilities of the assignor, unless the creditors who did not consent to the transfer choose to rescind the transfer on the ground of fraud. (Caltex [Phils.], Inc. vs. PNOC Shipping Transport Corp., 498 SCRA 400 [2006].) (4) Liability of purchasing corporation. — Generally, where one

corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor, provided the latter acted in good faith and paid adequate consideration for such assets, except where any of the following circumstances is present: (a) Where the purchaser expressly or impliedly agrees to assume such debts; (b) Where the transaction amounts to a consolidation or merger of the corporations; (c) Where the purchasing corporation is merely a continuation of the selling corporation (see Caliguia vs. National Labor Relations Commission, 264 SCRA 110 [1996].); and

378


Sec. 40

(d) Where the transaction is entered into fraudulently in order to escape liability for such debts. (Edward J. Nell Co. . vs. Pacific Farms, Inc., 15 SCRA 415 [1965], citing 15 Fletcher 160-161; McLeod vs. National Labor Relations Commission, 512 SCRA 222 [2007].) Where the requirements of the Bulk Sales Law (supra.) have not been complied with, both the selling and buying corporations may be held solidarily liable to the creditor of the selling corporation. Authority of the board.

(1) Stock corporations. — Section 40 covers not only sale but also lease, exchange, mortgage, pledge or other disposition of its properties. (a) The board is given the right to decide upon the terms and conditions of the transaction including the consideration for the property disposed of, for, at any rate, the transaction is still subject to approval by the stockholders or members. (b) After such approval, the board may nevertheless, in its discretion, abandon the transaction, without further action or approval by the stockholders or members but subject to the rights of third parties under any contract relating thereto, (par. 3.) (c) If the property to be sold constitutes merely a part of the assets of the corporation, even if substantial, and the sale thereof will not render the corporation incapable of continuing its business (par. 4.), the board of directors or trustees may dispose of the same as it may deem convenient without need of approval of the stockholders or members of the corporation. (SEC Opinion, Dec. 4, 1990.) Under paragraph 4, the authorization by the stockholders or members is not required. It is understood, however, that the transaction is not tainted with fraud or bad faith or prejudicial to the interest of the corporation. (2) Non-stock corporations. — Under the last paragraph, the vote of the majority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by Section 40 in the case of non-stock corporations where there are no members with voting rights.

Sec. 41


379

Appraisal right of dissenting stockholder.

It is to be noted that the exercise of the appraisal right of any dissenting stockholder (par. 1; see Sec. 81 [2].) is predicated on the "sale or other disposition of all or substantially all" of the corporate assets, the phrase being defined as such which would render the corporation "incapable of continuing the business or accomplishing the purpose for which it was incorporated." (Sec. 40, par. 2.) Conversely, any disposition which does not involve all or substantially all of the corporate assets as defined above, made in the ordinary course of business, does not require the approval of the stockholders or members as set forth in Section 40 and would not entitle any dissenting stockholder to exercise his appraisal right. (Ibid., par. 4.) To determine if the sale is made in the ordinary course of business, the test is not the amount involved but the nature of the transaction. Liability of p u r c h a s i n g corporation for debts of selling corporation .

As a rule, a corporation that purchases the assets of another will not be liable for the debts of the selling corporation, provided the former acted in good faith and paid adequate consideration for such assets, except when any of the following circumstances is present: (1) where the purchaser expressly or impliedly agrees to assume the debts, (2) where the transaction amounts to a consolidation or merger of the corporations, (3) where the purchasing corporation is merely a continuation of the selling corporation, and (4) where the transaction is fraudulently entered into in order to escape liability for those debts. (Philippine National Bank vs. Andrada Electric & Engineering Company, 381 SCRA 244 [2002].) Sec. 41. Power to acquire own shares. — A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes,


380

Sec. 41

including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired: (1) To eliminate fractional shares arising out of stock dividends; (2) To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and (3) To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code, (n) Power to acquire o w n s h a r e s .

Section 41 expressly authorizes a stock corporation to purchase or acquire its own shares subject to the limitation that the acquisition is for a legitimate corporate purpose or purposes 20

and that there be unrestricted retained earnings (see Sec. 43.) in its

books to cover the shares acquired. (1) Elimination of fractional shares. — A fractional share is

a share which is less than one (1) corporation share. Thus, if a stockholder owns 250 shares and the corporation declares 25% stock dividend, his total shares will be 312 and 1/2 shares. Inasmuch as fractional shares cannot be represented at corporate meetings (No. 1.), the corporation may purchase the same from the stockholder concerned or issue fractional scrip certificates 21

Although shares thus purchased are, unless formally "retired," treated as "treasury shares," and, under a discredited method of accounting, are carried on the corporation's books as an asset or are applied to reduce "capital," "stated capital," or "capital stock" issued, it is obvious that, although the selling shareholder has given up an asset, the corporation has not acquired one. Its own shares are of no value to it unless and until they are resold. What has actually happened is that the corporation's assets have been reduced by the amount paid for the shares, while the proportionate interest of each of the other shareholders in the diminished assets have been decreased by diminishing the number of outstanding shares. Legal capital is not reduced by the transaction. Reduction of capital (see Sec. 38.) may be made only by the methods prescribed in the statutes. Only a few statutes include reacquisition of shares as such a method and then only in exceptional circumstances. (W.L. Cary, Cases and Materials on Corporation Law, 1969 ed., p. 1592.) Fractional shares standing in the name of a stockholder may not be used as a basis of voting for directors at a shareholders' meeting, either cumulatively or otherwise. (Ballantine, p. 401.) 20

21

Sec. 41


381

to such stockholder who may negotiate for the sale thereof with other stockholders also owning fractional shares so as to convert them into full shares. (2) Satisfaction of indebtedness to corporations. — No. 2 of Sec-

tion 41 does not authorize a corporation to arbitrarily purchase the shares it issued to any of its stockholders indebted to it, whether at the prevailing market price or at par value for the purpose of applying the proceeds thereof to the satisfaction of its claim against them, and this is particularly true where the consent of such stockholders has not been secured. And even where their consent has been secured, the corporation can buy their shares only if the conditions for the purchase (infra.) are present, (see SEC Opinion, Aug. 11,1961.) A stockholder may avail of Section 63 which allows transfer of shares to a third party. (3) Payment of shares of dissenting or withdrawing stockholders.

— No. 3 of Section 41 refers to instances when a dissenting stockholder is given appraisal right (see Sec. 81.) and the right to withdraw from the corporation as provided in Section 16 (Amendment of articles of incorporation), Section 37 (Power to extend or shorten corporate term), Section 40 (Sale or other disposition of corporate assets), Section 42 (Power to invest corporate funds in another corporation or business or for any other purpose), Section 68 (Delinquency sale), Section 77 (Stockholders' or members' approval [of plan of merger or consolidation]), and Section 105 (Withdrawal of stockholder or dissolution of [close] corporation). Under the Civil Code (Art. 2112.), the pledgee (corporation) may appropriate thing (stock certificates) pledged, if after the second auction the thing pledged is not sold. (4) Other cases. — This power of the corporation to acquire its own shares is not limited to the cases enumerated in Section 41. (a) It may also be exercised under Section 9 (treasury shares). (b) With respect to redeemable shares, they may be purchased by the corporation regardless of the existence of unrestricted retained earnings in the books of the corporation, (see Sec. 8.)

382


Sec. 41

(c) Shares may also be reacquired to effect a decrease in the capital stock of a corporation, (see Sec. 38.) Where a corporation reacquires its own shares, it does not thereby become a subscriber thereof. (d) In close corporation, where there is a deadlock respecting the management of its business, the Securities and Exchange Commission may order the purchase at their fair value of shares of any stockholder by the corporation regardless of the availability of unrestricted retained earnings in its books. (Sec. 104, par. 1[4].) Conditions for the exercise of the power.

The right and power of a corporation to acquire or purchase its own shares is not absolute, but depends upon the contingency of the condition of its affairs and its relation to creditors at the time of the purchase. (Fisher, op. cit., p. 287.) Briefly, a corporation's right to purchase its shares according to the weight of authority is subject to the following limitations: (1) That its capital is not thereby impaired; (2) That it be for a legitimate and proper corporate purpose; (3) That there shall be unrestricted retained earnings (see Sec. 43.) to purchase the same and its capital is not thereby impaired;

22

(4) That the corporation acts in good faith and without prejudice to the rights of creditors and stockholders; and (5) That the conditions of corporate affairs warrant it. (SEC Opinions, Sept. 11, 1985, Oct. 12,1992, and April 11,1994.) "No corporation shall redeem, repurchase or reacquire its own shares, or whatever class, unless it has an adequate amount of unrestricted retained earnings to support the cost of the said shares, except: a. When the shares are reacquired in the redemption of redeemable shares of the corporation or pursuant to the conversion right of convertible shares of the corporation, in accordance with the provisions expressly provided for in its articles of incorporation and certificates of stock representing said snares; b. When the shares are reacquired to effect a decrease in the capital stock of the corporation as approved by the Securities and Exchange Commission; c. When the shares are reacquired by a close corporation pursuant to the order of the Securities and Exchange Commission acting to arbitrate a deadlock as provided for under Section 104 of the Corporation Code of the Philippines. (Sec. 111, CCP No. 1-Rules Governing Redeemable and Treasury Shares, 1982; see Sec. 8.)

Sec. 41


383

The SEC has exclusive supervision, control, and regulatory jurisdiction to investigate whether the corporation has unrestricted retained earnings to cover the payment for the shares, and whether the purchase is for a legitimate corporate purpose as provided in Sections 41 and 122. (Boman Environmental Dev. Corp. vs. Court of Appeals, 167 SCRA 540 [1988].) Thus, if the aforementioned conditions are present, a corporation may acquire the shares of alien stockholders to comply with constitutional or legal requirements prescribing the minimum percentage of capital stock ownership of Filipino citizens in certain corporations. (Ibid.; see Sec. 12.) Although the existence of legitimate corporate purposes may justify a corporation's acquisition of its shares under Section 41, such purpose cannot excuse the stockholder from the effects of taxation arising from the redemption of stocks by the corporation. If the issuance of stock dividends is part of a tax evasion plan and thus, without legitimate business reasons, the proceeds of the redemption may be deemed as taxable dividends. (Comm. of Internal Revenue vs. Court of Appeals, 301 SCRA 152 [1999].) 23

Trust f u n d doctrine.

This doctrine, first enunciated by the Supreme Court in the case of Philippine Trust Co. vs. Rivera (144 Phil. 469 [1923].), holds that the assets of the corporation as represented by its capital stock are "trust funds" to be maintained unimpaired and to be used to pay corporate creditors in the sense that there can be no distribution of such assets among the stockholders without provision being first made for the payment of corporate debts and that any such disposition of it is a fraud on the creditors of the corporation who extend credit to the corporation on the faith of its outstanding capital stock and, therefore, void. (1) Corporation generally without power to purchase its own

shares. — It could be inferred from our law that a corporation has generally no power to purchase its own shares of stock except otherwise provided in the Code. This rule is dictated by the necessity of protecting the interests of existing creditors who 23

See "Tax treatment of stock dividends," under Section 43.

384


Sec. 41

might be adversely affected by the stock purchase which, in effect, may operate to reduce its capital stock to the extent of the shares purchased without complying with the formalities required by Section 38. A stockholder has no right to demand refund of his investment without complying with the requirements of Section 41 since this will constitute acquisition by the corporation of its own shares. (SEC Opinion, Jan. 3,1985.) (2) Repayment to stockholders a fraud on corporate creditors. —

The purchase, in effect, constitutes fraud on corporate creditors as it amounts to repayment to the stockholder of his proportionate share from the corporate assets and hence, an impairment of the capital available for the benefit and protection of creditors who are preferred over the stockholders in the distribution of corporate assets, (see Sec. 122, last par.) A corporation have unrestricted retained earnings before it may acquire its own shares, based on the trust fund doctrine that the capital stock, property and other assets of a corporation are regarded as equally in trust for the payment of corporate creditors. The prohibition against the distribution of the capital of a corporation as cash dividend is also based on the same doctrine, (see Sec. 43.) Note that under the doctrine, the corporation is not prohibited to use its assets for purposes of its business. Effects of purchase on corporate creditors. If at the time the purchase is made, the corporation does not have a unrestricted retained earnings or has negative earnings, or if the amount paid for the shares exceeds the surplus, the purchase necessarily operates as a distribution to the selling shareholders of a part of the capital, and to that extent impairs capital. (1) The impairment may be intentionally permanent, as where the corporation thereafter treats the purchased shares as retired but does not formally reduce capital, or merely refrains from reselling the shares. (2) The impairment may be unintentionally permanent to the full amount paid, as where the corporation finds itself unable

Sec. 41

"TITLE IV. POWERS OF CORPORATION

385

to resell the shares at all, or to the extent of part of the amount paid, as where it is unable to resell except at a lower price. These consequences affect creditors. But there may be a difference between current creditors and long-term creditors. If the corporation is solvent, the former can enforce their claims. But the latter take the risk of future insolvency as they await maturity of their claims, (see W.L. Cary, Cases and Materials on Corporations, p. 1592 [1969 ed.].) Effects of purchase on remaining stockholders. In addition to diminishing assets and thereby reducing the creditors' margin of safety, the purchase of shares by a corporation is objectionable also in that it injures remaining shareholders' rights, although it may be advantageous also to those who do not sell. (1) In general. — The impact of this purchase on the rights of remaining shareholders was fully discussed as follows: "A reduction of capital must be an all around affair; that is, where capital is to be paid off or to be cancelled as lost or unrepresented by any available assets, or where the liability of unpaid capital is to be reduced or extinguished, the same percentage should be reduced in each share. This ratable reduction would leave each shareholder the same proportionate interest and rights which he had before. Any other scheme would disturb or alter the relative positions of the members. The purchase by a corporation of its own shares withdraws part of the original capital from the venture and redistributes and changes the relative rights of the remaining members. Shareholders should have the right to insist on the preservation of all the contributed capital for the prosecution of the venture, except in case of legitimate reduction of capital which statutes authorize and which shareholders are presumed to have made part of their contracts with the corporation. The capital subscribed is considered to be permanently devoted to the enterprise by the shareholders and

386


Sec. 41

it constitutes a basic business fund which must not be paid back except in entire or partial liquidation of the corporation. It might be said that when a corporation purchases its own stock, a situation is created which is analogous to the non-issuance of authorized stock. Non-issue of authorized stock is one thing, retirement of issued, another thing. Issued capital has contributed to the growth of the corporation on which the public in giving credit, by purchasing or loaning on shares or bonds or in many other ways, may rely." (Jose S. Campos, Jr., "The Purchase by a Corporation of its Own Shares," Phil. Law Journal, Oct. 1952, p. 707, quoting Prof. Nussbaum, "Acquisition by a Corporation of its Own Stock," 35 Col. L. Rev. 976, 982.) (2) Share in dividends. — The shareholders would also be adversely affected in the field of dividends. How a purchase of shares by a corporation affects the rights to dividends of the remaining stockholders was very well explained as follows: "If the shares are purchased at a price above the actual value of the shares, the remaining members' share in the undivided surplus is impaired and money is actually being taken from the pockets of the remaining members for the benefit of the retiring shareholders. If the purchase is made at a price commensurate with the actual value of the shares, the surplus which would ordinarily be devoted to dividends is instead tied up to effect either an indirect and unauthorized reduction in capital, or else the possibility of dividends is postponed until such time as the treasury stock can be and is resold at an adequate price. And even when the price paid is less than their intrinsic value and a profit is later realized when they are reissued at a higher price, the distribution of the surplus as dividends has still been postponed." (Ibid., quoting Levy, "Purchase by a Corporation of its Own Stock" [1930], 15 Minn. L. Rev. 1.) (3) Share in possible losses. — The diminution of the number

of shareholders may entail still other dangers. As treasury stock does not share in the profits, it may be contended that the remaining shareholders would as a result get a bigger individual share therein by way of increased dividends per share. On the other

Sec. 42


387

hand, their share of possible losses is increased, inasmuch as part of the working capital disappears. With this decrease in working capital, the chances are, the profits will be less and, therefore, the proportionate share of the remaining shareholders would also be decreased. (Ibid.)

(4) Others. — The purchase has or may have a variety of other consequences with respect to shareholders. (a) On the one hand, it diminishes the number of shares, so that each shareholder who does not sell has a larger interest in a smaller total of assets. By reducing the number of shares, it affects voting control, if the shares purchased are voting shares. (b) If the shares are purchased at less than their value, it benefits those who do not sell, and on the other hand, if the price is unduly high, it enables the selling shareholders to retire from the enterprise with corresponding disadvantage to other shareholders. (c) It enables the management to use corporate funds to rid themselves of shareholders whose activities are believed by them to be detrimental to the enterprise or inconvenient to the management. (W.L. Cary, op. cit., p. 1592.) Sec. 42. Power to invest corporate funds in another corporation or business or for any other purpose. — Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least two-thirds (2/3) of the members in the case of non-stock corporations, at a stockholders' or members' meeting duly called for the purpose. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, That where the


388

investment by the corporation is accomplish its primary purpose of incorporation, the approval members shall not be necessary.

Sec. 42

reasonably necessary to as stated in the articles of the stockholders or (171 1/2a)

Power to invest fund s in other corporations or for other purposes.

(1) In order that a corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose, compliance with the requirements of Section 42 is necessary (see De la Rosa vs. Mao Sugar Central Co., Inc., 27 SCRA corporation [1969].) and, of course, subject to the prohibition against certain corporations (e.g., insurance and banking corporations) from having more than one purpose. 24

(2) Where the purpose clause of the articles of incorporation of a company embodies different and related purposes, the corporation may intend to carry them out simultaneously or to prosecute first the primary business in which it is most interested and then embark later in any one of the other purposes, as the need for expansion of the enterprise may warrant or the necessity of a change of business may demand. (SEC Opinion, Jan. 2,1973.) By virtue of the provisions of Section 42, a corporation may be organized with multiple lawful purposes so long as the primary purpose is indicated in the articles of incorporation. However, the investment of its funds is limited to the primary purpose. (3) The term "funds" in Section 42 includes any corporate property to be used in furtherance of the business. Thus, idle corporate property may be temporarily leased to make it productive in the absence of express restrictions in the articles of incorporation or by-laws and the leasing is not used as a scheme to preju-

In accounting, investments refer to assets not directly identified with the primary activities of a company, as distinguished from inventories, receivables, plant and equipment, and assets used in the sale of goods or services. Investments occupy a supplementary relationship to a corporation's primary revenue-producing activities. They are expected to contribute to the objectives of the company either through direct returns (dividends or interest) or value appreciation, or through enhancing the long-run operations of the company by providing some business advantage, or, as in the case of special funds, by enabling the company to meet certain business requirements, (see PICPA Bulletin No. 12[1], Nov., 1977.) 24

Sec. 42


389

dice corporate creditors, subject to the requirements of Section 42. (SEC Opinion No. 54, Nov. 3, 2003.) (4) A non-stock, non-profit foundation may invest its funds in or subscribe to shares of another domestic corporation. The term "funds," as used in Section 42, include "donations" received by the corporation from other entities. However, its power to invest is limited by its articles of incorporation. (Ibid.) Purpose other than the primary purpose. (1) A secondary purpose. — The other purposes for which the funds may be invested without amending the articles of incorporation must be among those enumerated in the articles of incorporation. In order to legally engage in any of its secondary purposes, the corporation must comply with Section 42. (2) Not among the secondary purposes. — A corporation is not

allowed to engage in a business distinct from those enumerated in the articles of incorporation without amending the purpose clause of said articles (see Sees. 14[2], 16.) to include the desired business activity among its secondary purposes. 25

Pawnshops organized as corporations and partnerships may be allowed the ancillary activity of directly purchasing or selling goods and articles. Presidential Decree No. 114, otherwise

"Under General Order No. 47, which was issued during the period of martial law, private and public firms with 500 or more employees were required to provide for their own and their immediate families rice consumption needs either through importation of or by directly engaging in rice production. Since General Order No. 47 is not merely advisory but imperative, being a rule having the force of law (until revoked or repealed), firms affected can engaged in rice production without the need of amending their articles of incorporation. (SEC Opinion, Sept. 12, 1975.) Accordingly, shareholders' consent to a corporation's investment of funds in another corporation to comply with the requirement of General Order No. 47 is not required, considering that the investment is made pursuant to a statutory obligation. (SEC Opinion, Jan. 19, 1976.) General Order No. 47 was repealed by Executive Order No. 176 (May 28,1987). Corporate funds may be temporarily loaned even to stockholders, provided the following conditions are observed: (1) The funds are not presently used by the corporation and the loaning is not made on a regular basis; (2) By lending the funds, the corporation will make them productive instead of allowing them to remain idle; (3) There is no express restrictions in the articles of incorporation or by-laws; (4) There must be a collateral or assurance that the borrower is capable of paying them at maturity date; (5) The lending is not used as a scheme to prejudice corporate creditors or result in the infringement of the Trust Fund Doctrine; and (6) Section 42 is complied with. (SEC Opinion, Jan. 11,1991.)

390


Sec. 42

known as the Pawnshop Regulation Act, contains no provision limiting the business of pawnshops to such activity. By implication, their scope may be extended to other unrelated business unless clearly prohibited by the language of the Act. The only requirement is that the person or entity engaged at the same time in other businesses not directly related or not incidental to the business of pawnshop, shall keep such business distinct and separate from his pawnshop operations. (SEC Opinion, March 28,1985.) 26

(3) Incident to primary purpose. — A corporation may invest

its funds in another business which is incident or auxiliary to its primary purpose as stated in its articles of incorporation without the approval of the stockholders or members as required under Section 42. Even holders of non-voting shares or non-voting members, as the case may be, are entitled to vote on the matter, (see Sec. 6, par. 6[7].) In such case, a dissenting stockholder shall have no appraisal right. Thus, the purchase of beer manufacturing facilities by a corporation in a foreign country for the manufacture and marketing of beer thereat was held as an investment in the same business stated as its main purpose in its articles of incorporation, which is to manufacture and market beer and, therefore, does not need the approval of the stockholders. (Gokongwei, Jr. vs. Securities and Exchange Commission, 89 SCRA 336 [1979].) Ratification of defective investment.

A corporate transaction or contract which is within the corporate powers, but which is defective from a purported failure to observe in its execution the requirement of Section 42 that the investment must be authorized by the affirmative vote of the stockholders (or members), may be ratified. The requirement is for the benefit of the stockholders who may ratify the investment and its ratification obliterates any defect which it may have had at the outset. (Ibid.)

Mere ultra vires acts (see Sec. 45.) or those which are not illegal and void ab initio, but are not merely within the scope of the Ûnder Section 4175(P), Book IV, of the Central Bank Manual of Regulations for Banks and other Financial Intermediaries.

Sec. 43


391

articles of incorporation, are merely voidable and may become binding and enforceable when ratified by the stockholders. (Pirovano vs. De La Rama Steamship Co., 96 Phil. 335 [1954].) Sec. 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 percent (100%) 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 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 a need for special reserve for probable contingencies, (n) Concept of dividends.

A stock corporation exists to make a profit and to distribute a portion of the profits to its stockholders. (1) A dividend is that part or portion of the profits of a corporation set aside, declared and ordered by the directors to be paid ratably to the stockholders on demand or at a fixed time. (Fisher vs. Trinidad, 43 Phil. 480 [1922]; Nielson & Co., Inc. vs. Lepanto Consolidated Mining Co., 26 SCRA 540 [1968].) It is a payment to the stockholders of a corporation as a return upon their invest-

392


Sec. 43

ment. (Cojuangco vs. Sandiganbayan, 586 SCRA 790 [2009].)* It is a characteristic of a dividend that all stockholders of the same class share in it in proportion to the respective amounts of stock which they hold. (18 Am. Jur. 2d 281-283.) (2) A dividend is a sum which can be divided among stockholders without touching the capital stock. (Lockhart vs. Van Aestyne, 31 Mich. 76.) The term has been regarded as indicating that there must be a surplus or profits to be divided. However, the word has also been used with no reference to surplus or net profits, e.g., to describe distributions made to stockholders on liquidation of the corporation, and to a distribution of assets upon a reduction of the capital stock. (19 Am. Jur. 2d 283.) Dividends, regardless of the form these are declared, that is, cash, property, or stocks, are valued at the amount of the declared dividend taken from the unrestricted retained earnings of the corporation. (PLDT vs. National Telecommunications Commission, 539 SCRA 365 [2007].) Concept of profits.

In its usual and ordinary meaning, the term profit means the "return to capital rather than earnings from labor performed or services rendered." (U.S. Employees Association Employees Association [USEAEA] vs. U.S. Employees Association [USEA], 107 SCRA 87 [1981], citing Ballantine's Law Diet., 3rd ed.) It has also been defined as "the excess of return over expenditure in a transaction or series of transactions," or the "excess of an amount received over the amount paid for goods and services" (Nicolas vs. Court of Appeals, 288 SCRA 307 [1998].), citing Webster's Third New Int. Diet., p. 1986 and Barron's Law Dictionary, p. 1991.) As applied to a corporation, the term has a larger meaning than dividends and covers benefits of any kind, the excess of value over cost, acquisition beyond expenditures, gain or advance. {Ibid., citing Booth vs. Gross, Kelly & Co., 238 P. 289, 831, 41 A.L.R. 868.) It is the excess of receipts over expenditures, that is, net earnings. (Ibid., citing American cases.)

"Citing DE LEON, The Corporation Code of the Philippines Annotated, p. 384, 2002

Sec. 43


393

Dividends distinguishe d f r o m profits or e a r n i n g s .

(1) A dividend, as applied to corporate stock, is that portion of the profits or net earnings which the corporation has set aside for ratable distribution among the stockholders. Thus, dividends come from profits, while profits are the source of dividends. (2) Profits are not dividends until so declared or set aside by the corporation. In the meantime, all profits are a part of the assets of the corporation and do not belong to the stockholders individually. (19 Am. Jur. 2d 284.) They may be in cash as well as in kind. Dividends received by a company which is a stockholder in another corporation are corporate earnings arising from corporate investment. The right to a share in such dividends, by way of salary increases, may not be denied its employees when they are entitled thereto. It is not a case of a corporation distributing dividends in favor of its stockholders, in which case, such dividends would be the absolute property of the stockholders and hence, out of reach by creditors of the corporation. (Madrigal & Company, Inc. vs. Zamora, 151 SCRA 355 [1987].) P o w e r t o declare d i v i d e n d s .

The board of directors of a stock corporation has the power to 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 the outstanding shares held by them." 28

(1) Sfodt dividends. — In the case of stock dividend, it shall not be issued without the approval of stockholders representing at least 2 / 3 of the capital stock then outstanding at a regular meeting of the corporation or at a special meeting duly called for the purpose. (Sec. 43, par. 1.) If the requisite vote for the declaration of stock dividends has been secured, the stockholders who are opposed cannot legally "Dividends cannot be declared and paid on the basis of the paid-up stock. The basis is the number of shares held by the stockholders, not the amount paid in consideration thereof, (see Sec. 137.)


394

Sec. 43

refuse to receive their participation in the stock dividends. However, before stock dividends represented by one class of shares may be given to holders of another class of shares, it is necessary that the consent of such holders be first secured, they being given a class of shares different from the class they are holding. (SEC Opinion, March 1, 1973.) Thus, a corporation may declare stock dividends to both holders of founders and common shares, since there is no prohibition on the matter either in the Code or jurisprudence, provided the stockholders affected will agree to such declaration. (SEC Opinion, Sept. 15,1972.) (2) Other dividends. — A mere majority of the quorum of the board of directors is sufficient to declare other dividends. The board may declare, other dividends other than stock without need of stockholders' approval. (Sec. 43, par. 1.) The dividends are paid to the registered owners of stock as of a record date (infra.), usually a date different from the date of declaration. They are stated either at a given percent or a fixed amount for each share. The record date determines the time when the stockholders of record shall be ascertained. Dividends payable out of unrestricted retained e a r n i n g s .

Under the law, dividends other than liquidating dividends (which are not really dividends as they are from capital) may be declared and paid out of "the unrestricted retained earnings" of the corporation. (Ibid.) A corporation cannot make a valid 29

The Code, in Section 43, adopting the change made in accounting terminology, substituted the phrase "unrestricted retained earnings," which may be considered a more precise term, in place of "surplus profits arising from its business," in the former law. "Surplus profits" was used in the past to mean "retained earnings" as presently understood. Indeed, the Code still speaks of "surplus profits" in the second paragraph of Section's in fixing the maximum earnings which may be retained by a corporation and in Section 3 in defining stock corporations. The Code deleted the phrase "arising from its business." It may be argued that the term "unrestricted retained earnings," as used in the Code, refers to all the excess of assets of the corporation over its liabilities including the amount of the legal or stated capital. Hence, it is not limited to accumulated net profits of the corporation "arising from its business" but may now comprehend also other gains such as those derived from the sale of fixed assets. But the term does not include the unrealized increase in value of fixed assets, (infra.) 29

Sec. 43


395

contract to pay dividends other than from retained earnings or profits and an agreement to pay such dividends out of capital is unlawful and void. The power of a corporation to acquire its own shares is likewise subject to the condition that there be unrestricted retained earnings in its books to cover the shares to be purchased. (Sec. 41.) For purposes of the general rule, the capital or capital stock which may not be impaired or depleted by dividends is not the entire net assets of the corporation; rather, it is the legal capital of the corporation in the strict sense, referring to that portion of the net assets directly or indirectly contributed by the stockholders as consideration for the stocks issued to them upon the basis of their par or issued value.

30

R e a s o n s for t h e rule.

(1) The main reason for the rule is that the outstanding capital stock of a corporation, including unpaid subscriptions, is a trust fund (supra.) for the security of creditors and cannot be distributed to their prejudice to the stockholders as dividends, the creditors being precluded from holding the stockholders personally liable of their claims. (2) Moreover, each stockholder is entitled as a matter of right to have the capital of the corporation unimpaired in order to carry out the purpose for which the corporation has been created. The rationale is that stockholders should only receive dividends from their investment, and not from the investment itself. (3) The reason has also been stated to be that the capital stock of a corporation cannot be diverted or withdrawn to the prejudice of its creditors and stockholders. This latter statement of the reason for the rule, however, has been criticized, for although a court will treat the assets of an insolvent corporation as a trust fund for its creditors and stockholders, a corporation cannot be said to hold any of its property subject to a trust while it is a solvent and going concern. (18 C.J.S. 1097.)

"For definition of "legal capital/' see comments under Section 6.

396


Sec. 43

Rule as to no par value stock.

The Code makes it clear that with respect to no par value shares, the entire consideration (including paid-in surplus, infra.) received from the same shall be treated as capital and shall not be available for distribution as dividends. (Sec. 6, par. 3.) The theory is that the stockholders intended that all such consideration shall constitute the basic business fund of the corporation to be permanently devoted in the prosecution of the corporate business. Dividends f r o m property in w h i c h capital is invested. (1) To engage in "wasting business." — In the case of corpo-

rations engaged in "wasting business," such as mining or timber-cutting, sometimes capital consumed in the regular course of operation, is treated as earnings. According to the socalled "wasting assets" doctrine, which is based on an English case, such a "wasting assets" corporation, the capital of which is necessarily exhausted in the carrying on of its operations, may rightfully declare and pay dividends out of net income without making up for the loss of its capital which is thus being constantly diminished. (19 Am. Jur. 2d 298.) In other words, when a corporation is created for the purpose of investing its capital in property which will necessarily be consumed or exhausted in the ordinary course of its operations, so that the depreciation in the value of the property cannot be repaired, it is not subject to the same rules as other corporations. A mining company, for example, is not formed for the purpose of permanently using the property in which its capital is invested, but for the purpose of investing in property which, in the nature of things, will be gradually consumed in making profits, and, in estimating the profits of such a corporation for the purpose of determining whether it may lawfully declare a dividend, no deduction is to be made for depreciation in the value of its mine by reason of its use and consumption in taking out the ore or other minerals. Dividends may be lawfully declared out of the net proceeds of its operations after deducting expenses and debts and a reasonable fund for contingencies.

Sec. 43


397

Each dividend payment represents a liquidation of capital assets. (2) To utilize a lease or patent. — The same is true of a corpo-

ration created for the purpose of utilizing a lease for a term of years, or a patent. (3) To liquidate a business. — Similarly, where a corporation is formed for the purpose of liquidating the business of a partnership, and selling all of its property and dividing the proceeds among its stockholders such property is, in no proper sense, its capital stock within the meaning of the rule prohibiting a corporation from distributing its capital in the form of dividends, but is rather to be regarded as property held by the corporation in trust for the benefit of its stockholders, and which may be distributed by it to them in the manner prescribed in the articles of incorporation, at least where the rights of creditors are not involved. (11 Fletcher, pp. 1079-1083.) Unrestricted retained earning s explained. (1) The retained earnings

31

of a corporation is "the difference

between the total present value of its assets after deducting losses and liabilities and the amount of its capital stock." (11 Fletcher, p. 1041.) Capital stock, in this instance, should be understood to refer to outstanding stock (see Sec. 137.), and not the stated or nominal (authorized) capital stock, (see Sees. 12,13,14[8].) Stated otherwise, the ordinary way of determining whether a corporation has retained earnings or not is to compute the value of all its assets and deduct therefrom all of its debts and liabilities, including legal capital, and thus ascertain whether the balance exceeds the amount of its outstanding shares of capital stock. This may be expressed in the following equation: Retained earnings - Assets - liabilities and legal capital

In accounting, the term has been denned as "the accumulated net income of a corporation from the date of incorporation (or from the latest when a deficit was eliminated in a quasi-reorganization), after deducting therefrom distributions to stockholders and transfer to capital stock or other accounts." (PICPA Bulletin No. 10[4, b], Nov., 1975.) The captions "retained income" and "accumulated earnings retained for use in the business are also used in preference to the term "earned surplus." (Ibid., No. 28.) 31


398

Sec. 43

The difference between the total assets and liabilities of a corporation represents its net worth or net assets or the stockholders'

equity consisting of the capital invested and the retained earnings. Thus, the retained earnings will be the balance of the net worth or net assets after deducting the value of the corporation's outstanding capital stock. They refer to the accumulated undistributed earnings or profits realized by a corporation arising from the transaction of its business and the management of its affairs, out of current and prior years. 32

33

Section 43 does not categorically state that the retained earnings of a corporation from which dividends may be declared should arise from its business as required by Section 16 of the former Corporation Law. However, sound accounting principles dictate that dividends may be declared only out of actual earnings or profits realized from the business of the corporation. (2) Such retained earnings or portion thereof are said to be unrestricted and, therefore, free for dividend distribution to stockholders, if they have not been reserved or set aside by the board of directors for some corporate purpose or for some other purpose in accordance with managerial, legal, or contractual requirements, (see Sec. 43, par. 2.) For instance, under the Insurance Code (Pres. Decree No. 1460, Sees. 210-214.), insurance companies are required to maintain reserves to assure the payment of losses covered by their policies and the return of unearned premiums. The restrictions may be imposed by the Securities and Exchange Commission in pursuance of authority given by law. In any event, no legal obligation exists on the part of the board to distribute all the unrestricted retained earnings as dividends, (infra.)

Section 3 provides that stock corporations may distribute dividends out of "surplus profits." For purposes of dividend declaration, the term "surplus profits" may be used synonymously with unrestricted retained earnings. In accounting, the term has been denned as "the residual interest of owners in the assets of a corporate business entity, measured by the excess of assets over liabilities." (PICPA Bulletin No. 10[1], Nov. 1975.) "Dividends from profits may come from the current net profits, i.e., those earned in the preceding year, or from the undistributed profits or earned surplus, i.e., the accumulated profits realized during all prior years. 32

Sec. 43


399

I t e m s affecting unrestricted retained e a r n i n g s .

SEC Memorandum Circular No. 11 (Dec. 5, 2008) prescribes the guidelines in determining availability of retained earnings for cash, property and stock dividend declarations of stock corporations. It enumerates the items affecting the unrestricted retained earnings account from an accounting purview, as follows: (1) Nominal or temporary or income statement accounts closed to income and expense summary at the end of the period to determine actual results of operations during the period and further closed to retained earnings account; (2) Effects of changes in accounting policy; (3) Foreign exchange gains and losses; (4) Actuarial gains or losses; (5) Share in the net income of associates /joint ventures accounted for under equity method of accounting; (6) Dividend declarations during the period; (7) Appropriations of retained earnings during the period; (8) Reversals of appropriations; (9) Effects of prior period adjustments; and (10) Treasury shares. Existence of actual profits or e a r n i n g s .

To justify the declaration of dividends, there must be an actual bona fide surplus profits or earned surplus over and above all debts and liabilities of the corporation. (Steinberg vs. Velasco, 52 34

The SEC has explicitly reiterated its original policy that dividends (cash or stock), shall be declared only out of unrestricted retained earnings of the corporation. A corporation cannot declare dividends when it has zero or negative retained earnings (deficit). The surplus profits or income must be (1) bona fide income founded upon actual earnings or profits. The existence of surplus profits arising from business operations is a condition precedent to the declaration of dividends;. (2) Actual earnings or profits shall mean net income for the year based on the audited financial statements, adjusted for unrealized items enumerated below, which are not available for dividend declaration: (a) Share /equity in net income of the associate or joint venture accounted for under the equity method, as the same is not yet actually earned or realized; (b) Unrealized foreign exchange gains, except those attributable to cash and cash equivalents; (c) Unrealized actuarial gains which result when the company opts to recognize actuarial gains or 34


400

Sec. 43

Phil. 953 [1929].) Hence: (1) Earnings of the corporation which have not yet been received even though they consist in money which is due cannot be included in the profits out of which dividends may be paid. (11 Fletcher, p. 1064.)

35

(2) As a rule, dividends cannot be declared out of borrowed money, for borrowed money is not profit; but money may be borrowed temporarily for the purpose of paying dividends, if the corporation has used its surplus assets to make improvements for which it might have borrowed money. (18 C.J.S. 1102.) (3) A corporation may properly pay dividends from accumulated surplus out of previous years although realizing no profit from current earnings. (4) On the other hand, it cannot pay dividends although it has realized actual profits for the year in which dividends are declared until it has ehminated a deficit resulting from its operalosses directly to profit or loss statement; (d) Fair value adjustment or gains arising from market-to-market valuation, which are not yet realized; (e) The amount of recognized deferred tax asset that reduced the amount of income tax expense and increased the net income and retained earnings, until realized; (f) Adjustment due to deviation from Philippine Financial Reporting Standards/generally accepted accounting principles (PFRS/ GAAP), which results to gain; (g) Other unrealized gains or adjustments to the retained earnings brought about by certain transactions accounted for under the PFRS such as accretion income under International Accounting Standards 39, Day 1 gains on initial recognition of financial instruments, reversal of revaluation increment to retained earnings, and negative goodwill on investments in associate; and (h) Other adjustments that the SEC may prescribe. (3) Additional paid-in capital shall neither be declared as dividends nor reclassified to absorb deficiency except through an organizational restructuring duly approved by the Commission. (SEC Memo. Circ. No. 11, Dec. 5, 2008.) A "reconciliation of retained earnings" is required by the Circular to be submitted by listed companies, corporations with securities reconstructed under the Securities Regulation Code (SRC) and by public companies. For other corporations, the reconciliation shall be required only in two (2) instances. Corporation X owns more than 20% of the voting common shares of Corporation Y. Under the Equity Method of Accounting, Corporation X is required to book its share in the net earnings or loss of Corporation Y. Can Corporation X declare cash or stock dividend or both from its recorded equity earnings in Corporation Y which are not yet received in cash? No. Retained earnings or surplus profits referred to under Section 43 from which dividends can be legally declared do not include participation or share of a corporation in the profits of its subsidiaries and affiliates, unless and until such profits are actually received in the form of cash or property dividends. Thus, while for purposes of management accounting, Corporation X can recognize as income its equity in the net earnings in Corporation Y, the same cannot be declared as dividends since it is not yet actually realized as income inasmuch as Corporation Y has not yet declared the same as dividends. (SEC Opinion, Oct. 6,1995.) 35

Sec. 43

T I T L E rv. P O W E R S O F C O R P O R A T I O N

401

tions of preceding years. (William vs. Western Union Tel. Co., 93 N.Y. 162.) In other words, dividends may not be declared so long as a deficit exists, (infra.) (5) Treasury shares (see Sec. 9.), not being part of earned or surplus profits, are not distributable as dividends but if there are retained earnings previously held to support their acquisition, they may be declared as property dividend out of said earnings, (see infra.) Deduction of expenses.

In addition to deducting the amount of the capital stock from the value of the assets of the corporation, deduction must also, as a rule, be made for all expenses incurred in the conduct of the business of the company. (1) Generally speaking, net earnings are what remains of gross receipts after deducting the expenses of producing them. The Supreme Court of the United States has said: "The term 'profits,' out of which dividends alone can properly be declared, denotes what remains after defraying every expense, including loans falling due, as well as the interest on such loans." (2) Depreciation in the value of the corporation's plant is a proper expense charge and the same is true of expenditures for maintenance and upkeep. And a reserve fund may be accumulated for the purpose of making repairs and renewals. (3) Taxes are properly treated as a part of the company's operating expenses, to be paid out of the earnings, and this is true even though they are founded upon an erroneous valuation of the property upon which they are assessed. Only such expenditures as have actually been made can properly be claimed as a deduction from earnings. (11 Fletcher, pp. 1056-1060; see also 18 C.J.S. 1100-1102.) Distribution of paid-in surplus as cas h dividends.

Under the pertinent provision of Section 16 (now Sec. 43.) of the former Corporation Law, which reads as follows: "No corporation shall make or declare dividends except from the surplus profits arising from its business, or divide or distribute its capi-


402

Sec. 43

tal stock or property other than actual profits x x x," dividends, whether cash or stocks, must be declared only out of surplus profits arising from corporate business. The Securities and Exchange Commission has expressed the view that paid-in or premium surplus (difference between the par value and the higher price for which stock is sold by the corporation) cannot be declared as cash dividends under Section 16 above (SEC Opinion, May 7,1968.), or even as stock dividends because Section 43 of the Corporation Code provides that dividends can be declared only from the unrestricted retained earnings. (SEC Opinion, April 16,1988.) The reason given is that "the entire proceeds of sales of a corporation of its own stock, even when sold for more than par value, are part of its capital stock (i.e., to be regarded as paid-in capital, rather than as retained earnings) and, therefore, cannot be profits earned through the conduct of its business out of which dividends may be paid." (Merchants and Insurance Reporting Co. vs. Youtz, 178 R 540.) It also said that to permit this capital surplus to be distributed as cash dividend is a "fraud upon creditors who extend credit on the faith of its capital stock." (14 C.J. Sec. 1210, p. 801.) 36

Whether dividends can now be declared out of premium surplus under Section 43 of the new Corporation Code is a legal question and, consequently, is not to be resolved by whatever may be the present accounting practice on the matter. The following support the proposition that the distribution of paid-in surplus as cash dividends may be legally permitted under the present law: 37

The SEC has allowed the declaration of dividends from paid-in surplus subject to the following conditions: (1) They shall be declared only as stock dividends; (2) No creditors shall be prejudiced therefrom; and (3) There shall be no resulting impairment of capital. (SEC Opinion, Oct. 19,1989.) The reason is that when a corporation converts the premium or contributed surplus into capital by issuing to its stockholders stock dividends, it actually parts with nothing but merely transfers the surplus to capital account and issues shares of stock to represent the same. (SEC Opinions, Aug. 16,1993 and March 27,1955.) Reduction surplus or surplus realized by the reduction of the capital stock effected under Section 38 by decreasing the par value of authorized shares may be declared only as stock dividend. (SEC Opinion, Aug. 8, 1991; see Sec. 38.) "The preferred terminology is 'capital in excess of par (or stated) value,' 'additional paid-in capital,' 'additional contributed capital,' or similar descriptive phrases. Use of the captions 'surplus,' 'capital surplus,' or 'paid-in surplus' should be discontinued." (PICPA Bulletin No. 10[28], Nov. 1975.) 36

37

Sec. 43


403

(1) Dividends from other gains not arising from business.

Unlike Section 16 of the old law, Section 43 does not require that dividends distributable by a corporation be "from the surplus profits arising from its business," the quoted phrase having been deleted, indicating a legislative intent to do away with the idea of profits earned in the business as the only source of dividends. Hence, "unrestricted retained earnings" from which dividends may be declared are not limited to the accumulated earned surplus of the corporation but may also include other gains not "arising from its business." 38

(2) Absence of provision on treatment of paid-in surplus from issue

of par value shares. — There is no provision in the Code which specifically treats paid-in surplus from the issue of par value shares as part of the capital stock. On the contrary, while Section 6 (par. 3.) explicitly requires "that the entire consideration received by a corporation for its no par value shares shall be treated as capital and shall not be available for distribution as dividends," there is no similar provision with respect to par value shares. It is true that there was also no similar provision even under the old corporation law but the same would be a surplusage since Section 16 of said law already restricted the distribution by a corporation of dividends only to "surplus profits arising from its business." (3) Credit of paid-in surplus to profit and loss. — At the start of

the operation of a corporation, the actual value of its shares is the same as their par value. The premium on stock issued after the corporation has accumulated profits is justified by the need to equalize as between the new and the old stockholders their respective rights in such profits which are distributable in cash According to the SEC, the term "retained earnings" as defined under the generally accepted accounting principles is understood to mean "the accumulated profits realized out of normal and continuous operations of the business after deducting therefrom distributions to stockholders and transfers to capital stock or other accounts." Profits realized from the sale of treasury shares are treated as part of "capital" or "paid-in surplus" and cannot, therefore, be declared as stock or cash dividend. They are not ordinary profits which would form part of retained earnings. (SEC Opinion, April 14, 1988.) Corporations usually get additional funding from existing shareholders via loans or advances which are later converted into additional paid-in capital (APIC) in the nature of additional capital investment or debt-to-equity conversion. Per SEC Memorandum Circular No. 11, APIC shall not be declared as dividend. 38

404


Sec. 43

dividends. While such premium may be considered as part of the capital contributed or invested by a stockholder for accounting purposes, it is really, from the legal standpoint, in the nature of profit or surplus realized by the corporation resulting from the profitable operation of the corporate business. Hence, such premium should be credited to profit and loss and not to capital. (4) Treatment of paid-in surplus as premium for privilege of

subscribing. — The authorized capital stock limits the amount or number of shares that may be issued by a corporation at a specified par value. In other words, the amount which the corporation is authorized to raise by the issue of shares should not exceed the authorized capital stock which can only be increased by complying with the formalities prescribed by Section 38. It follows that when shares are issued above par, the excess is not to be treated as capital, i.e., not as part of the consideration for the shares but merely as a premium given for the privilege of subscribing to such shares, and hence, not as a part of the trust fund for the benefit of creditors who have no cause for complaint, provided the corporation is solvent and sufficient assets remain to pay their claims. It is significant to note that holders of par value shares participate in dividends, and in case of liquidation of the corporation, in the corporate assets, on the basis of the par value of their shares, irrespective of the amount of the consideration paid for by them, indicating that any excess is not to be considered part of their invested capital for purposes of dividend declarations. (5) Treatment of capital stock as referring to legal capital. — Except

by decrease of capital stock (Sec. 38.) and as otherwise allowed, the Code prohibits the distribution of corporate assets or property prior to dissolution (see Sec. 122, last par.) conformably to the general rule that the capital stock of a corporation constitutes a trust fund for the benefit of corporate creditors. For purposes of this rule, the capital stock contemplated by law should refer to the aggregate par value (or issued value in case of no par value shares) of the outstanding shares of stock, for creditors extend credit to a corporation on the faith of its capital stock represented by its outstanding shares and not necessarily on the basis of the

Sec. 43


405

actual consideration paid for each of the shares which may be unknown to them. Under the trust fund doctrine, it is only the assets of the corporation, as represented by the subscribed or outstanding capital stock, that constitute a fund to which creditors have a right to look for the satisfaction of their claims and which the corporation is not allowed to impair to their prejudice. (Phil. Trust Co. vs. Rivera, 44 Phil. 469 [1925]; Lumanlan vs. Cura, 59 Phil. 746 [1934].) In other words, the capital stock which must not be reduced by the payment of the dividends means the legal capital, i.e., the portion of the corporate assets equivalent to the total par value of all the outstanding par value shares (or the total consideration received for no par value shares) of the corporation. 39

(6) Increase of capital account without issuance of additional

shares. — Furthermore, it is the law, not the corporation, that must necessarily determine what assets shall form part of the capital stock which the corporation is not allowed to impair for the protection of its creditors. However, following the opinion of the Commission, it now depends entirely on the board of directors whether or not to create premium surplus and, therefore, whether or not the increase in the value of the stock is to be treated as part of the corporation's capital stock. The rule will make possible an increase in the capital account without issuing additional shares for the amount capitalized. The corporation, of course, may declare stock dividends from premium surplus, but as a stock dividend involves a transfer of surplus to capital account, it is valid only when corresponding shares are issued to the stockholders for the amount transferred. If a corporation can declare cash dividends out of actual earnings even to the extent of reducing the market value of stocks to their par value, why not out of premium surplus? (7) Issuance of stock at par value but less than market value. —

Lastly, Section 62 prohibits a corporation from issuing stock for a Accordingly, the term "legal capital" has been defined as follows: "That part of the paid-in capital of a corporation which by law, agreement, or resolution of directors become the par or stated value of the capital stock; the portion of the assets restricted as to withdrawal under corporation law." (E.L. Kohler, A Dictionary for Accountants, 1975 ed., p. 289.) It does not include paid-in surplus. 39

406


Sec. 43

consideration less than the par value but it is not required by law to issue stock which has increased in value, at a price above par. If the difference or premium must be treated as part of the capital stock for the benefit of the creditors, then a corporation should not be permitted to issue stock for a consideration less than its market value, although it may be above the par value. However, such issuance is not prohibited by Section 62. Thus, shares with a par value of P10.00 but with a market value of P15.00 may be legally issued for a price less than P15.00 provided it is not less than P10.00. It will depend, therefore, solely on the board of directors of the corporation whether the excess value should become part of the capital stock by issuing the stock at market price or be given free to stockholders by issuing stocks at par value. If the difference can be distributed gratuitously to the stockholders without diminishing the capital stock, why not as cash dividends? Distribution of revaluation surplu s as dividends.

A corporation can have its fixed assets like real estate revaluated for the purpose of determining its current market value. The excess increment on the property over the stated cost is credited to an account called revaluation or appraisal surplus to show that such is the result of an estimated increase in the value of the property, (see SEC Opinion, May 14,1970.) (1) General rule. — An increase in the value of fixed assets such as land as a result of mere valuation cannot be counted in the computation of a surplus as basis for a dividend declaration. The reason why purely conjectured increase in valuation cannot be considered for purposes of dividend declaration is because such appraisal, however justified for the time being, is subject to market fluctuations, is merely anticipatory of future profits and may never be actually realized as an asset of the corporation by the sale of the property at the value it was appraised. The surplus of a corporation which may be used for the payment of dividend must be a bona fide and not an artificial or fictitious one and not be dependent for its existence upon

Sec. 43


407

a theoretical estimate of an appreciation in the value of the corporation's assets. (SEC Opinion, Oct. 15, 1973, citing Berkes Broadcasting Co. vs. Crawmer, 356 Ph. 620.) Sound accounting requires that such unrealized appreciation shall not be confused with a paid-in surplus or an earned surplus due to accumulated profits arising from the successful conduct of the business. (SEC Opinion, Dec. 7, 1971, citing Ballantine, p. 541.) (2) Exceptions. — The above ruling is not absolute as the Securities and Exchange Commission allows certain exceptions making revaluation increment or reappraisal surplus available for cash and stock dividend. Thus, where a fixed asset is being depreciated based on its appraisal value, and the depreciation on the appraisal increment is charged against operations, the earning from operations in that period are diminished by the amount of such depreciation which amount, therefore, is actual income shifted to and lodged in another account. Whether such amount is restituted to retained earnings or not is of no consequence. In such event, the portion of increase in the value of fixed assets as a result of revaluation thereof may be declared as dividends, provided the following conditions exist: (a) The corporation has sufficient income from operations from which the depreciation on the appraisal increase was charged; (b) It has no deficit at the time the depreciation on the appraisal increase was charged to operations; and (c) Such depreciation on appraisal increase previously charged to operations has not been erased or impaired by subsequent losses; otherwise, only that portion not impaired by subsequent losses is available for dividend. (SEC Opinions, Oct. 2,1981 and March 19,1992.) Declaration of dividends.

(1) Conditions. — A dividend declaration ordinarily requires the concurrence of two things, namely: (a) The existence of "unrestricted retained earnings" out of which the dividends may be declared and paid; and

408


Sec. 43

(b) A corporate resolution of the board of directors declaring the payment of a portion or all of such earnings to the stockholders. (2) Additional requirements for stock dividends. — Cash divi-

dends require only approval of the board of directors. Stock dividends are issued by resolution of the board of directors and approval of the resolution by the stockholders. For the declaration of stock dividends, a corporation must have also a sufficient number of authorized unissued shares for distribution to stockholders; otherwise, it must increase its capital stock to the extent of the corporate earnings to be declared and distributed as stock dividends, (see Sec. 38.) The distribution of dividends will, of course, reduce the retained earnings of the corporation by exactly the amount paid out to stockholders in the case of cash dividend, or transferred to capital account in the case of stock dividend, (infra.) Discretion of the board of directors to declare dividends.

The board of directors has the responsibility to declare dividends and determine the timing as well as their amount. (1) The fact that profits or earnings have accrued in the prosecution of the corporate business does not necessarily impose upon the directors the duty to declare them as dividends. (Wabask R. Co. vs. Barclay, 280 U.S. 197.) (2) If in their honest judgment the directors reasonably determine that the profits should be kept in the business, no court has the power to compel them to make the distribution in the absence of bad faith or clear abuse of discretion, or such 40

^There are no infallible distinguishing earmarks of bad faith. The following facts are relevant to the issue of bad faith and are admissible in evidence: intense hostility of the controlling faction against the majority; exclusion of the minority from employment by the corporation; high salaries or bonuses, or corporate loans made to the officers in control; the fact that the majority group may be subject to high personal income taxes if substantial dividends are paid; the existence of a desire by the controlling directors to acquire the minority stock as cheaply as possible. But if they are not motivating causes they do not constitute bad faith as a matter of law. The essential test of bad faith is to determine whether the policy of the directors is directed by their personal interests rather than the corporate welfare. Directors are

Sec. 43


409

arbitrary or unreasonable conduct as amounts to a breach of trust. The apportionment of the net earnings to the payment of dividends is largely a question of policy entrusted to the discretion of the board of directors. If there is any doubt about the propriety of declaring dividends, the directors are justified in resolving the doubt against such action. (19 Am. Jur. 2d 322-323.) (3) So long as the board of directors acts in good faith, it is at liberty to distribute or not to distribute at all any dividend subject to the prohibition in the second paragraph of Section 43. 41

(infra.)

(4) The stockholders may sue the directors to compel them to declare and pay a dividend if they unreasonably accumulate profits of the corporation but they have the burden of proving the justification of declaring dividends. Limit on retained e a r n i n g s . (1) Under the Corporation Code. — Stock corporations are

prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock except when justified by any of the reasons mentioned. (Sec. 43, par. 2.) If the requirement which is mandatory is violated, the corporation may be compelled by the Securities and Exchange Commission to declare dividends to its stockholders. The prohibition on retention of profits provided in 42

43

fiduciaries. Their cestui que trusts are the corporation and the stockholders as a body. Circumstances such as those above mentioned and any other significant factors, appraised in the light of the financial condition and requirements of the corporation, will determine the conclusion as to whether the directors have or have not been animated by personal, distinct from corporate, considerations. (Gottfried vs. Gottfried, 73 N.Y.S. 2d 696.) In view of the restrictions imposed by Section 43, the "business judgment" rule which upholds judicial non-interference in corporate management (see Sec. 23.) has limited application with regard to dividend declarations. The SEC has resolved as a matter of policy to construe paid-in capital stock as used in the second paragraph of Section 43, to include payment on subscription in excess of par. (SEC Opinion No. 47, Sept. 30, 2003.) The SEC has issued the following rules governing the excess profits of corporations: (1) All corporations which have surplus profits in excess of necessary requirements for capital expansion and reserves shall declare and distribute the excess profits as dividends to stockholders. (2) Where the financial statements of the corporation show surplus profits in excess of 100% paid-up capital, it shall explain by footnotes why the same has not been declared as dividends. If the explanation is not satisfactory, the Commission shall direct the corporation to distribute the excess as dividends. 41

42

4J


410

Sec. 43

Section 43 is applicable to all stock corporations, including wholly owned subsidiaries. Section 43 does not make any qualification in using the words "stock corporations." (SEC Opinion, July 22, 1993.) There may be some question as to whether or not the retention of profits is justified by the "reasonable needs of the business." Suffice it to say that the policy of the law to encourage and force the distribution of dividends curtails the discretionary power of directors to retain corporate earnings."

The Commission will consider as sufficient justification for non-distribution of dividends the following: A. The corporation has definite expansion plans approved by the board of directors and stockholders, and whenever necessary, by the proper government authority. The amounts appropriated for such purpose shall be segregated from the free surplus. Upon completion of the expansion program, reserves established shall be declared as stock dividends. B. The corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not been secured. C. The non-distribution of dividends is consistent with the policy or requirement of a government office. Should an examination of the affairs of the corporation be necessary to determine the validity of the explanation given, an examination fee of not exceeding five hundred pesos (P500) shall be charged to and collected from the company. (3) It shall be the policy of all corporations whose securities are listed in any operating stock exchanges or registered and licensed under the Securities Act to maintain and distribute equitable balance of cash and stock dividends, consistent with the needs of stockholders and the demands for growth or expansion of the business. Any declaration of dividend, whether cash or stock, shall be reported to the Commission within fifteen (15) days from the declaration: Provided, That in the case of corporations whose securities are listed in any operating stock exchange or registered and licensed under the Securities Act, the report shall be filed with the Commission before or simultaneously with the release or publication of the notice of declaration of dividends to stockholders. Any and all appropriations out of surplus profits for reserves shall have prior approval of the board of directors and stockholders. The specific purpose arid justification for each reservation shall be clearly stated in the financial statements by footnotes. Section 43 supersedes Presidential Decree No. 270 which also requires all corporations which have surplus profits in excess of necessary requirements for capital expansion and reserves to declare and distribute the excess profits as dividends to stockholders, pursuant to such rules and regulations which under the Decree the Securities and Exchange Commission is authorized to promulgate. According to the Decree, "a more favorable and healthier climate for investments would be promoted if stockholders are able to share in the profits of corporations whenever possible, the same not being subject to the absolute or arbitrary action of management on the matter." The Decree applies only to publicly held corporations or those having stockholders in excess of twenty. (SEC Opinion, Sept. 14, 1973.) It does not apply to wholly owned subsidiaries of foreign corporations. (SEC Opinion, Jan. 8,1974.) The term "surplus profits," as used in the Decree, is synonymous to "retained earnings," as used in accounting. (SEC Opinion, Nov. 14, 1973.) Unlike Section 43, the Decree does not fix the limit of the surplus profits that may be retained. 44

Sec. 43

TITLE rV. POWERS OF CORPORATION

411

(2) Under the National Internal Revenue Code. — Section 29 of

the Tax Code imposes a 10% surtax on corporations improperly accumulating profits or surplus, in addition to other income taxes imposed on corporations. The purpose is to prevent individual taxpayers from avoiding the progressive rates of income tax by employing the corporate form for the accumulation of taxable income. (De Leon & De Leon, Jr., The National Internal Revenue 45

The Commission has opined that the scheme adopted by a corporation with substantial surplus profits whereby the stated value of each share of its outstanding no-par value shares was revalued by increasing the same from, say, P1,000 per share to P7,000, the payment to which would come from its retained earnings, instead of declaring stock dividends because the existing unissued shares of the corporation were not sufficient for distribution to its stockholders, was violative of Pres. Decree No. 270, as it deprived them of their right to participate in the surplus profits according to their respective interests. (SEC Opinion, July 31,1979.) "Sec. 29. Imposition of Improperly Accumulated Earnings Tax. — (A) In General. — In addition to other taxes imposed by this Tide, there is hereby imposed for each taxable year on the improperly accumulated taxable income of each corporation described in Subsection B hereof, an improperly accumulated earnings tax equal to ten percent (10%) of the improperly accumulated taxable income. (B) Tax on Corporations Subject to Improperly Accumulated Earnings Tax. — (1) In General. — The improperly accumulated earnings tax imposed in the preceding Section 1 shall apply to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation by penriitting earnings and profits to accumulate instead of being divided or distributed. (2) Exceptions. — The improperly accumulated earnings tax as provided for under this Section shall not apply to: (a) Publicly-held corporations; (b) Banks and other non-bank financial intermediaries; and (c) Insurance companies. (C) Evidence of Purpose to Avoid Income Tax. — (1) Prima Facie Evidence. — The fact that any corporation is a mere holding company or investment company shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members. (2) Evidence Determinative of Purpose. — The fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members unless the corporation, by the clear preponderance of evidence, shall prove to the contrary. (D) Improperly Accumulated Taxable Income. — For purposes of this Section, the term "improperly accumulated taxable income" means taxable income adjusted by: (1) Income exempt from tax; (2) Income excluded from gross income; (3) Income subject to final tax; and (4) The amount of net operating loss carry-over deducted; And reduced by the sum of: (1) Dividends actually or constructively paid; and (2) Income tax paid for the taxable year. 45

412


Sec. 43

Code Annotated, 2003 ed., Vol. 1, pp. 230-231.) Action to enforce declaration of dividends.

Since a stockholder has no individual interest in the profits of a corporation until a dividend has been declared, the general rule is that, prior to the declaration of a dividend, a stockholder cannot maintain an action at law to recover his share of the accumulated profits. Mandamus is not a proper remedy in such a case. However, an action at law may be maintained where it is alleged that sufficient net profits have been earned to obligate the corporation to pay the amount agreed. Before an action to compel the declaration and payment of a dividend can be maintained, it must appear that the complaining stockholder has made application to the directors of the corporation for the relief sought. Where, however, it appears that the directors of a corporation have wantonly violated their duty, and that an application by a stockholder to them for relief would be inefficacious, such application need not be made. In such an action, the corporation is a necessary party defendant. (18 C.J.S. 1142.) Time for declaration of d i v i d e n d s.

(1) At the end of the year. — A corporation has a fiscal year in order to determine the results of its operation during the year — whether it earned profits or incurred losses. Of course, such results may also be computed monthly, quarterly, or semi-annually, but a summary is always made at the end of the year to determine the performance of the company for the whole year. (a) If the company earned profits during the past year, it may declare the same as dividends, but if it does not, the

Provided, however, That for corporations using the calendar year basis, the accumulated earnings tax shall not apply on improperly accumulated income as of December 31, 1997. In the case of corporations adopting the fiscal year accounting period, the improperly accumulated income not subject to this tax shall be reckoned, as of the end of the month comprising the twelve (12)-month period of fiscal year 1997-1998. (E) Reasonable Needs of the Business. — For purposes of this Section, the term "reasonable needs of the business" includes the reasonably anticipated needs of the business. (NIRC.)

Sec. 43


413

profits are carried over to the next fiscal year. Conversely, if the company incurred losses during the past year, its books will record such loss and no profits, unless it accumulated earnings during the previous years which have not been distributed as dividends. It follows from this that a corporation may incur losses during one fiscal year or any portion thereof and still be able to declare dividends, that is, if such losses do not affect profits that the company has accumulated. On the other hand, a corporation may earn profits in one fiscal year but because of losses suffered during the previous years, it may not be able to declare dividends. (b) From the foregoing, it is clear that what is material is the existence of earned profits on the date of declaration, taking into account the results of the entire operations of the company. Since the financial statements are generally prepared after the end of the fiscal year, dividends are declared, as a general rule, after the fiscal period has ended, when retained earnings are shown to exist. Of course, the determination of the existence of retained earnings may be made even before the end of the fiscal year, but this is merely to enable the management to map out its dividend policy for the next fiscal year. (2) Before the end of the year. — Therefore, a corporation should not declare dividends out of profits earned during an interim period or before the end of the fiscal year, considering that profits earned during say, the first half of the year may be wiped out by losses incurred during the latter part of the same year. (SEC Opinion, July 16, 1971.) However, a corporation may declare dividends even before the end of the fiscal year, provided it has sufficiently earned surplus for the purpose which will not be impaired by losses, whether expected or not, during the remaining period of the fiscal year." (SEC Opinion, Oct. 22,1974.)

"The SEC requires the submission of the projected income statement of the corporation for the remaining period of the year as well as the basis and assumption used therein for the valuation of the Commission showing that the corporation will not sustain losses that would impair the existing earnings to be declared as dividends. Should the corporation sustain losses during the year, cash distributed to the stockholders of record must be refunded to the corporation. (SEC Opinion, Nov. 12,1990.)

414


Sec. 43

The Securities and Exchange Commission requires that the projected income statement of the corporation for the remaining period of the year as well as the basis and assumptions used therein shall be submitted to the Commission. Should the corporation sustain losses during the year, cash dividends distributed to the stockholder of record must be correspondingly refunded to the corporation. (SEC Opinion, July 24,1991.) Validity of dividend determined at time of declaration. (1) Effect of subsequent insolvency of corporation. — In deter-

mining whether dividends were lawfully made, the transaction must be viewed in the light of the time of its occurrence, and if net or surplus profits existed at that time, the payment of the dividend is not rendered unlawful by the subsequent insolvency of the corporation, and if the assets of a corporation are valued honestly and fairly in view of all the facts known at the time of the declaration, a dividend is not rendered unlawful by the fact that such assets subsequently prove to be worthless than the valuation placed upon them. (2) Effect of good faith in making payment out of capital. — How-

ever, mere ignorance of facts showing the true condition of the assets of a corporation which could have been ascertained by reasonable inquiry and examination is not sufficient to validate a dividend which has been paid out of capital. And whether the assets of a corporation were so valued is not a question to be determined by the board of directors of a corporation, nor by a majority of its stockholders; hence, a finding by the directors of a corporation that certain dividends, although in fact paid out of capital, were declared fairly and in good faith, in the light of what was known and believed at the time they were declared, and a subsequent ratification of such finding by a majority of the stockholders, do not validate the payment of such dividends. (18 C.J.S. 1102.) Payment of subscription f r o m d i v i d e n d s . (1) From dividends to be declared. — It has been held that a

stipulation to the effect that the subscription is "payable from the first dividends declared on any and all shares of said com-

Sec. 43


415

party owned by me at the time dividends are declared until the full amount of the subscription has been paid" is illegal for it "obligates the subscriber to pay nothing for the shares except as dividends may accrue upon the stock." In the contingency that dividends are not paid, there is no liability at all. (National Exchange Co. vs. Dexter, 51 Phil. 601 [1928].) (2) From cash dividends. — Where payment has been made on stock subscription, the rule depends on whether the stockholder is delinquent or not. (a) The stockholder is still entitled to receive cash dividends due on delinquent stock but the dividends "shall first be applied to the unpaid balance on the subscription, plus costs and expenses." (Sec. 43, par. 1.) The cash dividends may be applied as payment for the unpaid subscription of all delinquent shares. (See Sec. 71.) (b) Cash dividends cannot be withheld from the subscribers who have not fully paid their subscriptions unless they are delinquent on their unpaid subscriptions. The corporation may use the cash dividends to pay off stockholders' subscriptions but which have not been declared delinquent only if the stockholders concerned give their consent thereto. (SEC Opinion, March 18,1991.) (3) From stock dividends. — A stockholder's indebtedness to

a corporation under a subscription agreement cannot be compensated with the amount of his shares in the same corporation, there being no relation of creditor and debtor with regard to such shares, (see Art. 1249, Civil Code.) Under Section 43 (par. 1.), "stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid." In other words, under the provision, it is not allowed to apply stock dividend to unpaid subscription. 47

(a) A stockholder, as such, is not a creditor of the corporation for his shares although the latter is creditor of the former for the unpaid balance of his subscription. It is the 48

Note that stock dividend can be withheld only from a delinquent stockholder. Stock dividends may be declared out of retained earnings even if there are still unpaid subscriptions. "A subscription contract (see Sec. 60.) creates a creditor-debtor relationship between the corporation and the subscriber. 47

416


Sec. 43

prevailing doctrine that the capital stock of a corporation is a trust fund to be used more particularly for the security of creditors of the corporation who presumably deal with it on the credit of its capital stock. (18 C.J.S. 618.) In view of the foregoing, a stockholder's liability for unpaid subscriptions (although not yet delinquent) may not be offset by the issuance and distribution of stock dividends, (supra.) (b) A stock dividend requires a transfer of surplus to capital account and it cannot be made without issuing new shares. Since the retained earnings of the corporation are already applied as payment to the new issuance of shares, the same cannot be reapplied to previous subscriptions which are still unpaid as this would be, in effect, reacquiring its own shares, the proceeds of which will be applied to the unpaid subscription, which case is not allowed under Section 41. (SEC Opinion, July 4,1984.) (c) Section 6 states that preferred shares may be given preferential right in the distribution of dividends among others, but it does not prohibit holders of preferred shares from acquiring shares of whatever class by way of stock dividend. As long as all the requirements for the declaration of stock dividend are complied with, the issuance of common shares in favor of stockholders holding preferred shares is valid. (SEC Opinion No. 04-28, April 27,2004.) Instead of stock dividends, the corporation may declare cash dividends, and use the said dividends to pay off the stockholder's unpaid subscriptions. (SEC Opinion, March 15,1968.) Liability of stockholders and directors for illegally received dividends. (1) Liability of stockholders to refund them to corporation or its

creditors. — In case dividends are wrongfully or illegally declared and paid, there is ample authority for the rule that the stockholders who received them can be held liable to refund them to the corporation or its creditors. It is immaterial that the dividends were mistakenly paid out or were received in good faith. Since they do not act in a corporate capacity in receiving the dividends, they do not thereby ratify the illegal act of the board as to pre-

Sec. 43


417

elude a subsequent recovery. (Levington Life, F. & M. Ins. Co. vs. Page, 66 Am. Dec. 165.) (2) Where corporation insolvent at time of wrongful payment.

— The rule is especially true if the corporation is insolvent (McDonald vs. Williams, 174 U.S. 397.), although the authorities are conflicting where the corporation was solvent at the time of the wrongful payment. (a) It seems to be an unfair and unreasonable burden to require innocent stockholders to repay dividends, perhaps years after they have been spent, when they were received in good faith from a solvent corporation in the regular course of business, even if it has later become bankrupt. If a wrong was done to the security of creditors by the directors, they are the ones to be held responsible. (Ballantine, p. 600.) (b) In view, however, of the trust fund theory adopted in our jurisdiction, the payment of dividends from capital may be considered a wrongful diversion of a "trust fund" held for the benefit of creditors, so that the fund may accordingly be followed into the hands of stockholders, (see Phil. Trust Co. vs. Rivera, 44 Phil. 469 [1925]; Lumanlan vs. Cura, 59 Phil. 746 [1934].) The innocent stockholders can recover damages from the guilty directors. (3) Liability of directors. — If the directors acted in good faith, and without negligence, they are not liable to the corporation or to creditors for declaring and paying dividends when they should not have done so, and thereby diminishing the capital stock. But if they have been guilty of a fraudulent breach of trust, or of gross negligence, in paying dividends when they had no right to pay them/they are personally liable to creditors. Liability of directors for unlawfully paid dividends may be enforced under Section 31. Remedies of corporate creditors.

If dividends are improperly declared and paid when there are no net earnings, they may be reclaimed by the corporate creditors or by a receiver or assignee acting for the benefit of the creditors.

418


Sec. 43

(1) If the capital stock of a corporation is wrongfully paid away by the directors, it may be pursued by creditors into the hands of any one who is not an innocent purchaser or recipient of the same for a valuable consideration. (2) If such a wrong is threatened, a creditor may maintain a suit for an injunction, since the fund to which the creditor looks for security would thereby be impaired. (Clark on Corporations, pp. 435-436; see Steinberg vs. Velasco, 52 Phil. 953 [1929].) Persons entitled to dividends.

The right of one to receive dividends from a corporation on its stock is, manifestly, justified only on the theory that he is a stockholder. In other words, the right to dividends is an incident to ownership of stock, and this applies to stock dividends as well as to cash dividends. (19 Am. Jur. 2d 370.) (1) Except where the dividend is payable to stockholders of record on a specified date, the real owner of corporate stock at the time the dividend is actually declared thereon is the person entitled to the dividend (Ibid.), without regard to the time when the dividends were earned or made payable. In other words, it is only the stockholders of record as of the date of the declaration of dividends or holders of record on a certain future date, as the case may

be, who are entitled to receive dividends unless the parties have agreed otherwise. (SEC Opinion, Nov. 12, 1986; Cojuangco vs. Sandiganbayan, 586 SCRA 790 [ 2 0 0 9 ] > Naturally, the persons appearing as stockholders in the stock and transfer book on the date fixed will be the ones entitled to dividends, and the date for payment is only indicated for convenience of the company. The rule with respect to the payment of dividends is that there must be no discrimination against any stockholders (1 Fletcher, pp. 882-887.), so that the date for the purpose must ordinarily apply to all stockholders. (2) As between parties respectively entitled to capital and to income of stock held in trust, the right to particular dividends is generally dependent upon the creator of the trust, actual or presumed. (19 Am. Jur. 2d 371.) ^'Citing DE LEON, The Corporation Code of the Phils., Annotated, p. 410, 2002 Ed.

Sec. 43


419

(3) A transfer of shares which is not recorded in the books of the corporation is valid only as between the parties (Sec. 63.); hence, the transferor has the right to dividends as against the corporation without notice of the transfer but he is the trustee of the real owner of the dividends subject to the contract between the transferor and transferee as to who is entitled to receive the dividends. (4) If an unregistered pledge earns dividends, the pledgor is entitled to the same as against the corporation, in the absence of notice of the pledge; but if the pledge is recorded in the books of the corporation, the pledgee has the right to receive the dividends, with the obligation to compensate what he receives with the debt of the pledgor, (see Art. 2102, Civil Code.) (5) Share subscriptions not yet recorded in the stock and transfer book on the date of dividend declaration, are not entitled to said dividend. Hence, subscribers to the increase of capital stock are considered stockholders of record only at the time of the approval of said increase by the Securities and Exchange Commis-

sion (see Sec. 38, par. 3.) and not at the time of filing of the certificate of increase of the capital stock, (see SEC Opinion, Sept. 15, 1980.) Right of s t o c k h o l d e r s after declaration of d i v i d e n d s .

(1) Cash dividends. — As soon as cash dividends are publicly declared, the stockholders have the right to their pro rata shares. (1 Fletcher, pp. 780-789.) (a) In the absence of a record date, the dividend belongs 50

A record date is the date fixed in the resolution declaring dividends, when the dividend shall be payable to those who are stockholders of record on a specified future date or as of the date of the meeting declaring said dividend, (see Ballantine, pp. 566-567.) The date fixed determines the stockholders who are to receive the dividends. The usual practice is for the corporation to provide for the closing of its transfer books on a certain date such that only stockholders as of the given date are entitled to dividends. Usually, several days elapse between the time a person buys stock and the time the corporation records the sale. Thus, a seller of stock who is still the stockholder of record on a specified date may receive a dividend after he has sold his stock to another person. Because payments of stock dividends requiring an increase in the authorized capital stock are contingent upon SEC's approval (see Sec. 38.), record and payment dates are ordinarily indicated as falling within a certain period following SEC's approval of capital increase. All cash dividends declared by a corporation shall have a record date 50


420

Sec. 43

to the person who is the owner of the shares of stock at the time of declaration, and not to the owner of the shares at the time of payment. The reason is that when a dividend declaration is made, the corporation becomes debtor and the right of the shareholder to distribution, unless a record date is specified, becomes fixed by the declaration. (Ballantine, p. 566; see Barretto vs. Sta. Maria, 26 Phil. 200 [1914].) (b) It is the declaration of the dividends which creates both the dividends itself and the right of the stockholders to demand and receive it. (SEC Opinion, Oct. 9, 1992.) So, one who receives stock from a corporation immediately before a dividend is declared has the same right as the other stockholders to share therein, unless he is excluded by the term of his contract. (SEC Opinion, Aug. 6,1990, citing Fletcher, Sec. 5376.) (c) When a cash dividend is duly declared, the amount due a stockholder belongs to him and it cannot, without his consent, be reverted to the surplus account of the corporation. The company should exert real and sincere efforts to contact and deliver the dividend to him, and only after the lapse of the prescriptive period for claiming the dividend may the same be reverted to the surplus account of the corporation. (SEC Opinion, Jan. 29, 1971.) It is preposterous to say that a debt can be cancelled by the action of the debtor without the consent of the creditor. (McLaran vs. Crescent Planning Mill Co., 93 SW 819.) 51

which shall not be less than 10 or more than 30 days from the said declaration. In case, no record date is specified, the date shall be deemed fixed at 15 days from declaration. Companies that are obliged to pay dividends may have a single declaration for several cash dividends within a year subject to the condition, that their record and payment dates are also explicitly provided. (SEC Memo. Ore. No. 2, April 17,2009; amending Amended Rules governing Pre-Emptive and Other Subscription Rights and Declaration of Stock and Cash Dividends. The term ex dividends is used to indicate that the price of shares of a corporation excludes the dividend payable on a certain future date to the stockholders of record on a specified preceding date (E.L. Kohler, op. cit., p. 198.) or a previously declared dividend. The buyer is entitled to the declared dividend when the stock is sold cum dividends or dividends-on. Check payments are mailed directly to the stockholder or his nominee by the company's stock transfer agent. For unissued stock certificates or those registered in street name, checks are sent to the handling broker who, in rum, remits payment to the beneficial owner of the shares. 51

Sec. 43


421

(2) Stock dividends. — The above rule does not apply to stock dividends as the declaration of such dividends may be rescinded at any time before the actual issuance of the stock. (Staats vs. Biograph Co., 236 Fed. 454.) (a) Unlike a cash dividend, a stock dividend requires, as a general rule, more than mere declaration to make it effective. The vote to increase stock is not per se an increase; and until the stock is actually issued, or at least in some manner especially set apart to the stockholder, its effect is not complete. (19 Am. Jur. 2d 317.) (b) The so-called stock dividend in shares of the kind already held gives the shareholder nothing in the way of a distribution of assets but merely divides his existing shares into smaller units. There is no increase in his proportionate claim upon the corporate assets or income by reason of such a paper dividend. There is no obligation upon the corporation to declare stock dividends, which are not distributions but only a change of the share and capital structure. (Ballantine, p. 560.) (c) Since the declaration of stock dividend gives the stockholder nothing until all the formalities necessary to a valid increase of stock are complied with, its revocation, therefore, takes away nothing. But unless rescinded, the shareholders have absolute right to their respective shares in the stock dividends so declared and actual delivery of the corresponding certificate is not essential to make the shareholder the owner of the dividend. Time for p a y m e n t of dividends. (1) Frequency and intervals of declaration. — Dividends are

usually declared, one at a time, generally quarterly. (a) Where the condition of the company is sound and the earnings are regarded as constant, the directors may, at one meeting, declare dividends in advance for succeeding quarters, hardly even longer than a year altogether, the dividend for each succeeding quarter being made payable as of a certain date in the same manner as the first dividend.

422


Sec. 43

(b) Where the business of the corporation is running along in good shape, with abundant revenues with which to pay dividends, the payment of the regular dividends on the various classes of stock becomes a more or less routine matter, called to the attention of the board of directors by the treasurer at the directors' meeting prior to the expiration of the quarter or the half year or the year for which the dividends are to be payable. (19 Fletcher, pp. 220-221.) (2) Date of payment. — There is no hard and fast rule describing the interval of time between the date for the declaration of dividends, the date of record of stockholders entitled thereto, and the date of payment, the same being left to the sound and judicious discretion of the directors. (SEC Opinion, April 11,1962.) (a) It is customary for the directors to fix the time for payment of a dividend. But a corporation cannot discriminate among the shareholders as to the time of payment of dividends. (b) If no time is fixed by the resolution declaring a dividend, it is payable on demand, and if the resolution declares that it shall be payable at such time as the board of directors may direct and the board fixes no time, the law implies that it shall be paid within a reasonable time. (19 Fletcher, pp. 887888.) Equal participation in the distribution of dividends.

As a rule, dividends among stockholders of the same class must always be pro rata, equal and without discrimination and regardless of the time when the shares were acquired. (1) General on all the stocks. — The dividends must be general on all the stocks, so that each stockholder will receive his proportionate share. The directors have no authority to declare a dividend on any other principle. They cannot exclude any other portion of the stockholders from an equal participation in the profits of the company. The rule against discrimination is equally applicable to stock dividends. Each stockholder is entitled to receive new shares in proportion to the stock held by him and any discrimination is illegal. (11 Fletcher, pp. 1101-1104.)

Sec. 43


423

(2) Fractional shares included in computation. — For the same

reason that a corporation cannot exclude stockholders owning full shares from equal participation in the distribution of dividends, it cannot deny stockholders to fractional shares (see Sec. 41[1].) from participation in the dividends to the extent of their respective holdings. Thus, fractional shares resulting from a previous distribution of dividend by a corporation shall be included in the computation of stock dividend subsequently declared. (SEC Opinion, July 12,1961.) Total subscriptio n basis of s h a r e in d i v i d e n d s .

As a general rule, and as applied to any form of dividend declaration, the participation of each stockholder in the earnings or profits of the corporation is based on his total subscription and not on the amount paid by him in account thereof. (Sees. 43 [par. 1], 72.) For example, if a person subscribes for 1,000 shares of the par value of P10.00 per share and has paid P5,000.00 on his subscription, he will participate in dividends on the basis of 1,000 shares, not 500 shares. The reason is that a stockholder's entire subscription represents his holdings in the company for which he pays interest on any unpaid portion, (see Sees. 64, 66.) Subscribers are considered stockholders not from the time they are issued stock certificates but from the time their subscriptions are accepted by the corporation because it is from this time that they are bound by their subscriptions, subjecting them to all the liabilities and entitling them to all the rights of stockholders. (SEC Opinion, June 28, 1966.) Only in cases where a stockholder is delinquent in the payment of his unpaid subscription that he loses his privilege in a corporation where he has holdings, as provided in Section 71, except his right to receive cash dividends, which, however, shall first be applied to his unpaid balance on the subscription plus cost and expenses. (Sec. 43, par. 1.) Other m o d e s of division of dividends.

The above rule is not absolute and is subject to the rule of consent. Thus, it has been opined under the old Code that the

Sec. 43


424

distribution of dividends on the basis of the paid-up shares or any other mode which itself is lawful may be adopted by a corporation, but the unanimous consent of the stockholders is indispensable. (SEC Opinion, Dec. 7,1973.) It is believed that the same scheme is still legally feasible under Section 43 as it is not immoral nor against any public policy. The Securities and Exchange Commission has rendered an opinion to the contrary, (see note 1.) Classes of dividends.

Dividends payable to shareholders may be classified as follows: (1) Cash dividend. — It is dividend payable in cash. 52

(a) Dividends on par value shares are made at a stated percentage (e.g., 10%) of the par value although they may also be paid as a fixed amount per share. (b) As to no par value shares, dividends are payable in terms of so many pesos or centavos (e.g., P10.00, P0.01) per share since there is no basis on which a percentage can be stated. In other words, a stockholder participates in the dividends on the basis of the par value in case of par value shares, and the number of shares in case of no par value shares, and "It is a generally accepted auditing principle that cash means 'cash on hand or in bank.' Standard test in accounting defines 'cash' as consisting of those items that serve as a medium of exchange and provide a basis for accounting measurement. To be reported as 'cash/ an item must be readily available and not restricted for use in the payment of current obligations. A general guideline is whether an item is acceptable" for deposit at face value by a bank or other financial institution. Items that are classified as cash include coin and currency on hand, and unrestricted funds available on deposit in a bank, which are often called demand deposits since they can be withdrawn upon demand. Petty cash funds or change funds and negotiable instruments, such as personal checks, travelers' checks, cashiers' check, bank drafts, and money orders are also items commonly reported as cash. The total of these items plus undeposited coin and currency is sometimes called cash on hand. Interest-bearing accounts, or time deposits, also are usually classified as cash, even though a bank legally can demand prior notification before a withdrawal can be made. In practice, banks generally do not exercise this legal right. Deposits that are not immediately available due to withdrawal or other restrictions require separate classification as 'restricted cash' or 'temporary investments.' They are not 'cash'." (Rueda, Jr. vs. Sandiganbayan, 346 SCRA 341 [2000], citing Intermediate Accounting Comprehensive Volume, Ninth Ed., by Smith, Jr. and Skousen, Brigham Young University, Copyright 1987.) 52

Sec. 43


425

not upon the amount of the consideration paid by him for his shares. (c) If gift certificates are given to stockholders as share in the profits earned by the corporation, they may be treated as dividend subject to the requirements of Section 43. (SEC Opinion, Oct. 5,1994.) Cash and stock dividends are the more common forms of dividends; (2) Property dividend. — It is dividend distributed to the

stockholders in the form of property, real or personal, such as warehouse receipts, or shares of stock of another corporation, (see Ballantine, p. 564.) (a) A dividend payable in property is actually a cash dividend. The stockholder can take the property, sell it, and realize the cash. A corporation may, therefore, pay declared cash dividend in the form of a "property." The Securities and Exchange Commission allows the distribution of property dividend as liquidating dividend or where the distribution of the same is practicable, specifically where the surplus is in that form (property) and it is no longer intended to be used in the operation of the business. (SEC Opinion, Feb. 5,1991.) (b) If the property does not form part of the surplus or retained earnings of the corporation, the same cannot be declared as property dividends. (c) SEC rules (June 9, 1992.) require, among others, that the property to be distributed as dividends shall consist only of property which are no longer intended to be used in the operation of the business of the corporation and which are practicable to be distributed as dividends. No actual distribution of property dividends shall be made unless approved by the Commission; (3) Stock dividend. — It is dividend payable in unissued or increased or additional shares of the corporation instead of in cash or in property out of the unrestricted retained earnings of the corporation. A stock dividend may be declared only to the extent of the maximum number of shares authorized in the articles of incorporation.

426


Sec. 43

(a) Shares of stock are given the special name "stock dividends" only if they are issued in lieu of undistributed profits. If they are issued in exchange for cash or property, then they do not fall under the category of "stock dividends." A corporation may legally issue shares of stock (not as stock dividend) in consideration of services to it by a person not a stockholder or in payment of its indebtedness. A share of stock issued to pay for services rendered is equivalent to stock issued in exchange of property, because services is equivalent to property. Likewise, a share of stock issued in payment of indebtedness is equivalent to issuing a stock in exchange for cash. (b) Shares of stock may be issued to a non-stockholder or to a person who is not a stockholder but shares of stock coming from stock dividends are payable only to stockholders of the corporation and not to strangers or non-stockholders because only shareholders are entitled to dividends. (Nielsen & Co., Inc. vs. Lepanto Consolidated Mining Co., 26 SCRA 540 [1968].) (c) Stock dividends are in the nature of shares of stock, the consideration for which is the amount of unrestricted retained earnings converted into equity in the corporation's books. It is actually two things: 1) a dividend; and 2) the enforced use of the dividend money to purchase additional shares of stock at par. (Lincoln Phil. Life Insurance Co., Inc. vs. Court of Appeals, 293 SCRA 92 [1998], citing Nelson & Co., Inc. vs. Lepanto Consolidated Mining Co., 26 SCRA 540 [1968].) (d) A corporation may increase its authorized capital stock by way of stock dividends without touching its unissued shares as long as there are retained earnings to justify the declaration." (see SEC Opinion, Oct. 11,1972.) (e) A stock dividend has the same effect as cash dividends distributed to the stockholders who subsequently used said "The procedure prescribed by Section 38 to effect an increase of capital stock must be complied with. The increase will be to the extent of the retained earnings to be distributed as stock dividends.

Sec. 43


427

cash dividends in purchasing shares of the corporation. Since selling of shares at a premium is not prohibited (Sec. 62, par. 1.), stock dividends may be declared at a premium for such declaration is in the nature of a sale of shares at a premium; (f) As long as the requirements for the declaration of stock dividends are complied with, the issuance of common shares in favor of stockholders holding preferred shares is valid (SEC Opinion No. 04-28, April 27, 2004.); (4) Optional dividend. — It is dividend which gives the stockholder an option to receive cash or stock dividend; (5) Composite dividend. — It is dividend which is partly in cash and partly in stocks. Here, there is no option involved; (6) Preferred or preferential dividend. — It is dividend which

is payable, by virtue of contract, to one class of stockholders in priority to that to be paid to another class (19 Am. Jur. 2d 286.); (7) Cumulative dividend. — It is dividend which is contracted to be paid at a certain rate at stated times and, if net earnings at any dividend period are insufficient to pay the contract dividend, it is to be made out of subsequent net earnings (Ibid.); (8) Scrip dividend. — It is dividend in the form of a writing or certificate issued to a stockholder entitling him to the payment of money, stock or other benefit at some future time inasmuch as the corporation at the time such dividends are declared has profits not in cash or has no sufficient cash, or has the cash but wishes to reserve it for some corporate purposes. It is in the form of a promissory note or a promise to pay and may be issued to bear interest; (9) Bond dividend. — It is dividend distributed in bonds of the corporation to the stockholders. The bondholder becomes a creditor of the corporation to the extent of the amount of the bond. Thus, a corporation may use its retained earnings in improvement of its plant, or purchasing machinery or other property and issue its bonds in payment of dividends from such earnings (see 11 Fletcher, p. 893.); and (10) Liquidating dividends. — They are dividends which are actually distributions of the assets of the corporation upon disso-


428

Sec. 43

lution or winding up of the same. (Wise & Co. vs. Meer, 78 Phil. 655 [1947]) They are not paid on account of earnings or profits, but as a return of capital invested. So, the assets of a dissolved corporation are not distributed as dividends, as dividends are commonly known. The term has also been used to describe a distribution of assets made upon a reduction of the capital stock. (19 Am. Jur. 2d 283-284.) Dividends may also be participating and non-participating.

(see Sec. 6.) Ordinary and extraordinary dividends.

Dividends may be divided into the ordinary or regular current dividends payable by the corporation and extraordinary or "extra" dividends, which may consist of cash, property, or stock distributions. (1) As usually understood, ordinary dividends are those paid out of current earnings of a corporation according to some fixed plan or scheme, usually at regular intervals and sometimes limited to a substantially fixed rate of return to the shareholder. Generally, they are cash dividends, stock dividends being regarded as extraordinary dividends and not included within the phrase "regular dividends," although a policy of regular stock dividends is not unknown. (2) Extraordinary dividends, whether cash or stock, usually represent an accumulated excess of earnings over normal return on capital invested and constitute a distribution or a capitalization of surplus profits remaining after distribution of ordinary dividends. (19 Am. Jur. 2d 287.) Effect of declaration of c a s h d i v i d e n d .

(1) When a corporation issues cash dividends, the assets of the corporation diminish by exactly the amount paid out and correspondingly, the property of the individual stockholder increases. (11 Fletcher, p. 1110.) (2) The declaration itself of cash dividends is considered effective to create a debt from the corporation to each of its stockholders and segregate the amount thereof from the assets,

Sec. 43


429

even though the resolution provides that the dividend is payable of the stockholders in the corporate assets. Effect of declaration of stock dividend. (1) A stock dividend converts the surplus or profits of the corporation covered by such dividend into the permanent account, thereby placing it beyond the power of the board of directors to withdraw from corporate use and to distribute to the stockholders. (Eisner vs. Macomber, 252 U.S. 189.) (2) It shows that the corporation's accumulated profits have been capitalized instead of distributed to the stockholders or retained as surplus available for distribution, in money or kind, should opportunity offer. For from being a realization of profits for the stockholder, it tends rather to postpone said realization. (Nielsen Co., Inc. vs. Lepanto Consolidated Mining Co., 26 SCRA 540 [1969].) The declaration of a stock dividend is akin to a forced purchase of stocks. (PLDT vs. National Telecommunications Commission, 539 SCRA 365 [2007].) (3) Such a capitalization of surplus or transfer of such surplus to the capital account of the corporation adds nothing to and takes nothing from the corporation. The corporation merely transfers the surplus to capital account and issues shares of stock to represent the same. Such shares may be preferred as well as common stock. (4) The declaration likewise adds nothing to the interest of the stockholders. After a declaration of stock dividends, the stockholder receives no greater proportional interest in the assets of the corporation than he had before. In this respect, it is identical in substance with a splitting of original shares (infra.) in which outstanding shares are exchanged for an increased number of new shares of proportionally less par value than the old, leaving the aggregate value of all his stock substantially the same. Such an increase simply dilutes the shares as they existed before. (19 Am. Jur. 2d 288-289.) A stock dividend, therefore, is, in essence, not a dividend at all in the ordinary sense of the term. (5) When stocks dividends are distributed among the stockholders, the amount declared ceases to belong to the corporation. The unrestricted retained earnings of the corporation are

430

Sec. 43


diminished by the amount of the declared dividends, while the stockholder's equity is increased. The stockholders, by receiving stock dividends, are forced to exchange the monetary value of their dividends for capital stock, and the monetary value they forego is considered the actual payment or consideration for the original issuance of the stocks given as stock dividends. (PLDT vs. National Telecommunications Commission, supra.) (6) The declaration of stock dividend is advantageous to existing creditors of the corporation to the extent that corporate earnings are capitalized, unavailable for distribution to stockholders. At the same time, it improves the cash position of the corporation with expansion projects or programs obviating the necessity of borrowing and paying high interest rates. Tax treatment of stock d i v i d e n d s.

Stock dividends are not taxable as income because they represent merely an unrealized gain to the stockholder who receives nothing from the corporation that answers the definition of income under the National Internal Revenue Code. 54

Income, in tax law, is an amount of money or its equivalent coming to a person within a specified time, whether as payment for services, interest, or profit from investment. It is gain derived and severed from capital, from labor or from both combined, so that to tax a stock dividend would be to tax a capital increase rather than the income. Capital is wealth or fund; whereas,

"Sec. 73. x x x (B) Stock dividends. — A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent that it represents a distribution of earnings or profits. (Pres. Decree No. 1158, as amended.) The exception is designed to prevent the issuance and cancellation or redemption of stock dividends, which is fundamentally not taxable, from being made use of as a devise for the actual distribution of cash dividends, which are taxable. Thus, "the provision had the obvious purpose of preventing a corporation from avoiding dividend tax treatment by distributing earnings to its shareholders in two transactions — a pro rata stock dividend followed by a pro rata redemption — that would have the same economic consequences of a simple dividend." (Comm. of Internal Revenue vs. Court of Appeals, 301 SCRA 152 [1999].)

Sec. 43


431

income is gain or profit or the flow of wealth. (Comm. of Internal Revenue vs. Court of Appeals, 301 SCRA 152 [1999].) ILLUSTRATION: A, B, C, D, and E organized a stock corporation with an authorized capital stock of P400,000.00 divided into 4,000 shares with a par value of P100.00 per share. Each subscribed to and paid for 400 shares. Hence, the actual asset of the corporation at the beginning of the business was P200,000.00. After a few years of profitable business, the assets of the corporation amounted to P400,000.00, with no debts. Instead of declaring cash dividends, it was agreed to increase the capital stock and for that purpose, to issue 400 additional shares each stockholder in the form of stock dividends with a total value of P40,000.00 which amount represents the actual increase of his share or interest in the business. At the start of the year, each stockholder held 400 shares with a total value of P40,000.00, which is 1/5 of the total corporate capital of P200,000.00. At the close of the year, after stock dividends are declared, each stockholder still holds 1/5 interest in the corporation with his 800 shares worth P80,000.00 in relation to the increased corporate capital of P400,000.00. But the proportional interest of each share in the corporate assets is decreased because of the increase in the number of shares, from 1/2,000 to 1/4,000. The mere issuance of the stock dividends is not subject to income tax as they do not constitute income to their recipients. Effect of declaration of b o n d or scrip dividend .

In the absence of statutory provision to the contrary, a corporation may use its retained earnings, for example, in improvements of its property or in purchasing machinery or other property which it is authorized under its articles of incorporation to acquire and hold, and issue its bonds in payment of dividend from such earnings. Or, the corporation may issue a scrip dividend. Such a dividend, when the obligation to pay is absolute, is a debt absolutely due to the stockholders, although payment is postponed to a future date. (11 Fletcher, pp. 1116-1117.)


432

Sec. 43

(1) The declaration of a bond or scrip dividend makes the stockholder a creditor of the corporation for the amount of the bond or scrip issued as dividends, but the assets of the corporation remain the same as nothing passes out of the corporation to the stockholder. (2) It has the effect of deferring the payment of cash dividends. Distinctions between cash dividend and stock dividend.

They are as follows: (1) A cash dividend involves a disbursement to the stockholder of accumulated earnings, while stock dividend does not involve any disbursement; 55

(2) Cash dividend declared and paid becomes the absolute property of the stockholder and cannot be reached by the creditors of the corporation in the absence of fraud, while stock dividend, being still part of corporate property, may be reached by corporate creditors; (3) Cash dividend is declared only by the board of directors, at

its discretion, while stock dividend is declared by the board with the concurrence of the stockholders representing at least 2 / 3 of the outstanding capital stock at a regular or special meeting called for the purpose (Sec. 43.); (4) Cash dividend does not increase the corporate capital, while it is increased by a stock dividend; and (5) The declaration of cash dividend creates a debt from the corporation to each of its stockholders who then hold such stock, while no debt from the corporation to the stockholders is created by the declaration of stock dividend, except in the sense that capital stock constitutes a liability. (19 Am. Jur. 2d 317.)

Cash dividends and property dividends received from a domestic corporation and the share of an individual partner in the distributable net income of a (business) partnership are subject to income tax at 6%/8%/10%, effective January 1, 1998/1999/2000, respectively. The tax is 25% if the stockholder is a non-resident aliens individuals not engaged in business. (Sees. 24[B, 2], 25[A, 2, B], National Internal Revenue Code.) 55

Sec. 43


433

It is important to note that a dividend payable in stock is not synonymous with, and is not always or necessarily, a stock dividend. A dividend payable in stock may, under some circumstances, be a cash dividend (Ibid., 292.), as where the dividend consists in treasury stocks or in stocks of another corporation. (supra.)

(6) Cash dividend is taxable as income to the stockholder, while stock dividend is generally not subject to income tax. Stock dividend from issue of additional shares. Whenever an increase is made in the capital account of a stock corporation, the increase is valid only when it represents additional shares issued for which the equivalent consideration is received by the corporation. The increase may be the result of an issue of additional shares or the re-investment of retained earnings effected by the distribution of shares as stock dividend. Hence, a corporation with outstanding no-par value shares originally issued at P5.00 per share cannot increase its capital account by transferring its surplus to its capital account without issuing additional shares for the amount transferred. Under such method, stockholders who have already paid in full their no-par value shares would in effect be made to pay additional amounts for the same shares to increase their value. Section 6 (par. 3.) provides that "shares of capital stock issued without par value shall be deemed fully paid and non-assessable." Once no-par value shares have been issued at their issued price, their value can no longer be changed, (see Sec. 62, last par.) Accordingly, such stock dividend by a transfer of the surplus to capital with no shares to be issued cannot validly be made. (SEC Opinion, March 28,1974.) Distribution or re-issue of treasury stocks. The mere acquisition and distribution of previously issued stock does not constitute a stock dividend. (11 Fletcher, p. 891.) (1) As a re-issue of existing paid-up shares. — Treasury stocks

(see Sec. 9.), being property of the corporation, may not be dis-

434


Sec. 43

tributed among stockholders as stock dividends, but would constitute property or cash dividends. (SEC Opinion, June 13,1963.) No increase of capital is involved, since there is merely a re-issue of existing paid-up shares. Such a distribution of treasury stock would not be a stock dividend within the ordinary meaning of the term. (Comm. of Internal Revenue vs. Manning, 66 SCRA 14 [1975], citing Bass vs. Comm. of Internal Revenue, 129 F 2d 300.) (2) As a distribution of earnings. — If the dividend in stock

consists not of stock created or issued therefor as evidence of the transfer of surplus or undivided profits to fixed capital, but of stock in which corporate earnings have been invested or for which corporate assets have been exchanged or of stock received from the stockholders in payment of debts to the corporation and carried in treasury, it is a cash dividend whether such stock is previously issued and outstanding of the same corporation or stock of another corporation. (SEC Opinion, June 13,1963.) It is the same as if the corporation had used accumulated earnings to buy any other property — say, the stock of another corporation — and had distributed such substituted property in specie as a dividend to its shareholders. Thus, in a case, where a company utilized a portion of its earnings "to buy" the majority shares of a stockholder and distributed such shares to the remaining stockholders, it was held that the distribution was not a stock dividend but in effect a distribution of earnings to stockholders and, therefore, subject to income tax. (Comm. of Internal Revenue vs. Manning, supra.) Note: Dividends are no longer subject to income tax. (3) As representing a prior disbursement of purchase price to

a former stockholder. — The re-issue of treasury shares by a corporation as a purported stock dividend cannot be approved, since there is no capitalization of surplus. The stated capital was not reduced when the treasury shares were acquired and is not increased upon their re-issue. Such so-called stock dividend is simply stock watering which does not represent net worth or surplus, but only a prior disbursement of purchase price to a former stockholder. (SEC Opinion, June 13, 1963, citing Ballantine, p. 484.)

Sec. 43


435

Stock splits. (1) Distinguished from stock dividends. — The courts have

recognized a distinction between a "stock split" and a "stock dividend." The essential distinction between a stock dividend and a stock split is that in the former, there is a capitalization of earnings or profits, together with a distribution of the added shares which evidence the assets transferred to capital, while in the latter, there is a mere increase in the number of shares which evidence ownership without altering the amount of the capital, surplus, or segregated earnings. In brief, a stock split is merely a dividing up of the outstanding shares of a corporation into a greater number of units, without disturbing the stockholder's original proportional participating interest in the corporation. A stock split is essentially one of form and not of substance. (2) Ways by which accomplished. — It is said that stock splits are generally accomplished in two different ways: (a) If the stock is of the par value type, then the original certificate is exchanged and a new certificate substituted, embodying the original shares, plus the new number of shares authorized by the split. (b) If it is no-par value stock to be split, then the stockholder retains his original certificate and receives additional certificates for the additional shares. (19 Am. Jur. 2d 284-285.) The reverse procedure is known as "reverse stock split." ILLUSTRATION: X Corporation has 100,000 outstanding shares of stock, with a par value of P10.00 per share. Because the market price of the shares is considered high, the board feels that a lower price will improve marketability of the shares and attract more investors. It may authorize that the 100,000 shares be replaced by 500,000 shares with a par value of P2.00. Thus, each stockholder will receive 5 shares in exchange for each share owned. This increase in the number of outstanding shares is referred to as stock split. "Reverse stock split," on the other hand, involves the reduction of the outstanding shares into a smaller number of

436


Sec. 43

shares and this is done when it is felt that a higher price for the shares will be advantageous to the corporation. Thus, in the same example, the 100,000 outstanding shares may be called in and replaced by 50,000 shares with a par value of P20.00 per share. There is an increase in the par value (also market value per share) of outstanding shares of a specified class with a corresponding reduction in the number of shares issued.* In either case, the split merely changes the number of outstanding shares without affecting the stockholders' equity nor the capital stock. The receipt of shares as a result of the split does not generate taxable income to either the stockholder or the corporation. Distinction between distribution in liquidation and ordinary d i v i d e n d.

The distinction between a distribution in liquidation and an ordinary dividend is factual, the result in each case depending on the particular circumstances of the case and the intent of the parties. If the distribution is in the nature of a recurring return on stock, it is an ordinary dividend. However, if the corporation is really winding up its business or recapitalizing and narrowing its activities, the distribution may properly be treated as in complete or partial liquidation and as payment by the corporation to the stockholder for his stock or as return of the capital invested by him. The corporation is, in the latter instances, wiping out all or that part of the stockholders'

C h a n g e s in par values of capital stock should be charged or credited to additional paid-in-capital (APIC). If the increases in capital stock values exceed APIC, they should be charged to retained earnings. The common sources of APIC are as follows: (1) excess of par value paid for capital stock; (2) resale or retirement of treasury shares; (3) distribution of stock dividends; (4) issuance of detachable stock purchase agreements; (5) changes in par value; (6) donated assets; and (7) that created by corporate readjustment of quasireorganization. (see annotation under Sec. 80.) APIC, however, shall not be used to relieve income of the current or future years of charges chargeable against income except in the case of reorganization wherein a recognized enterprise may be relieved of such charges against income on condition that if the existing enterprise shall be continued the same result may be attained even without reorganization, provided said facts are fully disclosed and formally approved as in reorganization in which event the articles of incorporation shall be amended accordingly to reflect the changes in the capital structure. (SEC Opinion No. 05-01, Jan. 4, 2005, citing Statement of Financial Accounting Standard No. 18 which lays down the generally accepted accounting standards in our jurisdiction.)

Sec.

44


437

interest in the company. (Wise & Co., Inc. vs. Meer, 78 Phil 655 [1947].) For tax purposes, gains and losses from liquidating dividends are considered as capital gains or losses, (see Sees. 33 [b], 66[a], 21[f], National Internal Revenue Code.) Sec. 44. Power to enter into management contract. — No corporation shall conclude a management contract with another corporation unless such contract shall have been approved by the board of directors and by stockholders owning at least the majority of the outstanding capital stock, or by at least the majority of the outstanding capital stock, or by at least a majority of the members in the case of a non-stock corporation, of both the managing and managed corporation, at a meeting duly called for the purpose: Provided, That (1) where a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or (2) where a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation, then the management contract must be approved by the stockholders of the managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of the members in the case of a non-stock corporation. No management contract shall be entered into for a period longer than five years for any one term. 57

The provisions of the next preceding paragraph shall apply to any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise: Provided, however, That such service contracts or operating agreements which relate to the exploration, development, exploitation or utilization of natural resources may be entered into for such periods as may be provided by the pertinent laws or regulations, (n) 'or trustees.

438


Sec. 44

Power to enter into m a n a g e m e n t contract. (1) With another corporation. — Under Section 44, a corporation

is expressly allowed, without the need of amending its articles of incorporation, to enter into a management contract with another corporation, which refers "to any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise." Briefly stated, it is an agreement under which a corporation delegates the management of its affairs to another corporation for a certain period of time. Since the corporation can employ officers and agents to manage its business, there can be no objection to employing another corporation for the purpose. A corporation under management is bound by the acts of the managing corporation and is estopped to deny its authority, (see National Bank vs. Producers' Warehouse Association, 42 Phil. 609 [1922].) (2) With parent corporation. — Absent a finding of fraud or

bad faith, contracts entered into by a parent corporation with a subsidiary or affiliate may be held legal where the purpose is to provide more efficient operation and greater convenience to both. Thus, a holding company may, in some cases, intervene in the management and affairs of its subsidiaries or affiliates such as the centralization of accounting and personnel functions, provided the management in those affairs will not affect the separate and continuing existence of the managed corporation. However, since this situation may, in effect, place the subsidiary or affiliate to a certain extent within the control of the present company and the latter, in turn, assumes responsibility for such management, the same shall be subject to the provisions of Section 44 relative to execution of management contracts. (SEC Opinion, Nov. 28, 1990.) (3) With a natural person. — Section 44 refers only to a management contract with another corporation. Hence, it does not apply to management contracts entered into by a corporation with natural persons.

Sec. 44


439

Limitations on t h e power.

The following are the limitations for the exercise of the power: (1) Ratification of the contract.

— The contract must be

approved by a majority of the quorum of the board of directors or trustees and ratified by the prescribed vote of the outstanding capital stock entitled to vote (see Sec. 6, last par.) or of the members, as the case may be, of both the managing and the managed corporations, at a meeting duly called for the purpose. In either of the two cases mentioned in Section 44 (par. 1.), the management contract must be approved by the stockholders of the managed corporation owning at least 2 / 3 , not merely a majority, of the total outstanding capital stock entitled to vote, or in case the managed corporation is a non-stock corporation, by at least 2 / 3 , not merely a majority, of the members. Where the contract is between two corporations having interlocking directors, the contract must comply with the requirements of Section 33; (2) Period of the contract. — The period must not be longer than five (5) years for any one term except those contracts which relate to the exploration, development, exploitation or utilization of natural resources that may be entered into for such periods as may be provided by pertinent laws or regulations; and (3) Managerial power under the contract. — A management

contract cannot delegate entire supervision and control over the officers and business of a corporation to another as this will contravene Section 23, which lays down the fundamental rule that the corporate powers of all corporations shall be exercised by the board. In general, the management contract must always be subject to the superior power of the board to give specific directions from time to time or to recall the delegation of managerial power. The board cannot surrender or abdicate its power and duty of supervision and control for otherwise, it becomes a mere instrumentality of the management company. (Ballantine, p. 136.) ILLUSTRATIONS:

(1) Interlocking stockholders. — If A, B, and C, stockholders in both X Corporation and Y Corporation, the managing and managed corporations, respectively, own 35% of the total

440


Sec. 45

outstanding capital stock entitled to vote of X Corporation, the management contract must be approved by the prescribed 2 / 3 vote of the stockholders of Y Corporation. The same vote shall apply where A is the only stockholder in both corporations and he owns more than 1/3 of the total outstanding capital stock entitled to vote of X Corporation. Only a majority vote is required if the more than 1 / 3 ownership of A, B, and C, or of A refers to the outstanding capital stock of Y Corporation, the managed corporation. (2) Interlocking directors. — If A, B, C, D, and E constitute the majority of the members of the board of directors of X Corporation and also of Y Corporation, the bigger 2 / 3 vote by the stockholders of Y Corporation is necessary. This is a case of a contract between two corporations with interlocking directorates, (see Sec. 33.) The extent of the shareholdings of A, B, C, D, and E in X Corporation is immaterial. In both illustrations, the management contract need only be approved by the majority of the outstanding capital stock of X Corporation, or in illustration No. 2, of the members, in case X Corporation is a non-stock corporation. Sec. 45. Ultra vires acts of corporations. — No corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of the powers so conferred. (14a) Ultra vires and intra vires acts explained. It is well-settled that a corporation is not restricted to the exercise of powers expressly conferred u p o n it but has the implied or incidental powers to do what is reasonably necessary to carry out its express powers and to accomplish the purposes for which it was formed. Sections 36(11) and 4 5 give express recognition to these implied and incidental powers possessed by private corporations. According to the strict construction of the term, an ultra vires act is one not within the express, implied, and incidental powers of the corporation conferred by the Corporation Cod e

Sec. 45

TITLE rV. POWERS OF CORPORATION

441

or articles of incorporation. It is an act which is not positively forbidden, but impliedly forbidden because not expressly or impliedly authorized or necessary or incidental in the exercise of the powers so conferred. Acts or transactions within the legitimate powers of a corporation or are related to its purposes are said to be intra vires. ILLUSTRATIONS: (1) A corporation was organized for the purpose of engaging in the buying and selling of home appliances. The act of buying and selling motor vehicles would be ultra vires although it is itself lawful because it is outside the object for which the corporation is created and, therefore, beyond its powers. The buying and selling of refrigerators would be intra vires. (2) A corporation was organized to engage in the business of manufacturing a particular product. Marketing and selling the product may be logically necessary to the business of manufacturing, considering that there must be an end-user for the goods manufactured or produced. A seller, trader, dealer or importer of goods is not necessarily or indispensably the manufacturer of the goods. Therefore, manufacturing cannot be treated as reasonably necessary to the business of the selling. (SEC Opinion No. 07-14, July 2007.) Contracts intra vires entered into by the board of directors are binding upon the corporation and courts should not interfere unless such contracts are so unconscionable and oppressive as to amount to wanton violation to the rights of the minority, as when a stockholder avers that the board of directors has concluded a transaction that will result in serious injury to him. (Gamboa vs. Victoriano, 90 SCRA 40 [1979]; Ong Yong vs. Tiu, 401 SCRA 1 [2003].) Ultra vires acts distinguished f r o m other acts. Although the term ultravires acthas been used mdiscriminately, it is properly distinguishable from acts which are illegal, in excess or abuse of power, or executed in an unauthorized manner, or acts


442

Sec. 45

within corporate powers but outside the authority of particular officers or agents. (19 C.J.S. 419.) (1) From illegal act. — When properly used, an ultra vires act

means simply an act which is beyond the conferred powers of a corporation or the purposes or objects for which it is created as defined by the law of its organization. (Republic vs. Acoje Mining Co., Inc., 7 SCRA 361 [1963]; Atrium Management Corporation vs. Court of Appeals, 353 SCRA 23 [2001].) By itself, an ultra vires act is not necessarily illegal. On the contrary, it may be lawful, moral, and even praiseworthy. An illegal corporate act, on other hand, is an act which is contrary to law, morals, good customs, public order, or public policy (Art. 1306, Civil Code.) and, therefore, per se illicit, (see Pirovano vs. De la Rama, 96 Phil. 335 [1954].) The buying and selling of contraband goods would not only be illegal but also ultra vires. 58

The term ultra vires is distinguished from an illegal act for the former is merely voidable which may be enforced by performance, ratification or estoppel while the latter is void and cannot be validated. (Ibid.) (2) From act done without complying with certain conditions and

formalities. — Another class of corporate contracts which are sometimes said to be ultra vires, although the phrase as applied to them is inaccurate, is where the power exists to do what was done, provided the corporation does it in a certain prescribed way. Thus, informalities in connection with the consent of stockholders (or members) to the contract are often incorrectly referred to as ultra vires, using the term in its strict sense. The fact that the required consent of stockholders is not obtained does not make a contract ultra vires. (7 Fletcher, p. 567; also 14-A C.J., pp. 312-313.) The general rule is that a corporation must act in the manner and with the formalities, if any, prescribed by its charter or by the general law. However, a corporate transaction or contract *The only ground and policy upon which the defense of ultra vires, properly defined, can have real basis is the interest of the stockholders, if any, to confine the business activities of the corporation to the scope of the purposes specified in its articles of incorporation. (Ballantine, p. 242.) Creditors cannot attack a contract or transfer merely because it is ultra vires. The only ground for objection by creditors is its effect as a fraudulent diversion of corporate assets from the payment of their claims. (Ibid., p. 258.) 5

Sec. 45


443

which is within the powers of the corporation, which is neither wrong in itself nor against public policy, but which is defective from a failure to observe in its execution a requirement of the law enacted for the benefit or protection of a certain class, is voidable only and is valid until voided; the parties for whose benefit the requirement was enacted may ratify it or be estopped to assert its invalidity, and third persons acting in good faith are not usually affected by an irregularity on the part of the corporation in the exercise of its granted powers. (19 C.J.S. 432-444.) (3) From act beyond powers of particular officers. — The expres-

sion ultra vires has also been applied to acts done by the directors (or trustees) or other officers of a corporation in excess of the powers conferred upon them by the stockholders (or members). Such an act, however, is not necessarily ultra vires act of the corporation. An act may be within the powers of a corporation and not within the powers of the directors, for the powers of the latter are derived, not from the legislature, like the powers of the corporation, but from the stockholders in their corporate capacity. A result of the above distinction is that the stockholders of a corporation, while they cannot, by ratification, render valid an act which is beyond the powers of the corporation, may ratify an act which is within its powers, but beyond the powers of the directors. The courts often refer to contracts as ultra vires where all that is meant is that a particular officer had no power to make the contract. In this class of cases, the question is merely one of agency and, therefore, governed by old and well-settled rules of law relating to agency. (11 Fletcher, pp. 566-567.) (4) From act involving inexistent contract. — A contract may not

be illegal but inexistent and, therefore, void, when it lacks one or some of the essential elements {i.e., consent, object, and cause) of a contract, such as those which are absolutely simulated or fictitious; those whose cause or object did not exist at the time of the transaction; those whose object is outside the commerce of men; those which contemplate an impossible service; and those where the intention of the parties relative to the principal object of the contract cannot be ascertained. (Art. 1409, Civil Code.) Such contracts are not necessarily ultra vires. Neither party has a right of action against the other who can always raise the


444

Sec. 45

defense of the inexistence of the contract to defeat the claim of the former. Ratification of ultra vires acts.

(1) Where the contract or act is illegal per se, it is wholly void or inexistent. It cannot be ratified or validated. {Ibid., par. 2.) Inexistent contracts (supra.) defined in Article 1409 of the Civil Code cannot also be ratified. The doctrine of estoppel cannot operate to give effect to an act which is null and void. (2) Where the contract or act is not illegal per se but merely

beyond the power of a corporation, the same is merely voidable and may be enforced by performance, ratification, or estoppel, or on equitable grounds. (Republic vs. Acoje Mining Co., Inc., supra.)

(a) A corporation, like an individual, may ratify and thereby render binding upon it the originally unauthorized acts of its officers or other agents (Gokongwei, Jr. vs. Securities and Exchange Commission, 89 SCRA 336 [1979].) and ultra vires acts which are not illegal especially so if no creditors are prejudiced thereby and no rights of the State or the public are involved. (7 Fletcher, p. 585.) (b) Ratification can never be made on the part of the corporation by the same persons who wrongfully assume the power to make the contract, but the ratification must be by the officer or governing body having authority to make the contract. (Vicente vs. Geraldez, 22 SCRA 210 [1973]; Arguenza vs. Metropolitan Bank & Trust Co., 271 SCRA 1 [1997].) Effects of ultra vires acts w h i c h are not illegal.

The following rules are recognized: 59

'The effects of illegal contracts of a corporation are governed by the following provisions of the Civil Code: "Art. 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no action against each other, and both shall be prosecuted. Moreover, the provisions of the Penal Code relative to the disposal of effects or instruments of a crime shall be applicable to the things or the price of the contract.

Sec. 45


445

(1) An ultra vires contract, while executory on both sides, can-

not be enforced by either party thereto. (7 Fletcher, p. 607.) It is in the public interest that corporations do not transcend the powers granted to them by law and their assets be not subjected to risks created by forbidden acts; (2) When an ultra vires contract has been fully performed

on both sides, neither party can maintain an action to set aside the transaction or to recover what has been parted with. The well-settled doctrine is that the defense of ultra vires cannot be set up or availed of in completed or consummated transaction. (Ibid., p. 652.) Only the State may challenge the contract on ultra vires grounds. No public interest is involved here since both parties have already received to their advantage the benefits of the contract voluntarily entered into; and (3) When an ultra vires contract has been performed on one

side and the other has received benefits by reason of such performance, recovery is permitted in most courts on behalf of the former (Ibid., p. 620.) on the ground that it would be unjust to sanction retention of benefits coupled with refusal to perform. Other courts hold the contract unenforceable but compel the party who has received the benefits of performance to return what he has received or, failing to do that, to pay its reasonable value. (Ibid., p. 613.) The doctrine of ultra vires cannot be invoked when it would defeat the ends of justice or work a legal wrong. (Coleman vs. Hotel de France, 29 Phil. 323 [1915].) It cannot be allowed to prevail whether the plea is interposed for or against a corporation when it will cause prejudice to a party who acted in good faith.

This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has given, and shall not be bound to comply with his promise." "Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be observed: (1) When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the contract, or demand the performance of the other's undertaking; (2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what he has given without any obligation to comply with his promise."


446

Sec. 45

Thus, loans given to or by a corporation have to be repaid notwithstanding that the transaction is ultra vires. Contracts ultra vires in part only.

If the contract is separable, it may be sustained and enforced as to the part not ultra vires, and held invalid as to the part ultra vires.

By way of illustration: (1) Securities taken by a corporation, though ultra vires as to some of the debts secured, may be enforced as to those debts for which the corporation was authorized to take them. (2) Where a corporation issues bonds and executes a mortgage to secure the same, the bonds are valid if within the powers of the corporation, though the mortgage may be ultra vires. (3) The rule also applies where a corporation executes a mortgage covering property which it has no power to mortgage, as well as property which it may mortgage. The mortgage is valid as to the latter. (7 Fletcher, p. 587.) Acts p r e s u m e d to be within corporate powers. (1) Where private rights only are involved. — It is the policy of

the law to look with disfavor upon the defense of ultra vires, where private rights only are involved, especially when interposed by a corporation to avoid an obligation which is otherwise legal and equitable. (Ibid., p. 570.) Thus, "when a contract is not on its face necessarily beyond the scope of the power of the corporation by which it was made, it will, in the absence of proof to the contrary, be presumed to be valid. It is not seemly for a corporation, any more for an individual, to make a contract and then break it, to abide by it so long as it is advantageous, and repudiate it when it becomes onerous." (Coleman vs. Hotel de France Co., 29 Phil. 323 [1915].) The defense of ultra vires rests on violation of trust or duty toward stockholders (or members), and should not be entertained where its allowance will do greater wrong to innocent parties dealing with the corporation. (19 C.J.S. 433.)

Sec. 45


447

(2) Where act clearly beneficial to the corporation. — The ten-

dency of more recent decisions is to hold an act within corporate powers, if possible, where it is clearly beneficial to the company as where the act directly tends to increase its business. Thus, a corporation, a financial institution, which owns and maintains a computer to service its data processing needs may sell the computer to other entities after servicing its needs. Whatever transactions as are fairly incidental or auxiliary to the main business of a corporation may be undertaken by the same. (SEC Opinion, May 3,1976.) In any case, Section 36(11) is broad enough to cover a very wide range of implied powers as to make difficult the avoidance of corporate contracts on the ground of ultra vires. Ultra vires acts as the acts of the corporation. The doctrine so often laid down by the courts — that a corporation has such powers only as are conferred upon it by its charter — if taken literally, would be equivalent to saying that an act done by the officers of a corporation on its behalf and in its name, but in excess of its powers, even though authorized by the stockholders (or members) in their corporate capacity, is not the act of the corporation, as distinguished from its officers and stockholders. The rule that a corporation has no powers except such as are conferred by its charter cannot and does not mean that it cannot exceed its powers. (1) A corporation has no right or authority to do acts which are not within the powers conferred upon it by the legislature, but, as in the case of an individual, it is possible for it to do wrong. It may exceed its powers and do an ultra vires act, and the act will be, in contemplation of the law, not merely the act of the officers or stockholders, but the act of the corporation itself. Thus, a conveyance or transfer of property to or by a corporation may transfer the title, though the corporation has no power under its charter to hold or transfer the property. (2) When an ultra vires contract with a corporation is fully executed by both parties (supra.), the court will not interfere at the

448


Sec. 45

instance of either party to deprive the other of the rights acquired under the contract. (3) Actions quasi ex contractu may be maintained under some circumstances, by or against a corporation, for money or property loaned, paid or delivered under an ultra vires contract. (4) When an ultra vires contract with a corporation has been fully performed by one of the parties, and the other has received the benefit of such performance (supra.), the latter is estopped to set up the ultra vires character of the transaction to defeat an action on the contract itself. 60

(5) Torts and crimes are always ultra vires, and yet it is well-

settled that a corporation may commit a tort and be liable in damages therefor, and it may be guilty of a misdemeanor, and be indirectly convicted and fined therefor. This is sufficient to show beyond any doubt that a corporation may exceed its powers. (7 Fletcher, pp. 579-580; see Sec. 44.) Who may invoke ultra vires. (1) Generally. — The question as to the effect of ultra vires acts often depends on who is invoking ultra vires. Thus, the State may have the right to invoke it, although neither of the parties to the contract may urge it, as in the case of an executed contract. So, a party to the contract may, under some circumstances, urge ultra vires in a case where a total stranger would not have that right. Likewise, dissenting stockholders sometimes sue to enjoin the execution or performance of an ultra vires contract where neither party to the contract could set up the claim. (2) State. — When the State creates a corporation, the grant of the charter is on the implied condition that the corporation shall act within the powers conferred upon it. Ultra vires acts, whether otherwise wrong or not, are a breach of this condition. Such an act does not of itself put an end to the existence of the corporation, but it is, subject to certain qualifications, a ground for a direct proceeding by the State to obtain a judgment of forfeiture. But when a corporation is guilty of exercising powers not authorized "See "Effects of ultra vires contracts which are not illegal," supra.

Sec. 45


449

by its charter, the State instead of proceeding against it to obtain a judgment forfeiting its charter may proceed by quo warranto, to obtain a judgment merely ousting it from further exercise of the unauthorized power. (7 Fletcher, pp. 604-605; see Sec. 121.) The Securities and Exchange Commission may suspend or revoke the certificate of registration of a corporation for commission of ultra vires acts, (see Pres. Decree No. 902-A, Sec. 6[1].) (3) Stockholders. — The stockholders of a corporation have a right to expect and to insist that its funds shall nofbe diverted by giving them away or by employing them in an ultra vires business or transaction, and any stockholder, therefore, has such an interest that he may apply to a court for an injunction to prevent such a diversion, even though all other stockholders may consent to the ultra vires act. In like manner, he may sue to enjoin a corporation from using its funds in the ultra vires purchase of shares of stock in another corporation. However, a stockholder may be precluded from attacking an act as ultra vires, by his laches. In other words, if a stockholder wants protection against the consequences of an ultra vires act, he must ask for it with sufficient promptness to enable the court to do justice to him without doing injustice to others. Furthermore, it need hardly be stated that where the stockholder has himself participated in the ultra vires act, or consented thereto, he will be estopped from maintaining legal proceedings to secure the annulment of the consequences thereof. So, also a stockholder may be barred from asserting the invalidity of a transaction whereby a corporation has borrowed money beyond the limit of its authorized indebtedness where the money has been expended for the benefit of the stockholders and the corporation. (7 Fletcher, pp. 600-603.) (4) Strangers. — Except where it is otherwise provided by statute, it is a general rule that a plea of ultra vires cannot be interposed by a stranger not a party to the contract, at least if he is not injured by such act or contract. For instance, although the act of a corporation in acquiring a cause of action is ultra vires, yet the want of power to engage in such business cannot be interposed as a defense when the

450


Sec. 45

corporation seeks to enforce such cause of action. Thus, the maker of a note cannot defend upon the ground that the contract whereby the note was transferred was ultra vires, on the ground that the payee had no power to indorse it for transfer. So, if a person is in possession of real property and an action is brought against him by a corporation to recover it or to quiet title or the like, defendant cannot set up that the title of plaintiff was acquired ultra vires, where defendant was a stranger to the original transaction alleged to be ultra vires. (Ibid., pp. 594-596.) (5) Competitors in business. — A stranger whose rights have not been infringed by an ultra vires act of a competitor corporation cannot urge ultra vires to prevent the latter from acting beyond its powers, unless the right to do so is given by a statute. In other words, a competitor cannot attack acts of a corporation as ultra vires, merely on the ground of injurious competition, where such acts are neither public nuisances or trespasses. The only injury of which he can be heard in a judicial tribunal to complain is the invasion of some legal or equitable right. (Ibid., p. 598.) (6) Creditors. — Judgment creditors may impeach an ultra vires contract as in fraud of creditors, the same as any other contract. But creditors of the corporation, whose rights are not infringed by the ultra vires contract, cannot attack it. They cannot attack a corporate transaction as ultra vires unless its intent or effect is fraudulently to divert the corporate assets from their debts. It follows that ordinarily, a subsequent creditor cannot object. (Ibid., p. 599.) Estoppel to deny corporat e p o w e r to contract.

(1) General rule. — As provided in Section 21, an association which assumes to exercise corporate powers and enters into a contract as a corporation and persons who contract with it as a corporation are estopped, in an action on the contract, to deny its corporate existence. (2) Where power to enter into contract in issue. — The general

principle does not apply where the question is whether a contract is within the powers conferred upon a corporation by its

Sec. 45


451

charter to make, and hence, since estoppels must be mutual, the other party to the contract is not estopped to set up that the contract was beyond the powers of the corporation. (3) Where contract wholly executory. — In other words, the

mere act of entering into the contract does not estop either party to show that the contract is ultra vires. If it did, ultra vires could

not be set up as against a contract wholly executory, whereas the rule that wholly executory contract may be attacked as ultra vires is one of the few rules as to which there is no contention. All this does not mean that either party to the contract may not, by his acts, be estopped from setting up ultra vires. (4) Where contract apparently ultra vires. — It is held in some

States that a corporation may be estopped to deny its power to enter into a particular contract, where the contract is apparently within its powers, and is rendered ultra vires because of extraneous facts peculiarly within the knowledge of the corporation, and not known to the other party. (5) Where contract has been performed on one side. — And in

some States, although not in all, the contention that a contract is ultra vires, either against the corporation or against the other party, where the contract has been performed by one of the parties and the other has received the benefit of such performance, is said to be precluded on the theory of an estoppel. (7 Fletcher, pp. 580-581.) Corporate liability for torts, crimes, a n d other violations.

(1) General rule. — A corporation, being a juridical entity, can only act as such through its officers and agents. This being the case, it is responsible for the tortious acts of the latter done within the scope of their authority or in the course of employment to the same extent that an unincorporated individual or association would be. (see 1 Fletcher, pp. 27-28; Stevens on Corporations, p. 355; see Art. 2180, Civil Code.) (a) The authority may come from the stockholders or members acting as a body, or generally, from the directors (or trustees) as the governing body. (P.N.B. vs. Court of Appeals, 83 SCRA 237 [1978].)

452


Sec. 45

(b) The act of the officer or agent must have been within the scope of his authority or course of employment; but subject to this limitation, it may have been without orders, or even in disregard of the instructions to the officer or agent or may have been in excess of instructions, or may have been malicious or willful. Nor, need the corporation have authorized the doing of the particular act or ratified it after it was done. (19 C.J.S. 946-949.) (c) A corporation cannot, in order to escape liability for damages for the wrongful acts of its agents or employees, assert that such acts were beyond the scope of its corporate power or that they occurred in connection with a transaction beyond the scope of such power. It is to be kept in mind that all torts are necessarily ultra vires, since if an act is legally authorized, it is for that reason lawful and not a tort. (Ibid., 948.) (d) In labor cases, the Supreme Court has held corporate directors and officers solidarily liable with the corporation for the termination of employment of employees done with malice or in bad faith (Sunio vs. National Labor Relations Commission, 127 SCRA 390 [1984]; General Bank & Trust Co. vs. Court of Appeals, 135 SCRA 569 [1985]; MAM Realty Development Corp. vs. National Labor Relations Commission, 244 SCRA 797 [1995]; Uichico vs. National Labor Relations Commission, 273 SCRA 35 [1997].) on the theory that the legal fiction of separate corporate personality may be disregarded whenever it is used as a means of conrrrtitting an illegal act. (see Acesite Corporation vs. National Labor Relations Commission, 449 SCRA 360 [2004].) Any decision against the employer corporation can be enforced against the officers in their personal capacities for acting on behalf of the corporation should the corporation be unable to satisfy the judgment in favor of an employee (as where it is no longer existing). (A.C. Ransom Labor Union-CCLU vs. National Labor Relations Commission, 142 SCRA 269 [1986]; Camelcraft Corporation vs. National Labor Relations Commission, 186 SCRA 393 [1990]; Valderrama vs. National Labor Relations Commission, 256 SCRA 466 [1996].) (e) Under the Labor Code (Arts. 288, 289 thereof.), when a corporation violates a provision declared to be penal in na-

Sec. 45


453

ture, the penalty shall be imposed upon the guilty officer or officers of the corporation, disregarding the fiction of corporate entity. (Reahs Corporation vs. National Labor Relations Commission, 271 SCRA 247 [1997].) (f) Even though a judgment or order is addressed to the corporation, the officers as well as the corporation itself, may be punished for contempt for disobedience to its terms, at least if they knowingly disobey the court's mandate, since a lawful judicial command to a corporation is, in effect, a command to the officers. (Heirs of T. De Leon Vda. De Roxas vs. Court of Appeals, 422 SCRA 101 [2004].) (g) If the drawer a check is an officer of a corporation, the notice of dishonor to the said corporation is not notice to the employee or officer who drew or issued the check for and in its behalf. Responsibility under B.P. Big. 22 (Bouncing Checks Law) is personal to the accused. The corporation has no obligation to forward the notice addressed to it to the employee concerned especially because the corporation itself incurs no criminal liability under B.P. Big. 22. Personal knowledge of the notice of dishonor is necessary. (Mangomen vs. People, 459 SCRA 169 [2005].) (2) Imputation of criminal intent. — Although it has no mind,

an intention on the part of its agent to do wrong may be imputed to the corporation. Accordingly, corporations may be held liable for libel and malicious prosecution. But since a corporation as a person is a mere legal fiction, it cannot be proceeded against criminally because it cannot commit a crime in which personal violence or malicious intent is required. Criminal action is limited to the corporate agents guilty of an act amounting to a crime and never against the corporation itself. (West Coast Life Ins. Co. vs. V. Hurd, 27 Phil. 401 [1914]; Times, Inc. vs. Reyes, 39 SCRA 303 [1971].) The existence of the corporate entity does not shield from prosecution the corporate agent who knowingly and intentionally causes the corporation to commit a crime. (The Executive Secretary vs. Court of Appeals, 429 SCRA 81 [2004].) The above is true with respect to crimes punishable under the Revised Penal Code. It is the responsible officer or officers acting for the corporation who must of necessity be the ones to

454


Sec. 45

assume the criminal liability; otherwise, this liability as created by law would be illusory, and the deterrent effect of the law, negated. The corporate officer or employee must have actually participated in the commission of the criminal offense or violation of law attributed to the corporation, to be himself individually guilty of the crime, (see Sia vs. People, 121 SCRA 655 [1983].) The principle applies to those corporate agents who, by virtue of their managerial positions or other similar relation to the corporation, could be deemed responsible for its commission, if by virtue of their relationship to the corporation, they had the power to prevent the act. Whether the officers or employees are benefited by their delictual acts is not a touchstone of their criminal liability. Benefit is not an operative act. (Ching vs. Secretary of Justice, 481 SCRA 609 [2006].) (3) Penalties imposable. — While a corporation cannot be arrested, imprisoned, or executed, it may be summoned, fined, or ousted by quo warranto from the unlawful exercise of its powers. (10 Fletcher, p. 651.) The fine, however, is a mere consequence of the conviction of the corporate agent found guilty of the violation of law. For violations of any of the provisions of the Corporation Code or, on grounds provided by existing laws, rules and regulations, a corporation is subject to fine and/or dissolution without prejudice to the institution of appropriate action against the guilty director, trustee, or officer of the corporation, (see Sees. 121, 144; see also Pres. Decree No. 902-A, Sec. 6[i] thereof; see also R.A. No. 8791 [The General Banking Law of 2000], Sees. 66, 70, 91.) Again, the existence of the corporate entity does not shield from prosecution the agent who knowingly and intentionally commits a crime at the instance of a corporation. (Ong vs. Court of Appeals, 401 SCRA 648 [2003].)

— oOo —

Title V BY-LAWS Sec. 46. Adoption of by-laws. — Every corporation formed under this Code, must, within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission, adopt a code of by-laws for its government not inconsistent with this Code. For the adoption of by-laws by the corporation, the affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or of at least a majority of the members, in the case of non-stock corporations, shall be necessary. The by-laws shall be signed by the stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to the stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to the inspection of the stockholders or members during office hours; and a copy thereof, duly certified to by a majority of the directors or trustees and counter-signed by the secretary of the corporation, shall be filed with the Securities and Exchange Commission which shall be attached to the original articles of incorporation. Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and submitted to the Securities and Exchange Commission, together with the articles of incorporation. In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission of a certification that the by-laws are not inconsistent with this Code. The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment thereto 455

456


Sec. 46

of any bank, banking institution, building and loan association, trust company, insurance company, public utility, educational institution or other special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such by-laws or amendments are in accordance with law. (20a) Meaning of by-laws.

By-laws may be defined as the rules of action adopted by a corporation (or association) for its internal government and for the government of its stockholders or members and those having the direction, management and control of its affairs in their relation to the corporation and as among themselves (see 18 C.J.S. 589, p. 344; 8 Fletcher, pp. 632-633.), including rules for routine matters such as calling meetings and the like. (Ballantine Law Dictionary [1990 Ed.], p. 201.) Power to adopt by-laws.

The corporate power to adopt by-laws is expressly granted by Section 36(5) and Section 46. The power is inherent in every corporation as one of its necessary and inseparable legal incidents. This power is regarded as of so much importance, being essential to enable the corporation to accomplish the purposes of its creation, that it is ordinarily conferred in express terms by the law. (Supreme Comandery K.G.R. vs. Ainsworth, 71 Ala. 436, 46 Am. Rep. 332.) Even holders of non-voting shares or non-voting members, as the case may be, are entitled to vote on the adoption of bylaws, (see Sec. 6, par. 6[2].) It has been held that where the statute under which a corporation is formed authorizes it to make by-laws upon specifically named subjects, there is an implied denial of authority to make by-laws upon subjects not named. (Nicholson vs. Franklin Brewing Co., 91 N.E. 991.) Function of by-laws.

By-laws supplement the articles of incorporation. They provide the details not important enough to be stated in the articles.

Sec. 46

TITLE V. BY-LAWS

457

Until repealed or amended, a by-law is a continuing rule for the government of the corporation and the individuals composing it. The function of by-laws is to define the rights and duties of corporate officers and directors or trustees, and of stockholders or members towards the corporation and among themselves with reference to the management of corporate affairs and to regulate transaction of the business of the corporation in a particular way. (see La Salle Country Form Bureau vs. Thompson, 245 111. App. 413; Ireland vs. Globe Mill Co., 21 R.I. 9; 8 Fletcher, pp. 633634.) By-laws are a source of authority for corporate officers and agents of the corporation. (Citibank, N. A. vs. Chua, 220 SCRA 75 [1993]; see Sees. 25,47.) Primarily, by-laws look to the future. (8 Fletcher, p. 634.) Necessity of adopting by-laws. (1) A matter of practical and legal necessity. — Upon the

issuance of the certificate of incorporation, the corporation comes into existence. (Sec. 19.) But it is not yet prepared to do business. It must have the means or instrumentalities for the accomplishment of its purposes. It must have executive officers charged with the task of actual management, and rules governing the management of its affairs. The corporation is in existence but not yet organized. A code of by-laws for the government of the corporation, its officers and members must be adopted. It has been said that the by-laws of a corporation are the rules of its life, and that until by-laws have been adopted, the corporation may not be able to act for the purposes of its creation, and that the first and most important duty of the members is to adopt them. This would seem to follow as a matter of principle from the office and function of by-laws. Viewed in this light, the adoption of by-laws is a matter of practical, if not one of legal, necessity. (8 Fletcher, p. 640.) (2) In the case of corporation sole. — While an ordinary corporation is governed by its by-laws, a corporation sole is governed by the Rules, Regulations and Discipline of its religious denomination which already contain the provisions embodied in the by-laws of ordinary corporations. Section 111 (par. 2.) expressly allows corporations sole to include in their articles of incorpora-


458

Sec. 46

tion any provision other than those required under said section to regulate the affairs of corporations sole. Hence, a corporation sole need not comply with Section 46 provided that the provisions ordinarily embodied in the by-laws are already provided for in the articles of incorporation or Rules, Regulations and Discipline of its religious denomination. (SEC Opinion, Jan. 25, 1984.) Time and procedure for the adoption of by-laws.

(1) According to Section 46, the by-laws must be adopted "within one month" after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission. Nevertheless, for the convenience of the incorporators, by-laws may be adopted and filed, prior to incorporation, with the articles of incorporation, (par. 2.) In either case, by-laws shall be effective only upon issuance by the Commission of a certification that they are not inconsistent with the Code. (par. 3; see Sec. 48, last par.) 1

(2) The procedure for the adoption of by-laws is likewise set forth in Section 46. With respect to special corporations governed by special laws, the Securities and Exchange Commission shall not accept their by-laws or any amendment thereto unless accompanied by a certificate of the appropriate government agency to the effect that such by-laws or amendments thereto are in accordance with law. (last par.) The formal requisites such as the filing of a certified copy of the entire by-laws for approval with the Securities and Exchange Commission is only for record purposes and in order that said copy be attached to the original articles of incorporation. (SEC Opinion, Nov. 2,1977.) The procedure for the amendment of by-laws or the adoption of new by-laws is provided in Section 48.

'In addition to the by-laws, a corporation may adopt other rules and regulations provided they are not contrary to the provisions of the by-laws, articles of incorporation, and the Corporation Code. While corporate by-laws are subject to the approval of the SEC, other rules and regulations of the corporation do not need such approval, unless they involve matters where the law requires SEC approval. (SEC Opinion, Oct. 16,1995.)

Sec. 46

TITLE V. BY-LAWS

459

Effect of failure to file by-laws .

Non-filing of the by-laws on time will not result in the automatic dissolution of the corporation. Such consequence is not provided in the Corporation Code. Pursuant to Section 6(i, 5) of Presidential Decree No. 902-A (see Sec. 19.), the failure to file a code of by-laws within one (1) month from the date of its incorporation with the Securities and Exchange Commission shall render the corporation liable to the revocation of its registration. 2

There must, first of all, be a hearing to determine the existence of the ground, and assuming such finding, the penalty is not necessarily revocation but may only be suspension. Under the rules and regulations of the Commission, the failure may be merely with the imposition of an administrative fine. (Chung Ka Bio vs. Intermediate Appellate Court, 163 SCRA 534 [1988].) C o n s t r u c t i o n , application, a n d effectivity of b y - l a w s .

(1) By-laws of a corporation should be construed and given effect according to the general rules governing the construction of contracts. (18 Am. Jur. 2d 699; see Arts. 1370-1377.) (2) Those providing for disenfranchisement of members of a corporation are penal in character and must be strictly construed. Thus, under a provision in the by-laws that a member on suspended accounts may not use facilities or avail of the privileges of a non-stock, non-profit organization, such a member may still exercise his right to vote. He does not lose his membership, ipso facto, because of an act of default which is made a cause for Section 46 uses the word "must." Ordinarily, the word connotes an imperative act or operates to impose a duty which may be enforced. It is synonymous with "ought" which connotes compulsion or mandatoriness, though the word "must" in a statute, like "shall," is not always imperative and may be consistent with an exercise of discretion. The second paragraph of Section 46 allows the filing of by-laws even prior to incorporation. This provision rules out mandatory compliance with the requirement of filing the by-laws in the first paragraph. (Loyola Grand Villas Homeowners Assoc. vs. Court of Appeals, 276 SCRA 681 [1997].) By its failure to submit its by-laws within the prescribed period, a corporation may be considered a de facto corporation, (see Sec. 20.) It does not ipso facto lose its powers as such. The SEC Rules on Suspension/Revocation of the Certificate of Registration of Corporations details the procedures and remedies that may be availed of before an order of revocation can be issued. (Sawadjaan vs. Court of Appeals, 459 SCRA 516 [2005].) 2

460


Sec. 46

expulsion or forfeiture unless it is expressly so provided, but there must be a proper action by the corporation expelling him. (SEC Opinion, March 10,1987.) (3) By-laws should be made to apply prospectively, not retroactively. (4) By-laws become effective only upon the issuance by the Securities and Exchange Commission of a certification that they are not inconsistent with the Code. (Sec. 46, par. 3.) It is only upon that time that the provisions of said by-laws should be followed or observed. (SEC Opinion No. 05-07, June 24, 2005.) (a) In view of the phrase "every corporation formed under this Code," which can only refer to corporations incorporated in the Philippines, Section 46, insofar as it refers to the effectivity of corporate by-laws (par. 3.), applies only to domestic corporations and not to foreign corporations. (Citibank, N.A. vs. Chua, 220 SCRA 75 [1993].) (b) In the case of foreign corporations licensed to transact business in the Philippines (see Sec. 126.), matters relating to their by-laws are governed by the law of their incorporation, (see Sec. 129.) Since the Commission will grant a license only when the foreign corporation has complied with all the requirements of law, it follows that when it decides to issue such license, it is satisfied that the applicant's by-laws, among the other documents, meet the legal requirements. This, in effect, is an approval of its by-laws although it may not have been made in express terms. Therefore, a foreign corporation's by-laws, though originating from a foreign jurisdiction, are valid and effective in the Philippines. (Citibank, N.A. vs. Chua, supra.) Validity of by-laws.

The following are considered as the elements of valid bylaws: (1) They must not be contrary to existing law and inconsistent with the Code (Sec. 36[5]; Sec. 46.); (2) They must not be contrary to morals and public policy (Sec. 36[5]; see Fletcher vs. Botica Nolasco Co., Inc., 47 Phil. 583 [1925].);

Sec. 46

TITLE V. BY-LAWS

461

(3) They must not impair obligations of contract (Ibid.); (4) They must be general and uniform in their operation and not directed against particular individuals (8 Fletcher, p. 734.), i.e., not discriminatory; (5) They must be consistent with the charter or articles of incorporation; and (6) They must be reasonable. M u s t be consistent w i t h law.

By-laws must not be contrary to the general law, and, therefore, as a rule, a by-law is void if it is repugnant to the law of the land, whether statutory or constitutional. This rule is declared by the Code in empowering corporations in Section 36(5) "to adopt by-laws not contrary to law," in Section 46 (par. 1.), "to adopt a code of by-laws not inconsistent with this Code," and in Section 47, to provide in its by-laws the matters enumerated "subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation." The legislature cannot delegate the power to enact by-laws contravening general law. As the legislative power cannot be delegated, it is not competent for the legislature to confer upon a corporation power to enact by-laws contravening, repealing, or in any wise changing any provision of the law of the land. (14 C.J. 364-366.) A by-law or provision thereof that is contrary to law cannot attain validity through acquiescence or on the basis of long practice, nor give rise to any vested right. (Grace Christian High School vs. Court of Appeals, 281 SCRA 133 [1997].) Must be consistent with public policy.

Public policy has been defined as "the governing policy within a community as embodied in its legislative and judicial enactments which serve as a basis for determining what acts are to be regarded as contrary to the public good; the principle of law by virtue of which acts contrary to the public good are held invalid." (Webster's Third New Int. Diet., p. 1836.)

462


Sec. 46

By-laws must also be consistent with the public policy and not in conflict with public welfare. If they conflict with either, they are invalid and will not be sustained. (8 Fletcher, pp. 704705.) Thus, by-laws operating in restraint of trade by imposing unreasonable restrictions on the right of a stockholder to transfer his stock are invalid. Must not impair obligation of contracts.

The word "by-law" ordinarily signifies a rule for future action, and the power of a corporation to adopt by-laws does not extend to the adoption of such as impair the obligation of existing contracts or destroy or impair rights, either of stockholders or members or of third persons which have become vested by virtue of the existing by-laws or otherwise, and by-laws which have such effect will not be sustained, (see 8 Fletcher, pp. 715721.) A by-law may not operate retrospectively if it does thereby disturb or impair any existing contract or vested right. (18 C.J.S. 328.) But there is no impairment: (1) Where a contract with a corporation is expressly or impliedly made subject, not only to existing by-laws but also to future by-laws and changes in by-laws, for parties may contract with corporations with reference to laws of future enactment, and may engage to be bound and affected as they would be bound and affected if such laws were existing and thus consent that such laws shall enter into and form a part of their contracts, modifying or varying them. (2) Where the other party to the contract surrenders his original contract and accepts a new one after an amendment of the by-laws, for he thereby submits to the amended by-laws then in force. (Ibid.)

(3) The right to amend the by-laws lies solely in the discretion of the employer corporation, this being in the exercise of management prerogative or business judgment. However, this right, extensive as it may be, cannot impair the obligation of existing contracts or rights, such as the right to security of tenure as a regular employee guaranteed under the Labor Code. (Silafranca vs. Philamlife Village Homeowners Assoc., Inc., 300 SCRA 469 [1998].)

Sec. 46

TITLE V. BY-LAWS

463

M u s t be g e n e r a l a n d not directed against particular individuals.

A by-law affecting stockholders or members must be general, that is, it must affect alike, and operate equally as to all stockholders or members under the same circumstances, and not be directed against particular stockholders or members. It is plain that all corporation by-laws must stand on their own validity, and not on any dispensation granted to members. They cannot be subjected to any conditions which do not apply to all alike, and cannot be compelled to receive, as a matter of grace, anything which is a matter of right; neither, on the other hand, should there be personal exemptions of a general nature from any valid regulations that bind the mass of corporators. (1) So, an order of certain directors that one of the members of the board be denied the right to inspect the corporate books cannot be sustained as a valid by-law. (2) Not even a statute authorizing a corporation to pass bylaws for the sale of delinquent stock for unpaid assessments authorizes a by-law or resolution declaring a forfeiture of the stock of a particular stockholder only, (see 8 Fletcher, pp. 734735.) (3) But a by-law which disqualifies a person who is a director in a corporation whose business is in competition with or is antagonistic to another corporation, from election to the board of directors of the latter corporation, is valid, it appearing that the by-law, by its terms, applies to all stockholders. If the by-law were to be applied in the case of one stockholder but waived in the case of another, then it could be reasonably claimed that the by-law was being applied in a discriminatory manner. (Gokongwei, Jr. vs. Securities and Exchange Commission, 89 SCRA 336 [1979].) Must be consistent with the charter or articles of incorporation.

By-laws are subordinate to the charter of the corporation and part of its charter is its articles of incorporation. (1) In order for by-laws to be valid, they must be consistent with the terms and spirit of the charter of the corporation — the

464


Sec. 46

word "charter" being here used in its broadest sense and as having reference to the statutory right to be a corporation without regard to whether such right be obtained by special act or under general statutes. A by-law which is not thus consistent with the charter but is in conflict with or repugnant to it, is void. Thus, where a corporation has been made one of a stock character by the articles of incorporation, it cannot be made one of a mutual character by a by-law. Further applying such rule, a corporation cannot by a bylaw vest the entire management of its business in an executive committee, when the charter or enabling act vests the management in the board of directors or trustees. (2) A by-law can neither enlarge the rights and powers conferred by the charter nor restrict the duties and liabilities imposed thereby, and in case it attempts to do so, the charter will prevail. (3) A by-law prohibiting acts which are within the powers conferred, expressly or impliedly, by its charter, affects the authority of its officers, but does not render such acts ultra vires. By-laws of a corporation are not enforced by avoiding contracts made in violation of them. (4) By-laws must be consistent with the nature, purposes, and objects of the corporation; otherwise, they will be invalid. Thus, where there is nothing in the articles of incorporation which suggests power in the corporation to control, regulate, or interfere with its stockholders in the conduct of their separate individual business, by-laws which assume to do this are beyond the scope of the corporate purpose and are void, (see 8 Fletcher, pp. 722-727; see also 18 C.J.S. 604-605.) Must be reasonable.

Reasonableness is another essential of a valid by-law. The validity or reasonableness of a by-law of a particular corporation — whether it is in conflict with the law of the land, or with the charter of the corporation or is in a legal sense unreasonable and, therefore, unlawful — is purely a question of law rather than one of fact.

Sec. 46

TITLE V. BY-LAWS

465

(1) The rule is subject to the limitation that where the reasonableness of a by-law is a mere matter of judgment, and upon which reasonable minds must necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment of those who are authorized to make by-laws and who have exercised their authority by adopting the one attacked. Accordingly, a by-law which disqualifies a competitor from election to the board of directors of another corporation has been held as valid and reasonable. In the absence of any legal prohibition or overriding public powers, wide latitude may be accorded to a corporation in adopting measures to protect legitimate corporate interests. (Gokongwei, Jr. vs. Securities and Exchange Commission, 89 SCRA 336 [1979].) (2) On the other hand, a provision in the by-laws granting continuous compensation to directors even after the termination of their employment for past services rendered gratuitously is unreasonable for to permit such by-laws would be to create an obligation unknown to law, and to countenance a misapplication of the funds of the corporation to the prejudice of the stockholders. (Barretto vs. La Provisora Filipina, 57 Phil. 649 [1932]; 59 Phil. 212 [1933].) (3) A by-law which the corporation was without power, under the law, to adopt will not be validated, however, by the fact that its provisions are reasonable. Furthermore, a by-law may be reasonable as to the corporation and as to third persons contracting subsequent to its adoption, with the corporation, and yet be invalid as to third persons sustaining, at the time of its adoption, contractual relations with the corporation. (4) When the stockholders alone are affected by the unreasonableness of the by-law, it can be attacked by them only and not by a third person, (see 8 Fletcher, pp. 727-734.) Binding effect of by-laws. (1) As to the corporation and its officers. — By-laws, as the

self-imposed private laws of a corporation, have, when valid, substantially the same force and effect as laws of the corporation as have the provisions of its charter insofar as the corporation and the persons within it are concerned. They are in effect

466


Sec. 46

written into the charter and in this sense, they become a part of the fundamental law of the corporation. And the corporation and its directors (or trustees) and officers are bound by and must comply with them (8 Fletcher, pp. 750-751.) unless and until they are changed, amended, or repealed in accordance with Section 48. But subordinate employees without actual knowledge of the bylaws are not bound. (2) As to stockholders or members. — As a general rule, the

stockholders or members of a corporation are presumed to know the provisions of the corporation's by-laws. (a) This presumption is ordinarily regarded as a legal one, and hence, conclusive and incapable of being rebutted by evidence of want of actual knowledge. In other words, a stockholder or member, by the very fact of his being such, is charged with notice of the by-laws and if he remains actually ignorant of their provisions, he does so at his peril. (8 Fletcher, p. 753.) (b) Under Section 46, it is required that the original bylaws be approved by at least a majority of the outstanding capital stock or of the members, signed by the stockholders or members voting for them, and kept in the principal office of the corporation, subject to their inspection during office hours. Stockholders or members cannot, therefore, claim lack of notice or knowledge. (3) As to third persons. — The weight of authority is that they are not bound by the by-laws of a corporation since the by-laws operate merely as internal rules among the stockholders. The exception is when the third person has knowledge of its provisions either actually or constructively at the time the transaction in question was entered into, (see China Banking Corporation vs. Court of Appeals, 270 SCRA 503 [1997].) (a) A person contracting with a corporation with actual notice of a by-law affecting such a contract as he enters into may, however, expressly exclude the by-laws, so that his contract will not be affected thereby. But the by-law enters into the contract and he is bound thereby, if it is not expressly excluded.

Sec. 46

TITLE V. BY-LAWS

467

(b) So also, when a by-law is intended to operate as to certain third persons and is communicated to them for the purpose of inducing action by them in reliance thereon, the corporation cannot defeat claim by one of their number under such by-law by asserting that by-laws are rules for the internal government of the corporation and its stockholders or members only and that third persons cannot claim rights thereunder. (c) If a person contracts with a corporation with reference to a by-law, as, for example, a by-law by which the stockholders or members bind themselves individually for all debts that may be contracted by the corporation, the bylaw becomes a part of his contract and he may enforce the same; but it is otherwise if he does not contract with reference to or on the faith of the by-law. (Ibid., pp. 762-765; Fletcher vs. Botica Nolasco Co., Inc., 47 Phil. 583 [1925].) (d) A corporate contract cannot be held invalid just because the signatory thereon was not the chairman of the board which allegedly violated the corporation's by-laws. Since by-laws operate merely as internal rules among the stockholders, they cannot affect or prejudice third persons who deal with the corporation unless they have knowledge of the same. (PMI Colleges vs. National Labor Relations Commission, 277 SCRA 462 [1997].) Waiver of by-laws.

Knowledge of the facts rendering a by-law applicable is, of course, essential to its waiver. In any event, the question whether there has been a waiver of a by-law is ordinarily one of fact. (1) By the corporation. — By-laws which are not required by the charter or statute and which operate in favor of the corporation are subject to waiver, both express and implied, by the corporation, considered as an entity separate and apart and having rights distinct from those of its stockholders or members. It would certainly seem that the fact that a corporation does waive its by-laws cannot be objected to by third persons. (2) By the stockholders or members. — In like manner, a by-law may be waived by a stockholder or member when it is he whose individual rights are advanced or protected by its provisions.

468


Sec. 47

(a) If the corporation acts or contracts in disregard of a by-law with the consent or acquiescence of the stockholders or members, there is a waiver of the by-law, at least pro hac vice, whether it is afterwards sought to set up the by-law as against strangers or as against its stockholders or members. (b) A corporation will not be permitted to assert in an action to enforce liability against it that the liability was incurred in contravention of its by-laws where there has been a continued disregard of such by-laws acquiesced in by the stockholders or members. (c) When the power to make by-laws is vested in the stockholders or members, and they have made by-laws for the protection of the corporation, they cannot be waived by the directors or trustees or other officers of the corporation. But the stockholders or members may permit the directors or trustees or other officers to act in disregard to such a by-law, or they may ratify their action, and in such a case, there is a waiver of the by-law by the stockholders or members, (see 8 Fletcher, pp. 768-774; see also 18 C.J.S. 593-594.) (d) It has been opined that a by-law provision which allows the waiver of any provision of the by-laws by the vote of a certain number of stockholders or members is not valid as such waiver would be tantamount to an indirect amendment of the by-laws, which can only be amended in accordance with the procedure outlined in Section 48. (SEC Opinion, Oct. 19, 1989.) Sec. 47. Contents of by-laws. — Subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation, a private corporation may provide in its by-laws for: (1) The time, place and manner of calling and conducting regular or special meetings of the directors or trustees; (2) The time and manner of calling and conducting regular or special meetings of the stockholders or members;

Sec. 47

TITLE V. BY-LAWS

469

(3) The required quorum in meetings of stockholders or members and the manner of voting therein; (4) The form for proxies of stockholders and members and the manner of voting them; (5) The qualifications, duties and compensation of directors or trustees, officers and employees; (6) The time for holding the annual election of directors or trustees and the mode or manner of giving notice thereof; (7) The manner of election or appointment and the term of office of all officers other than directors or trustees; (8) The penalties for violation of the by-laws; (9) In the case of stock corporations, the manner of issuing certificates; and (10) Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs. (21a) C o n t e n t s of b y - l a w s .

"Subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation, a private corporation may provide in its by-laws for" the matters enumerated in Section 47. This means that as to matters already regulated by the Corporation Code, the by-laws cannot provide otherwise. Thus: (1) Place of meeting. — While the place of directors' or trustees' meeting may be held at the place determined in the by-laws, "anywhere in or outside of the Philippines" (Sec. 53, par. 3.), the stockholders' or members' meeting must always "be held at the city or municipality where the principal office of the corporation is located or if practicable in the principal office of the corporation." (Sec. 51, par. 1; see, however, Sec. 93.) (2) Quorum. — Section 47 permits corporations to determine in their by-laws "the required quorum in meetings of stockholders or members x x x," that is, fix a specific number necessary to constitute a quorum for the transaction of business, but such by-laws cannot provide that a lesser number shall constitute a


470

Sec. 47

quorum in those cases in which the law requires for the validity of certain corporate acts the approval of a minimum number of votes, (see Sec. 52.) The Code gives the corporation also the power to prescribe in the articles of incorporation or by-laws a number greater than the majority of the members of the board of directors or trustees to constitute a quorum, (see Sec. 25, par. 2.) (3) Proxies. — With respect to proxies of stockholders and members, the by-laws may provide for (a) the form of such proxies and (b) the manner of voting them subject to the date provisions of Section 58. Thus, the by-laws may validly provide that proxies be notarized and filed with the corporate secretary, at least, say, two days before the date of the meeting, but they may not do away with the restrictions imposed by Section 58 on voting by proxy. (4) Qualifications of directors. — The qualifications of directors

may be fixed in the by-laws, but such by-laws cannot dispense with the minimum legal requirements that a director must be a registered owner of at least one (1) share of stock and that at least two (2) of the directors must be residents of the Philippines. (Sec. 23.) The amendment to a corporation's by-laws limits the term to a maximum of three (3) consecutive years as director, after which the director has to wait for one (1) consecutive year before he can run again for election in the board. The amendment takes prospective effect upon its approval by the SEC. Therefore, those directors who at the time of the by-laws' effectivity have served for more than three (3) years are not covered by the provision and may seek re-election. (SEC Opinion, Aug. 7,1997.) (5) Disqualification for position of director. — The by-laws may

validly provide for disqualification for the position of directors, e.g., being engaged in any business which competes with or is antagonistic to that of the corporation. (Gokongwei, Jr. vs. Securities and Exchange Commission, 89 SCRA 336 [1979].) 3

The desired qualifications or disqualifications must be specifically or clearly spelled out in the by-laws without the necessity of being subject to the judgment or determination by the board. Such a requirement is dangerous and can cause possible future conflicts which may adversely affect the right of stockholders or members to participate in the management of the corporation. (SEC Opinion, April 23,1993.) 3

(6) Compensation to stockholders or members. — Stockholders

or members as such do not render service for attendance at corporate meetings but exercise rights personal to themselves in the corporation. Hence, the by-laws may not provide compensation to them, if they are not "directors or trustees, officers and employees." (SEC Opinion, June 30,1971.) (7) Election and term of office of directors or trustees. — Neither

can the corporation provide in the by-laws for the manner of election and the term of office of directors or trustees which are already provided by law. (Sees. 23 and 24.) (8) Imposition of penalties or sanctions. — While a corpora-

tion has not an uncontrollable discretion in the enforcement of its by-laws, its power to enforce its by-laws properly made, by pecuniary penalties and corporate disabilities proportionate to the violation, is not to be doubted. For instance, by-laws as to the suspension or expulsion of members of a corporation for misconduct or nonpayment of dues will be sustained. It has been held, however, that by-laws cannot be enforced by a forfeiture of property or stock of the defaulting member. (18 Am. Jur. 2d 703.) In the absence of any provision in the by-laws authorizing the imposition of penalties, a violation of by-laws would merely constitute in appropriate cases an actionable wrong for which the ultimate remedy resides in the courts. (SEC Opinion, March 10,1972.) The remedy of mandamus is generally available to compel officers of a corporation to perform the duties imposed on them by the by-laws. The obligations imposed by the by-laws of a corporation upon its officers are not such as rest wholly in contract for the breach of which there is an adequate legal remedy preventing the issuance of mandamus to compel compliance with them. (18 Am. Jur. 2d 703.) (9) Issuance of certificates of stock. — This matter is an internal

one which the law has left for the corporation to decide, (see Sec. 63.) However, the authority granted to a corporation to regulate the transfer of its stock does not empower it to restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as to the formalities and procedure to be

472


Sec. 48

followed in effecting transfer. (Thomson vs. Court of Appeals, 298 SCRA 280 [1998].) "The enumeration contained in Section 47 is merely directory. Failure of the corporation to make provision for the matters therein contained will not affect the validity of the by-laws nor of the corporate act. This proposition is evidenced by the fact that the Corporation Code itself contains particular provisions on matters which may properly be contained in the by-laws." (C.G. Alvendia, op. cit., p. 241.) Sec. 48. Amendments to by-laws. — The board of directors or trustees, by a majority vote thereof, and the owners of at least a majority of the outstanding capital stock, or at least a majority of the members of a non-stock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the outstanding capital stock or two-thirds (2/3) of the members in a nonstock corporation may delegate to the board of directors or trustees the power to amend or repeal any by-laws or adopt new by-laws: Provided, That any power delegated to the board of directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be considered as revoked whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the members in a non-stock corporation, shall so vote at a regular or special meeting. Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a majority of the directors or trustees, shall be filed with the Securities and Exchange Commission, the same to be attached to the original articles of incorporation and original by-laws. The amended or new by-laws shall only be effective upon the issuance by the Securities and Exchange Commission of a certification that the same are not inconsistent with this Code. (22a and 23a)

Sec. 48

TITLE V. BY-LAWS

473

A m e n d m e n t a n d repeal o f by-laws a n d a d o p t i o n o f n e w by-laws .

(1) Power implied. — The power to make by-laws implies the power to alter or repeal them and enact new ones, but the power to alter by-laws or adopt new by-laws has the same limits as the power to make them in the first instance. (2) Formalities. — Section 48 provides the formalities to be followed in making amendment or repeal of by-laws or in adopting new by-laws.' The by-laws may provide for a greater number of votes. In all cases, the power can only be exercised at a regular or special meeting duly called for the purpose. Even holders of non-voting shares or non-voting members, as the case may be, are entitled to vote on the matter, (see Sec. 6, par. 6[2].) Amendments to or repeal of by-laws cannot be done in a "referendum." The rationale for the requirement of a meeting is to give the stockholders/members a chance to deliberate on the amendments or repeal to be voted upon. The inability of a stockholder/member to attend such meeting personally is not a problem as he can execute a written proxy (see Sec. 58.) authorizing another person to exercise his rights in the meeting as if he were personally present. (SEC Opinion, Oct. 13, 1997.) (3) Delegation of power. — The power may be exercised by

the stockholders or members directly, or indirectly by delegating said power to the board of directors or trustees. However, it has been held that the authority given to the board of directors to alter or amend by-laws must be so construed as to restrict it from altering or annulling a by-law imposing a limitation on its 5

As a matter of procedure, it is not proper to indicate, in bold letters or otherwise, the portions of a new code of by-laws that distinguishes it from the earlier by-laws of the corporation. As the term implies, a new by-laws is considered an entirely new set of rules that supersedes all preceding ones. (SEC Opinion, June 27,1966.) T h e delegation to the board of directors (or trustees) of the power to amend, alter, or repeal by-laws or adopt new by-laws should not be embodied in the by-laws, but merely in a resolution adopted by 2 / 3 of the outstanding capital stock or of the members. This is for the reason that the delegated authority is temporary in nature and may be revoked any time by a majority vote. Accordingly, if the power is provided in the by-laws, the power delegated may have been revoked already, but may still appear therein until the corresponding amendment is made and filed with the Securities and Exchange Commission. (SEC Opinion, Oct. 25,1965.) 4

474


Sec. 48

powers. (Stevens vs. Davison, 18 Gratt [Val.] 819; 18 Am. Jur. 2d 702.) (4) Necessity of meeting. — Although there is no express requirement of stockholders' or members' meeting for the "delegation" of the power, such meeting is necessary. The legislative intent appears to be that as the delegation of the power is an unusual act, the law has properly made it more difficult to do so than to revoke such a delegation which requires only a majority. If the revocation of the delegated power requires a meeting, there is no reason why a meeting is not also required in the delegation of such power. If the rule were otherwise, it would be making the delegation much easier than its revocation, which is inconsistent with the intent of the provision to make the delegation more difficult to obtain. (SEC Opinion, July 22,1992.) (5) Implied repeal or amendment of by-law. — There may be an

implied repeal (or amendment) of a by-law in the same manner and to the same extent as there may be an implied repeal of a statute, although repeals by implication are no more favored in the case of by-laws than in the case of statutes. So, a by-law is impliedly repealed by a subsequent by-law inconsistent with it. (see SEC Opinion, Feb. 4,1976, citing 8 Fletcher, p. 694.) (6) Waiver of by-law provision. — A by-law may not be amend-

ed, however, otherwise than as provided in Section 48. To allow the waiver of any provision in the by-laws would be tantamount to an indirect amendment thereof, (see SEC Opinion, Oct. 10, 1989.) The corporation, its directors, officers and members are bound by and must comply with the by-laws, (supra.) (7) Non-delegable power. — The power to amend the articles of incorporation lies with the stockholders or members and cannot be delegated to the board of directors or trustees, (see Sec. 16.) Neither can the power to adopt the original (not new) by-laws be delegated. Revocation of delegated p o w e r of board of directors or trustees. (1) Lesser number of vote required. — To revoke the delegated

power to amend or repeal the original by-laws or to adopt new

by-laws, the law merely requires the vote of stockholders representing a majority of the outstanding capital stock or a majority of the members, as the case may be, while the vote for the delegation is 2 / 3 . The evident purpose of the law is to make it easier to revoke the delegated power as a safeguard against possible abuse of the power by the board of directors or trustees. Before, the vote for revocation was "majority of the stockholders." In other words, the basis of the vote was the number of stockholders themselves and not the shares held, which is normally the mode of voting in stock corporations. This is, however, the only instance of per capita voting by stockholders provided for in the old law. (2) Previous notice of proposed revocation at meeting not necessary.

— While the amendment or repeal of any by-laws or adoption of new by-laws by the stockholders or members must be made "at a regular or special meeting duly called for the purpose," the italicized phrase is omitted with reference to the revocation by the stockholders or members of the delegated power of the board of directors or trustees to amend, etc. This means that the revocation is valid notwithstanding that no previous notice was given to stockholders or members of the intention to propose such revocation. By-laws a n d resolutions distinguished.

In addition to the by-laws, a corporation may adopt other rules and regulations for its government, which may be in the form of a board resolution. (SEC Opinion, July 12,1993.) Generally speaking, by-laws and resolutions are recognized and treated by the courts as distinct and different, not merely in name, but with regard to their respective offices, functions, and operations. (1) Nature and subject matter. — A resolution is merely a

declaration of the will of the corporation in a given matter and in the nature of a ministerial act. (Evans vs. City of Jackson, 30 So. 2d 315, 317, 202 Miss. 9; 37-A Words and Phrases 3.) A by-law, on the other hand, is a permanent rule of action (except only insofar as it may be repealed or amended) of the conduct of corporate

476


Sec. 48

affairs while a resolution is ordinarily limited in its operation, applying usually to a single act or transaction of the corporation or to some specific person, situation or occasion. (a) So-called election laws adopted by a corporation as mere rules on motion and not by the procedure specified in the by-laws for adoption of a by-law, to meet a particular situation then existing, without any intention to legislate for similar future situations, partake of the nature of resolutions and are not operative as by-laws. (Hornady vs. Goodman, 167 G.A. 555,146 S.E. 713; 8 Fletcher, p. 646.) (b) While the power to amend the by-laws may be delegated to the board of directors or trustees, such delegated power is temporary in nature and may be revoked at any time by the vote of the majority of the outstanding capital stock or of the members; hence, it cannot be permanently be embodied in the by-laws but merely in a stockholders' or members' resolution. (SEC Opinion, Feb. 9,1994.) (2) Rule in case of conflict. — The by-laws of a corporation are,

in effect, its constitution, and will prevail over a resolution of the board of directors/trustees. (SEC Opinion, Jan. 4,1985, citing Fletcher, 1st ed., Sec. 481.) (3) Necessity of approval by SEC. — While corporate by-laws are subject to the approval of the SEC, other rules and regulations do not need its approval, unless they involve matters where the law requires such approval. (SEC Opinion, July 13,1993.) Resolution a d o p t e d as a by-law.

Although a by-law may be in the form of a resolution, and in such case, repeal a previous by-law, a simple resolution in favor of some object which is inconsistent with or forbidden by a bylaw does not repeal or override the by-law. (1) By way of illustration, where the first resolution of the members of a non-stock corporation disqualifies trustees who have served for three (3) consecutive terms from mrming for reelection and the second resolution provides "that not more than ten (10) members of the outgoing board shall be reelected," the first resolution which was not embodied as a provision in the by-

Sec. 48

TITLE V. BY-LAWS

477

laws, does not have the force and effect of by-laws and cannot be considered as an amendment to the same, and since the second resolution was embodied in the by-laws, trustees who have served for three (3) consecutive terms are eligible for reelection so long as they are included in the first ten (10) re-electionists. (SEC Opinion, Nov. 10,1976.) (2) Similarly, the additional qualifications that a member of a non-stock corporation would have before he could be elected to the board should be provided for in the by-laws by amending the same pursuant to Section 48; otherwise, the same cannot be enforced. (SEC Opinion, July 4, 1984.) But the resolution of the stockholders or members of a corporation not inconsistent with the by-laws should be given effect, (see SEC Opinion, Oct. 5,1976.) Articles of incorporation a n d by-laws distinguished.

A clear distinction exists between the two. (1) The former constitutes the charter or fundamental law of the corporation, while the latter are merely rules and regulations adopted by the corporation; 6

(2) The former is executed before incorporation by the incorporators, while the latter, usually after incorporation by the stockholders or members; and (3) The filing of the former is a condition precedent to corporate existence, while the filing of the latter is a condition subsequent.

T h e word "constitution" is sometimes used with reference to corporations in its true sense, that is, descriptive of the fundamental or supreme laws of the corporation, or as a synonym or equivalent for charter. More frequently, however, the constitution of a corporation particularly one of a fraternal or mutual benefit charter, is considered nothing more than a by-law or by-laws under an inappropriate name. A so-called "constitution" adopted by a fraternal benefit corporation is of no higher dignity than by-laws adopted by it; both are creations of the corporation and have, in large measure, a common purpose or object, to wit: to regulate or govern in its internal affairs. (SEC Opruon, Oct. 5, 1984, citing 8 Fletcher, Sec. 4167.)

478


Sec. 48

Filing and effectivity of a m e n d e d or new by-laws.

(1) Section 48 governs the filing of the amended or new by-laws. Under Section 46, a certificate of the appropriate government agency that the amendments are in accordance with law is required in case of amended by-laws of any corporation governed by special laws. Without such certificate, the Securities and Exchange Commission shall not accept them for filing. (2) As in the case of the original by-laws (Sec. 46, par. 3.), the amended or new by-laws shall only be effective upon the issuance by the Securities and Exchange Commission of a certification that the same are not inconsistent with the Code. (Sec. 48, last par.) Therefore, a corporation cannot immediately implement the amended or new by-laws without the certification or approval of the Commission. The amendment or repeal takes effect prospectively and not retroactively. If the special corporation is governed by a special law, the amended or new by-laws shall be effective only upon approval by both the appropriate government agency and the Commission. (3) The amended or new by-laws shall apply prospectively and not retroactively. (4) The rules applicable to the filing of the amended by-laws of foreign corporations and the effectivity of the amendments are found in Sections 129 and 130 of the Code.

— oOo —

Title VI MEETINGS Sec. 49. Kinds of meetings. — Meetings of directors, trustees, stockholders, or members may be regular or special, (n) Sec. 50. Regular and special meetings of stockholders or members. — Regular meetings of stockholders or members shall be held annually 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: 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 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. (24a) Whenever, for any cause, there is no person authorized to call a meeting, the Securities and Exchange Commission, upon petition of a stockholder or member, and on the 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 members present have chosen one of their number as presiding officer. (26a) 479

480


Sees. 49-50

Kinds of meetings. (1) Meetings of stockholders or members. — It may be:

(a) Regular or those held annually (see Sec. 24.) 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. It is held principally for the purpose of electing another set of directors or trustees; or (b) Special or those held at any time deemed necessary or as provided in the by-laws. (Sees. 49, 50.) (2) Meetings of directors or trustees. — It may be:

(a) Regular or those held by the board monthly, unless the by-laws provide otherwise; or (b) Special or those held by the board at any time upon the call of the president or as provided in the by-laws. (Sees. 49, 53.) Necessity of m e e t i n g s .

The corporate powers are vested in the board of directors or trustees and/or the stockholders or members as a body and not as individuals. (1) Meetings of stockholders or members. — "It is a fundamental

rule of corporation law that unless the statute otherwise provides, stockholders [or members] can act only in meetings properly convened and assembled. The written assent of a majority of the shareholders [or members] without a meeting to a matter requiring action by them is not sufficient." (Fisher, op. cit., p. 191.) The reason for the rule lies in the protection to the stockholders (or members) by notice and the opportunity to attend, discuss, and vote at a meeting. Individual assents, however, given by the shareholders separately, may preclude or estop those who assent from complaining of what they have consented to. (SEC Opinion, Sept. 22,1972, citing Ballantine, p. 390.) (2) Meetings of directors or trustees. — Similarly, as agents of

the corporation managing its affairs, the directors or trustees can only exercise their powers as a board, not individually or separately. The law proceeds upon the theory that directors or trustees shall meet and counsel with each other, and that any

Sees. 49-50

TITLE VI. MEETINGS

481

deterrnination affecting the corporation shall only be arrived at after a consultation at a meeting of the board upon notice to all, attended by at least a quorum of its members. (SEC Opinion, March 10,1972, citing Ballantine, p. 123.) Exceptions to t h e rule.

The general rule is that where the law expressly requires a meeting for a particular transaction, any action taken by the corporation without a meeting properly held for such purpose is void. (1) Under Section 16, any corporation may amend its articles of incorporation "by a majority vote of the board of directors or trustees and the vote or written assent two-thirds of the stockholders representing at least two-thirds of the outstanding capital stock, x x x or x x x of the members x x x." Thus, a meeting of stockholders or members is not necessary. (2) It is evident that the corporation will be bound by the unanimous act or agreement of its stockholders or members although expressed elsewhere than at a formal meeting. (3) In any of the cases mentioned in Section 101, any action taken by the directors of a close corporation without a meeting shall nevertheless be deemed valid, unless otherwise provided in the by-laws. 1

Requisites for a valid meeting of stockholders or m e m b e r s .

The following requisites must be complied with in order that there will be a valid meeting of stockholders or members: (1) It must be held at the proper place (Sec. 51.); (2) It must be held at the stated date and at the appointed time or at a reasonable time thereafter (Ibid.); (3) It must be called by the proper person (Sec. 50, last par.); 2

•For other exceptions to the requirement that the board must act as a body, see comments under Section 23. The Securities and Exchange Commission has the power "to compel the officers of any corporation or association registered by it to call meetings of stockholders or members thereof under its supervision." (Pres. Decree No. 902-A, Sec. 6[f].) 2

482


Sec. 51

(4) There must be a previous notice (Sees. 50, 51.); and (5) There must be a quorum. (Sec. 52.) If the meeting is held at an unauthorized place or without proper notice and not all the stockholders or members are present, those who have a right to complain may take steps to set aside any action taken at such meetings even though a majority of the stockholders or members were present (Fisher, op. cit., p. 196.) in the absence of waiver, estoppel, or ratification. (5 Fletcher, p. 25.) Sec. 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 corporation is located, and if practicable in the principal office of the corporation: Provided, That Metro Manila shall, for the 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. (24a) 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. (25a) Place and time of m e e t i n g s of stockholders or m e m b e r s .

(1) The proper place for the holding of stockholders' or members' meeting is that provided in Section 51. (par. 1.) This is mandatory. Consequently, the by-laws cannot provide otherwise, except as allowed by Section 93 with respect to meetings of members of a non-stock corporation. Directors' or trustees' meetings, on the other hand, may be held at any place fixed in the by-laws even beyond the bounds of the State where the corporation exists. (Sec. 53, last par.) The directors or trustees are not a corporate body; they are, when acting as a board, but agents of the corporation.

Sec. 51

TITLE VI. MEETINGS

483

The rule as to the place of meetings of stockholders or members is subject to the exception provided in the second paragraph of Section 51. ILLUSTRATION: The city or municipality where the principal office of X Corporation, a stock corporation, is located is stated in its articles of incorporation at Makati, Metro Manila, (see Sec. 15[third].) The principal office of the corporation is housed at a building located at 1234 Ayala Avenue, Makati, Metro Manila. Thus, the meeting of the stockholders of X Corporation may be held anywhere in Metro Manila (presently composed of 8 cities and 9 municipalities including Makati) which, for purposes of Section 51, is considered a city or municipality, but if practicable, at 1234 Ayala Avenue, Makati, Metro Manila. However, failure to comply or observe the proper place for holding the stockholders' or members' meeting will not render the meeting illegal if all the stockholders or members are present or duly represented at the meeting. (2) Section 47(2) empowers corporations to provide in their by-laws for the time and manner of calling and conducting regular and special meetings of stockholders or members. Regular meetings shall be held 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." (Sec. 50, par. 1.) Special meetings may be held "at any time deemed necessary or as provided in the 3

by-laws." (Ibid., par. 2.)

The meeting should be held at the appointed time, or, if not then held, at a reasonable time thereafter. Special meetings may be held at any reasonable time. (5 Fletcher, p. 20.) Proper person to call m e e t i n g .

The "call" for a meeting is exercised by the person who has the power to call the meeting. It may consist of direction to the

T h e date should also indicate the day of the week, e.g., "Thursday, January 15, 2006 at 4:00 P.M." to avoid the inconvenience of the date falling on a non-working day.

484


Sec. 51

secretary of the corporation to notify the stockholders or members of the meeting. (1) The person or persons designated in the by-laws have authority to call stockholders' or members' meeting. (2) In the absence of such provision in the by-laws, the meeting may be called by a director or trustee or by an officer entrusted with the management of the corporation unless otherwise provided by law. (3) Under Section 50 (last par.), a stockholder or member may make the call on order of the Securities and Exchange Commission whenever for any cause, there is no person authorized to call a meeting. Presidential Decree No. 902-A empowers the Securities and Exchange Commission, among others, "to compel the officers of any corporation or association registered by it to call meetings of stockholders or members thereof under its supervision." (Sec. 6[f] thereof.) Section 50 (last par.) applies only where there is no person authorized to call a corporate meeting or the officers authorized fail or refuse to call a meeting. Any interested stockholder or member may petition the Commission to authorize him to call a meeting or to compel the officers of the corporation to call a meeting. (4) The special meeting for the removal of directors or trustees may be called by the secretary of the corporation or by a stockholder or member as provided by Section 28. Notice of every meeting required.

As distinguished from "call," "notice" is the writing informing the stockholders or members of the meeting. It is customary and convenient to provide in the by-laws for notice of all meetings both regular and special but the prevailing rule in other jurisdictions is that, as to regular meetings, no notice need be given other than that contained in the by-laws when the time and place of such meeting are specially designated therein. (7 R.C.L. Corps, par. 314.) But if the meeting is a special one, notice must be given. Whether regular or special, notice must be given when required by the law or by the by-laws of the corporation.

Sec. 51

TITLE VI. MEETINGS

485

Under the present law, written notice even of regular meetings must be sent to registered stockholders or members at least two (2) weeks before the meeting, or at least one (1) week for special meetings, unless a shorter or longer period is required by the by-laws. In meetings ordered by the Securities and Exchange Commission as in Section 50 (last par.), it is evident that notice is necessary. However, notice of any meeting may be waived, expressly or impliedly, by any stockholder or member. (Sec. 50, pars. 2, 3.) The corporate by-laws govern the procedure of sending notices of meetings. (Sec. 47[67].) If the by-laws is silent, the manner prescribed in Section 50 shall be followed. (SEC Opinion, June 9,1994.) Statement of purpose of meeting. There are certain matters of importance which the law requires to be taken up at meetings of stockholders or members called expressly for the purpose. It is, therefore, necessary that the notice should state the purpose for which the meeting is called. These cases are provided in meetings called to consider any of the following matters: (1) Election of directors or trustees (see Sec. 24, last sentence.); (2) Removal of directors or trustees (Sec. 28.); (3) Filling of vacancies in the office of director or trustee (Sec. 29, par. 2.); (4) Ratification of contract of the corporation with a director or trustee (Sec. 32, par. 2.); (5) Extension or reduction of corporate term (Sec. 37.); (6) Increase or decrease of capital stock (Sec. 38, par. 1.); (7) Creation or increase of bonded indebtedness (Ibid.); (8) Sale or other disposition of all or substantially all of the corporate assets (Sec. 40, par. 1.); (9) Investment of corporate funds in another corporation or business or for any other purpose (Sec. 42.); (10) Declaration of stock dividends (Sec. 43.);

486


Sec. 51

(11) Entering into a management contract with another corporation (Sec. 44.); (12) Amendment to, or repeal of, any by-laws or adoption of new by-laws (Sec. 48, par. 1.); (13) Fixing the issued price of no par value shares (Sec. 62, last par.); (14) Plan of merger or consolidation (Sec. 77, par. 1.); (15) Amendment of the articles of incorporation of a close corporation (Sec. 103.); (16) Voluntary dissolution of the corporation where no creditors are affected (Sec. 118.); (17) Voluntary dissolution of the corporation where creditors are affected (Sec. 119.); and (18) Dissolution by shortening corporate term. (Sec. 120.) The above matters may be transacted during the annual stockholders' or members' meeting of the corporation as long as the required notice is complied with. The objection that no notice was given or that the notice given was defective, cannot be raised by third persons who have not been injured. (5 Fletcher, pp. 68-69.) Requisites of notice of m e e t i n g .

The requisites of proper notice may be enumerated as follows: (1) It must be issued by one who has authority to issue it; (2) It must be in writing (Sec. 50, par. 1, Sec. 51, par. 1, and Sec. 53, par. 3.); (3) It must state the date, time, and place of the meeting, unless otherwise provided in the by-laws (Ibid.); (4) It must state the business to be transacted thereat; (5) It must be sent at a certain time before the scheduled meeting as fixed by law, unless a different period is required by the by-laws (Ibid.); and

(6) Further, the notice must comply with any other requirements prescribed by the law or by the by-laws of the corporation.

Sec. 51

TITLE VI. MEETINGS

487

(a) For instance, Section 77 requires that the notice of meeting for the approval of merger or consolidation "shall state the purpose of the meeting and shall include a copy or a summary of the plan of merger or consolidation, as the case may be." (b) Section 118 prescribes that the notice of meetings for voluntary dissolution shall be made by publication, in addition to written notice which shall be sent by registered mail or personal delivery. A substantial compliance with the requirements as to notice will be sufficient. If general and special statutory provisions relating to notice are conflicting, the special statutes control for matters covered by them. Notice should be stated in language which may be readily understood and should be construed in a sense in which businessmen to whom they are addressed should understand them. (18 C.J.S. 1230.) A special meeting may not consider business other than those listed in the notice of meeting unless there is unanimous waiver. Effect of failure to comply with requisites for meeting. Under Section 51 (par. 2.), all proceedings had and any business transacted at any meeting of stockholders or members shall be valid even if the meeting be improperly held or called, provided the following two requisites are present: (1) That the proceedings had and the business transacted are within the power or authority of the corporation, that is, they are not ultra vires (see Sec. 45.); and

(2) That all the stockholders or members of the corporation are present or duly represented at the meeting. In other words, if the two requisites mentioned are not present, any action taken at the meeting shall not be valid. Note that Section 51 refers to "all proceedings had and any business transacted." Since the meeting is called for the benefit of stockholders or members, they impliedly waive any irregularity of the meeting by being present or represented at such meeting.

488


Sec. 52

Without the signature of the secretary of the meeting, an alleged minute taken by a mere clerk has neither probative value nor credibility. (Union of Supervisors [R.B.]-NATU vs. Secretary of Labor, 109 SCRA 139 [1981].) Sec. 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) Q u o r u m required in stockholders' and m e m b e r s ' meetings .

Section 47(2) permits corporations to determine in their bylaws, "the required quorum (see Sec. 25.) in meetings of stockholders or members" for the transaction of business at such meetings. In the absence of a quorum, no action can be taken except to adjourn. (1) Not less than number required by law. — In those cases, how-

ever, in which the law determines the number of shareholders or members whose concurring votes are necessary to make their action binding on the corporation, not less than such number is necessary to constitute a quorum at a meeting called to transact such business, (infra.) In such cases, the by-laws may provide for a greater quorum, (see Sec. 97[3].) (2) Any number but at least two. — In other cases, the by-

laws may validly provide for the holding of meetings with the presence of any number of stockholders or members, even less than a majority, provided that there are at least two. It is customary, however, to provide in the by-laws that the presence of the registered holders of a majority of the outstanding shares is necessary to constitute a quorum, but that a smaller number may meet and adjourn to a later date, and that at such adjourned meeting the shareholders attending shall constitute a quorum. 4

'Where there is an unsuccessful attempt by the corporation or if it would be impossible for the corporation to get the required quorum of stockholders necessary to transact business, the corporation may petition the SEC for the appointment of a management committee, board or body to undertake the management of the corporation pursuant to Section 6(d) of Presidential Decree No. 902-A. (SEC Opinion, April 11,1994.)

Sec. 52

TITLE VI. MEETINGS

489

(3) A majority of outstanding capital stock or members. — Under

Section 52, a majority of the outstanding capital stock as defined in Section 137 or in case of non-stock corporations, a majority of the members shall constitute a quorum "unless otherwise provided in this Code or in the by-laws." For non-stock corporations, the basis for determining the quorum is the total number of registered members. Only those who are actual, living members with voting rights shall be counted in determining the existence of a quorum during members' meetings. Dead members shall not be counted. (Tan vs. Sycip, 499 SCRA 216 [2006].) The best evidence of who are the present members of a nonstock corporation is the "membership book." In the case of a stock corporation, it is the stock and transfer book. (Ibid., citing R. Lopez, The Corporation Code of the Philippines, 1994, Vol. 1, p. 973.) Unlike Section 25, Section 52 does not base the quorum on the meetings of stockholders or members on their absolute number as fixed in the articles of incorporation. (Tan vs. Sycip, supra.) (4) Where withdrawal leaves less than a quorum previously

declared. — Once a quorum is present, the affirmative vote of the majority in the absence of express provision in the by-laws to the contrary and unless the vote of a greater number is required by law, is sufficient to decide any question properly presented. All the stockholders (or members) are bound by the result of such a vote and, this, even notwithstanding the withdrawal (after the existence of a quorum has been determined or declared) of enough shareholders (or members) to leave less than a quorum. (Hill vs. Town, 1722 Mich. 508; 138 N.W. 334, and other cases.) A minority group cannot prevent corporate action by walking out. 5

(5) Effect of death of a stockholder or member. — In stock

corporations, 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

'In case the stockholders remaining constitute less than a quorum, the meeting should be adjourned unless the withdrawal was made purposely to break the quorum.

490


Sec. 52

the estate is effected, the stocks of the decedent are held by the administrator or executor. On the other hand, membership in and all rights arising from a non-stock corporation are personal and non-transferable, unless the articles of incorporation or the by-laws 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 bylaws. (Tan vs. Sycip, supra.) Postponement of stockholders ' or m e m b e r s ' annual m e e t i n g . (1) Change of date of meeting fixed in by-laws not allowed. —

The general rule is that where the date of the annual meeting is fixed in the by-laws of the corporation, the board of directors or trustees cannot change the date so as to lengthen their term of office. "An annual meeting, required and slated for the year, cannot be dispensed with by the corporate officers, and the directors cannot by law or otherwise, so change the time of annual election as to continue themselves in office more than a year, against the wishes of the owners of a majority of the stock." (5 Fletcher, p. 25.) (2) Postponement of meeting to a later date when allowed. —

The rule, however, admits of exceptions as where the annual meeting cannot be held on the date fixed by the by-laws for some valid reason, such as an erroneous date for holding the meeting stated in the notice sent out to members. In such case, the annual meeting may be postponed to a date later than that fixed by the by-laws, provided proper notice of the change of date is given to the members. (SEC Opinion, March 8,1995.) (3) Holding of meeting within a reasonable time after fixed date.

— It is the duty of the board of directors or trustees to call the annual meeting without unnecessary delay or within a reasonable time, particularly when a demand therefor is made on them by the stockholders or members, because they can continue to hold over only as long as their successors have not been elected; hence, it is not within their power to delay such election as to prolong their stay in office. (SEC Opinion, Feb. 21,1968.)

Sec. 52

TITLE VI. MEETINGS

491

Payment of compensation for attendance at stockholders' or members' meetings. There is nothing in the Code which expressly or impliedly authorizes the payment of per diems to stockholders or members for their attendance at stockholders' or members' meetings. The reason for this silence seems to be simple. The term per diem, as used in connection with compensation, wages, or salary, means pay for a day's services. (32 Words and Phrases, p. 17.) It connotes payment for services rendered which cannot be ascribed to the exercise of the right by a stockholder or member when he attends a corporate meeting. As a matter of fact, Section 47(5) of the Corporation Code, which authorizes by-laws to provide "compensation of directors or trustees, officers, and employees," excludes stockholders and members in the enumeration, and this simply underscores the fact that stockholders or members, as such, do not render service but exercise rights personal to themselves in the corporation. (SEC Opinion, June 30,1971.) Matters in which the law requires minimum number of votes. Any matter or transaction must necessarily fail if the votes attained are less than what the law requires for the particular transaction. Hence, if there is a tie, the issue or proposition loses. (SEC Opinion, Aug. 4,1995.) Hereunder are enumerated the corporate acts, together with the corresponding minimum votes required for their approval: (1) to amend the articles of incorporation — a majority of the board of directors or trustees and vote or written assent of 2 / 3 of the outstanding capital stock or of the members (Sec. 16; see Sec. 120.); (2) to elect directors or trustees — a majority of the outstanding capital stock or of the members entitled to vote (Sec. 24.); (3) to remove directors or trustees — 2 / 3 of the outstanding capital stock or of the members entitled to vote (Sec. 28.); (4) to call a special meeting to remove directors or trustees — a majority of the outstanding capital stock or of the members entitled to vote (Sec. 28.);

492


Sec. 52

(5) to ratify a contract of a director /trustee or officer with the corporation — 2 / 3 of the outstanding capital stock or of the members (Sec. 32.); (6) to extend or shorten corporate term — a majority of the board of directors or trustees and 2 / 3 of the outstanding capital stock or of the members (Sec. 37.); (7) to increase or decrease the capital stock — a majority of the board of directors and 2 / 3 of the outstanding capital stock (Sec. 38.); (8) to incur, create or increase bonded indebtedness — a majority of the board of directors and 2 / 3 of the outstanding capital stock (Ibid.); (9) to sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of the corporate assets — a majority of the board of directors or trustees and 2 / 3 of the outstanding capital stock or of the members (Sec. 40.); (10) to invest corporate funds in another corporation or business or for any purpose other than the primary purpose — a majority of the board of directors or trustees and 2 / 3 of the outstanding capital stock or of the members (Sec. 42.); (11) to issue stock dividends — a majority of the quorum of the board of directors and 2 / 3 of the outstanding capital stock. (Sec. 43.) Note: The approval of the stockholders is not required with respect to other dividends such as cash and bond dividends. They may be declared by a majority of the quorum of the board; (12) to enter into a management contract — a majority of the quorum of the board of directors or trustees and a majority of the outstanding capital stock or of the members of both the managing and the managed corporations, and in some cases, 2 / 3 of the total outstanding capital stock entitled to vote or of the members with respect to the managed corporation (Sec. 44.); (13) to adopt by-laws — a majority of the outstanding capital stock or of the members (Sec. 46.); (14) to amend or repeal the by-laws or adopt new by-laws — a majority of the board of directors or trustees and of the outstanding capital stock or of the members (Sec. 48.);

Sec. 52

TITLE VI. MEETINGS

493

(15) to delegate to the board of directors or trustees the power to amend or repeal the by-laws or adopt new by-laws — 2 / 3 of the outstanding capital stock or of the members (Ibid.); (16) to revoke the preceding power delegated to the board of directors or trustees — a majority of the outstanding capital stock or of the members (Ibid.); (17) to fix the issued price of no par value shares — a majority of the quorum of the board of directors if authorized by the articles of incorporation or in the absence of such authority, by a majority of the outstanding capital stock (Sec. 62, last par.); (18) to effect or amend a plan of merger or consolidation — a majority of the board of directors or trustees and 2 / 3 of the outstanding capital stock or of the members of the constituent corporations (Sec. 77.); (19) to dissolve the corporation — a majority vote of the board of directors or trustees and 2 / 3 of the outstanding capital stock or of the members (Sees. 118,119.); and (20) to adopt a plan of distribution of assets of a non-stock corporation — a majority vote of the board of trustees and 2 / 3 of the members having voting rights. (Sec. 95, par. 2.) Certain corporate acts require the approval or authorization of the stockholders or members. It has been held that where, except for one, the stockholders of a corporation also sit as members of the board of directors, it will be illogical and superfluous to require the stockholders' approval of subject resolutions requiring the authorization of the stockholders on record. (Lopez Realty, Inc. vs. Fontecha, 247 SCRA 183 [1995].) It has been ruled that the approval by 2 / 3 of the outstanding capital stock either prior to the voting of the board or by subsequent ratification, is required for the temporary stoppage of operation of a corporation. The cessation of business, though temporary, is a fundamental concern of the stockholders who stand to be primary affected by such event. It involves not a mere exercise management prerogative. (SEC Opinion No. 04-43, Oct. 26, 2004.) Greater voting requirement.

A corporation may prescribe a greater voting requirement for the approval of any of the above corporate acts in its articles of


494

Sec. 53

incorporation and/or by-laws in order to protect the rights of minority stockholders or members. Such higher number is also the number necessary to constitute a quorum. Note that in Nos. (1), (6), (7), (8), (9), (10), (11), (12), (14), (18), (19), and (20), the acts mentioned must be approved by both the board of directors or trustees and the stockholders or members. Any matter or transaction must necessarily fail if the number of votes attained is less than what is prescribed for the particular transaction. If an issue to be resolved requires a majority for it to be passed and there is a tie, the issue or proposition simply loses. There is, therefore, no need to break the deadlock. (SEC Opinion, Aug. 23,1991.) Sec. 53. Regular and special meetings of directors or trustees. — Regular meetings of the board of directors or trustees of every corporation shall be held monthly, unless the by-laws provide otherwise. Special meetings of the board of directors or trustees may be held at any time upon the call of the president or as provided in the by-laws. Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless the by-laws provide otherwise. Notice of regular or special meetings stating the date, time and place of the meeting must be sent to every director or trustee at least one (1) day prior to the scheduled meeting, unless otherwise provided by the by-laws. A director or trustee may waive this requirement, either expressly or impliedly, (n) Place a n d time of m e e t i n g s of directors or trustees.

(1) Regular or special meetings of directors or trustees may be held anywhere in or outside the Philippines, unless the bylaws provide otherwise. 6

In our age of modem technology, the courts may take judicial notice that business transactions may be made through teleconferencing among people in two or more locations through an electronic medium. A teleconference represents a unique alternative to face-to-face (FTF) meetings. In the Philippines, teleconferencing and video conferencing 6

Sec. 54

TITLE VI. MEETINGS

495

(2) Regular meetings "shall be held monthly, unless the bylaws provide otherwise," while special meetings "may be held at any time upon the call of the president or as provided in the by-laws." (Sec. 53.) Notice of every meeting required. Section 53 requires that notice of every meeting, whether regular or special, stating the date, time, and place of the same must be sent to every director or trustee at least one (1) day prior to the scheduled meeting, unless otherwise provided by the bylaws. Nevertheless, notice of a regular meeting need not be given if the articles of incorporation or by-laws specify the time of the meeting (except when it is to be held at another place). A meeting held in the absence of some of the directors (or trustees) and without any notice to them is illegal, and the action at such meeting although by a majority of the directors, is invalid unless subsequently ratified or waived, expressly or impliedly, by the absent directors or unless rights have been acquired by innocent third persons, as against whom the corporation must be held estopped to set up the failure to observe formalities. (Ballantine, p. 127.) Of course, should a meeting without any notice or without a quorum take place, whether notice thereof has been given or not, all the resolutions and acts approved in said meeting cannot be considered valid and may be questioned by any objecting director or stockholder unless subsequently ratified expressly by the board of directors (or trustees) in a duly convened meeting or impliedly by the corporation's subsequent course of conduct. (Lopez Realty, Inc. vs. Fontecha, 247 SCRA 183 [1995].) Sec. 54. Who shall preside at meetings. — The president shall preside at all meetings of the directors or trustees as well as of the stockholders or members, unless the bylaws provide otherwise, (n) of members of board of directors of private corporations is a reality, in light of R.A. No. 8792, otherwise known as the "Electronic Commerce Act." (Expertravel & Tours, Inc. vs. Court of Appeals, 459 SCRA 147 [2005].) SEC Memo. Cir. No. 15 (Nov. 30, 2001) provides the guidelines for board meetings done through tele- or video conferencing where the participants who are not physically present are located in different places, both here and abroad.

496


Sec. 55

Presiding officer at meetings.

(1) President/Chairman/Vice-chairman. — The president shall preside at all meetings of directors or trustees and of the stockholders or members, even where the chairman of the board is present at such meeting, unless otherwise provided in the bylaws (Sec. 54.) and subject to the provisions of Section 50. (last par.) Thus, the by-laws may provide that the chairman, instead of the president, shall preside at board meetings. Where there is a vice-chairman provided in the by-laws, he presides in the absence of the chairman. (2) Stockholder or member in a temporary capacity. — Where

the officer entitled to preside is not present at the time for a meeting to convene, it has been recognized that a stockholder or member who takes the floor may temporarily preside at the meeting of stockholders or members pending the selection of the presiding officer. Unless the contrary is provided by the bylaws, the presiding officer may be selected by viva voce vote of the stockholders or members present, (see 19 Am. Jur. 2d 138.) (3) Stockholder or member chosen. — Where for any cause no

person is authorized to call a meeting, the petitioning stockholder or member authorized by the Securities and Exchange Commission to call a meeting of the corporation "shall preside thereat until at least a majority of the stockholders or members present have chosen one of their number as presiding officer." (Sec. 50, last par.) The fact that a director is at the same time the presiding officer of the meeting does not deprive him of the right to vote as such director. He cannot be deprived of the right by a majority vote of its board without his consent. (SEC Opinion, Jan. 25,1990.) Sec. 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 such right in writing which is recorded on the appropriate corporate books by the pledgor or mortgagor, (n)

Sec. 55

TITLE VI. MEETINGS

497

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) Right to v o t e in s t o c k c o r p o r a t i o n s.

(1) In general. — It is through the right to vote that the stockholder participates in the management of the corporation. The right to vote, unlike the rights to receive dividends and liquidating distributions, is not a passive theory because management or administration is, under the Code, vested in the board of directors (or trustees), with certain reserved powers residing in the stockholders (or members) directly. (Cojuangco, Jr. vs. Roxas, 195 SCRA 794 [1991].) 7

(a) The right has been described as the stockholder's "supreme right and main protection." (Stokes vs. Continental Trust Co., 78 N.E. 1090.) (b) The right is inherent in, and incidental to, the ownership or the property in the stock of which the stockholder cannot be deprived without his consent, and he may vote it as he chooses, whether it be with the minority or majority, although not in the manner or for a purpose contrary to law or public policy or fraudulently. (5 Fletcher, p. 99.) (c) A court will not deprive a stockholder of his right to vote his shares, except upon a clear showing of its lawful denial under the articles of incorporation or by-laws of the corporation, as it is a right inherent in stock ownership. (Sales vs. Securities and Exchange Commission, 169 SCRA 109 [1989].) One who is actually a stockholder cannot be denied his right to vote by the corporation merely because the corporate officers failed to keep its records accurately. A corporation's records are not the only evidence of the TJnder the provisions of the old Corporation Law, voting privileges of the stockholders are always determined and based on their ownership of the subscribed capital stock. In the new Corporation Code, the same rule applies. However, the word "outstanding" is used in lieu of the word "subscribed" so as not to include treasury shares in voting. In short, voting is based on the number of shares of stock standing at the time fixed in the by-laws in the stockholder's name in the books of the corporation, otherwise known as "outstanding capital stock." (SEC Opinion, May 21, 1982.)

498


Sec. 55

ownership of stock in a corporation. (Lanuza vs. Court of Appeals, 454 SCRA 54 [2005].) (d) The right to vote stock imposes no legal duty on the holder to vote it. (19 Am. Jur. 2d 149.) (e) The vote is based on the number of shares represented (Sec. 52.) and not on the number of stockholders present which shares must always be a part of the outstanding capital stock as defined in Section 137. It is not legally feasible to provide that certain shares shall be entitled to more than one (1) vote per share, (see Sees. 24,47[7].) Section 6 applies only in cases where certain classes of shares, particularly shares classified as preferred, are denied voting rights ordinarily enjoyed by a stockholder. (f) Owners of shares are under no disability to vote at a stockholders' meeting from the fact that they are also directors of the corporation. They do not vote in their fiduciary capacity, but like other stockholders, in the right of the shares held by them. (19 Am. Jur. 2d 159.) (2) Voting shares. — Ordinarily, only legal owners of shares in a stock corporation have the right to be present and vote in any corporate meeting. Their voting rights vary depending upon the class of their stock. The control of the corporation, exercised by the voting power of the stockholders, is in the hands of the holders of common stock. (a) A corporation holding shares in another corporation may, like any owner, vote said shares in all meetings of the stockholders by the corporate officer duly authorized by the board of directors and as directed by it. (b) Except as provided in Section 55, one who does not appear to be a stockholder upon the books of the corporation is not eligible to vote a stock although he may be entitled to the legal title to the stock voted. (Re Argust Printing Co., 48 N.W. 347.) (c) A transferee of stock cannot vote upon it if his transfer is not registered in the books of the corporation. (Sec. 63.) A registered stockholder must be allowed to vote irrespective of any question of bona fides. (SEC Opinion, April 11,1985.)

Sec. 55

TITLE VI. MEETINGS

499

(d) The registered owners of shares sequestered by the government (PCGG), or their duly authorized representatives or proxies, may vote said shares. The government may not vote the shares and elect the members of the board of directors. It cannot perform acts of ownership of sequestered property as it does not become the stockholder of record by virtue of such sequestration. It is a mere conservator. The only conceivable exceptions under which the government is granted the authority to vote the shares are: 1) where government shares are taken over by private persons or entities w h o / which registered them in their own names; and 2) where the capitalization or shares that were acquired with public funds somehow landed in private hands. (Cojuangco, Jr. vs. Roxas, supra; see Republic vs. Sandiganbayan, 199 SCRA 39 [1991]; Trans Middle East [Phils.] vs. Sandiganbayan, 490 SCRA 455 [2006].) This "two-tiered test" does not apply but the public character of the acquisition of the sequestered shares where the shares have been conclusively shown to have been purchased with public funds, or funds that are prima facie public in character or, at the very least, are clearly affected with public interest as in the case of the coconut levy funds which partake of the nature of taxes. (Republic vs. COCOFED, 372 SCRA 462 [2001]; see Republic vs. Sandiganbayan, 402 SCRA 84 [2003].) 8

There is a "record date" fixed by the board of directors for determination of stockholders entitled to vote; if it does not do so, such date shall be the date of the notice of meeting. (3) Non-voting shares. — They may vote in certain cases. Where the law provides two-thirds or a majority of the outstanding capital stock "entitled to vote" (see Sees. 24, 28, 44.), only shares

"'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. (Ibid.) In this case, the "public character" test was applied to the controversy.

500


Sec. 55

with voting rights may participate and vote in the deliberation of the corporation. (SEC Opinion, July 7,1949.) However, holders of stock without voting rights may vote in the cases provided in Section 6. (par. 6, Nos. 1-8.) In all other corporate acts, only voting shares are entitled to be voted. (Ibid., last par.) (4) Disqualified shares. — Whenever the law disqualifies shares from voting on any matter, they are not considered outstanding for the determination of a quorum at any meeting to act upon, or the required vote to approve action upon that matter under any other provision of the law or articles of incorporation or by-laws of the corporation. Accordingly, treasury shares are not so considered because they are denied voting rights by the law. (SEC Opinion, April 11,1985.) (5) Preferred and redeemable shares. — "Except as otherwise provided by the articles of incorporation and stated in the certificate of stock," holders of preferred shares have the right to vote. Common shares may not be deprived of voting rights, but preferred and redeemable shares may be deprived of the right to vote, unless otherwise provided in the Code. (Sec. 6, pars. 1, 2, Nos. 1-8; see Sec. 81 [1].) (6) Delinquent shares. — Holders of stock declared delinquent by the board of directors for unpaid subscriptions (Sec. 67.) are not entitled to vote or to representation at any stockholders' meeting. (Sec. 71.) But they may act as proxies for stockholders whose shares are not delinquent. (7) Treasury shares. — They have no voting rights. (Sec. 57.) Fractional shares of stock (see Sec. 41.) cannot also be voted unless they constitute at least one (1) full share. (8) Shares not fully paid. — Holders of subscribed shares not fully paid which are not delinquent are entitled to vote. (Sec. 72.) Right to vote in non-stoc k corporations.

"The right of the members of any class or classes to vote may be 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

Sec. 55

TITLE VI. MEETINGS

501

entitled to one vote." (Sec. 89, par. 1.) Thus, the general rule is one vote to each member. In stock corporations, voting is based on the number of shares owned and not on the number of stockholders or per capita.

Controversies involving the right to vote and "the election or appointment of directors, trustees, officers or managers of corporations, partnerships or associations" were formerly under the original and exclusive jurisdiction of the Securities and Exchange Commission. (Pres. Decree No. 902-A, Sec. 5[b, c].) The Securities Regulation Code (R.A. No. 8799.) transferred jurisdiction to decide intra-corporate disputes to the regional trial courts. (Sec. 5.2 thereof.) M a n n e r of v o t i n g .

A stockholder or member may vote: (1) directly (in person), or (2) indirectly, through a representative — (a) by means of a proxy (Sees. 55, 56, 58, and 89, par. 2.), or (b) by a trustee under a voting trust agreement (Sec. 59.), or (c) by executors, administrators, receivers, or other legal representatives duly appointed by the court. (Sec. 55, par. 2.) Voting may be either straight or cumulative, (see Sec. 24.) Representative voting.

A stockholder or member may vote, directly or indirectly, through a representative as stated above. (1) Legal representative of stockholder or member. — Section 55

authorizes executors, administrators, receivers, or other legal representatives duly appointed by the court to attend and vote in behalf of the stockholders or members on shares under their administration without need of any written proxy (see Sec. 58.) because they have legal title to the stock of the deceased owner or their principal. This is an exception to the rule in Section 24 that only stockholders of record may vote.

502


Sec. 55

Apart from the above statutory provision, however, it is clear that by virtue of their position as legal representatives, they have the power to vote the stocks in the name of the stockholders (Schmidt vs. Mitchell, 101 Ky. 570.) and this even if the shares still stand on the books of the corporation in the name of the stockholder, or without a formal transfer of the shares on the books of the corporation to them. (Market St. RR. vs. Hellman, 109 Cal. 541; 42 R 225.) Their signature can create a legal and valid proxy. (SEC Opinion, Jan. 28,1963.) Under Article 225 of the Family Code (Exec. Order No. 209.), the father and the mother shall jointly exercise legal guardianship over the property of their unemancipated common child without the necessity of a court appointment. In case of disagreement, the father's decision shall prevail, unless there is a judicial order to the contrary. The parents may, therefore, represent and vote for their minor child in a stockholders' meeting inasmuch as said acts are embraced in the administration of the child's property. (2) Pledgee or mortgagee of stockholder's shares. — As to pledgees

or mortgagees of shares in stock corporations, they shall have the right to attend and vote at meetings of stockholders only when expressly given such right in writing by the pledgor or mortgagor, as the latter remains the owner of the stock pledged or mortgaged. The authorization is required by the Code to be recorded on the appropriate corporate books by such pledgor or mortgagor. (Sec. 55, par. 1.) However, if the pledgor or mortgagor of the shares of stock is disqualified to vote it, the disqualification extends as well to the pledgee or mortgagee. (19 Am. Jur. 2d 163.) (3) Officer or agent of corporation owning shares. — Shares

standing in the name of another corporation, whether domestic or foreign, may be voted by such officer, agent or proxy as the bylaws of such other corporation may prescribe or, in the absence of a provision in the by-laws, as its board of directors may determine, or they may be voted by the chairman of the board, president, or any vice-president but always under the ultimate direction of the board. Thus, where the by-laws of the corporation do not contain any provision on the matter, the board of directors may authorize the stockholders of the company to vote for and in behalf of the corporation but the authority granted would in no way qualify

Sec. 55

TITLE VI. MEETINGS

503

any one of the stockholders as eligible for membership in the board in view of the stock ownership requirement under Section 23. (SEC Opinions, July 26,1988 and March 13,1991.) Voting rights for shares of stock of a deceased stockholder. (1) Where a legal representative has been appointed. — On the

death of a stockholder, his administrator or executor becomes vested with the legal title to the stock and entitled to vote the same at all meetings, and until a settlement and division of the estate is effected, the stock of the decedent belongs to said administrator or executor as his personal representative. This is true even if the shares stand in the books of the corporation in the name of the decedent, or without a formal transfer of the stock in the books of the corporation. However, the administrator or executor should present proof or evidence of his judicial appointment. (SEC Opinion, May 12, 1988.) Thus, in the absence of a judicial appointment, a person has no right to vote a proxy signed by his mother in connection with the shares of his deceased father. (SEC Opinion, Oct. 16,1987.) (2) Where no legal representative has been appointed. — Where

the estate of a deceased stockholder is still undivided and there is no administrator or other legal representative duly appointed by the court nor an executor designated in a will to administer said estate, no person can vote the shares of the deceased since nobody can legally represent his estate under the second paragraph of Section 55. (SEC Opinions, Feb. 28,1967 and April 11,1988.) (a) An heir of a deceased stockholder whose stock still remains pro indiviso among the heirs, cannot be considered a stockholder of a stock corporation in his own right until the share is registered in his own name on the books of the corporation. (SEC Opinion, March 1,1976.) (b) To transfer the shares of stock in favor of the heirs of the deceased stockholder, judicial or extrajudicial partition of the estate is necessary if he died intestate; otherwise, it will be necessary to wait for the termination of the testamentary proceedings and the final adjudication of the shares of stock

504


Sec. 56

in accordance with the will of the decedent. In the light of the above, an agreement between a corporation and a stockholder which provides that the former shall provide a life insurance policy for the latter, whereby an insurance company shall pay the insured stockholder, his heirs, and assigns, the sum insured corresponding to the approximate value of his shares upon his death, is not valid for purposes of transfer of stocks of said deceased stockholder in favor of the corporation. Furthermore, this scheme, if allowed, would be tantamount to reacquisition by the corporation of its own shares. Under Section 41, a corporation cannot purchase its own shares unless the conditions provided therein are complied with. (SEC Opinion, Nov. 25,1991.) (3) Where partition has been executed by the heirs. — Where a

judicial or extrajudicial settlement has been executed by the heirs in accordance with law and registered in the proper register of deeds, dividing among themselves the shares of the deceased, the presentation thereof will entitle the heirs to vote the shares alloted in their respective names at the meeting. (SEC Opinion, Feb. 28,1967.) Sec. 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 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) Voting wher e share o w n e d by t w o or more persons .

In case of shares of stock owned jointly by two or more persons (i.e., "and" shares), Section 56 requires the consent of all the co-owners in order to vote such stock. Such consent is not necessary where: (1) There is a written proxy executed by the joint-owners authorizing one or some of them or any other person to vote for all; and

Sees. 57-58

TITLE VI. MEETINGS

505

(2) The shares are owned in an "and/or" capacity by the holders thereof, in which case any one of the joint-owners can vote said shares or appoint a proxy therefor. (Sec. 58.) Where the property relation between husband and wife is governed by the system of absolute community of property, the same shall be governed by the rules on co-ownership, (see Arts. 75, 90, Family Code.) Consequently, as co-owners of shares of stock, they shall be considered as one stockholder. Sec. 57. Voting right for treasury shares. — Treasury shares shall have no voting right as long as such stock remains in the Treasury, (n) Voting right for treasury s h a r e s .

Section 57 expressly denies any voting rights to treasury shares as long as such stock remains in the treasury (see Sec. 9.), i.e., they are not formally cancelled, and are, therefore, subject to reissue by the corporation at some future time. To give voting rights to treasury shares could enable the directors to prolong their stay in office against the wishes of the holders of the majority of the stock. Such shares are also not entitled to dividends. The only right which a corporation has over treasury shares is to reissue the same for a valuable consideration. In case of sale or reissue, treasury shares regain whatever voting rights and dividends to which they were originally entitled. Sec. 58. Proxies. — Stockholders and members may vote in person or by proxy in all meetings of stockholders or members. Proxies shall be 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) Meaning of proxy.

(1) A proxy, as the term is used, designates the formal written authority given by the owner or holder of the stock, who has a right to vote it, or by a member, as principal, to another person, as agent, to exercise the voting rights of the former.

506


Sec. 58

(2) It is also used to apply to the holder of the authority or person authorized by an absent stockholder or member to vote for him at a stockholders' or members' meeting. (3) The term is also applied to refer to the instrument which evidences the authority of the agent. A proxy is thus a special form of agency. The proxy holder is in the eye of the law an agent and as such a fiduciary. (Ballantine, p. 412.) Purpose and use of proxies.

The advantages derived from their use cannot be disregarded. (1) Presence of quorum in meetings. — The system of proxy

voting is not a mere convenience or favor to the distant and indifferent shareholders. It also assures the presence of a quorum in meetings of stockholders of larger corporations, (see Ballantine, p. 411.) "Proxy voting is a development which necessarily accompanied the increase in the size and geographical dispersion of corporate membership. Without this device, the inability of the stockholders [or members] to attend in person might make it impossible to secure the quorum necessary to take corporate action." (SEC Opinion, Feb. 6, 1976, citing III A. Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Phils., p. 470.) (2) Exercise of right to vote though absent. — At the same

time, proxy voting enables those who do not wish to attend a stockholders' or members' meeting to protect their interest by exercising their right to vote through a representative. (3) Voting and management control. — The solicitation and use

of proxies is also one of the devices of securing voting control or management control in the corporation. (SEC Opinion, Feb. 6, 1976.) Voting by proxy.

(1) The right to vote by proxy is specifically recognized in the election of the board of directors or trustees (Sec. 24.), in voting in case of joint ownership of stock (Sec. 56.), and in voting by

Sec. 58

TITLE VI. MEETINGS

507

trustee under voting trust agreements (Sec. 59, last par.), and in voting by members in non-stock corporations. (Sec. 89, par. 2.) (2) In considering other matters, voting by proxy is expressly allowed by Sections 55 (par. 2.) and 58. Section 47(4) provides that a corporation may provide in its by-laws the "form for proxies of members or stockholders and the manner of voting them." Voting by proxy is also recognized by implication under Section 51 (par. 2.) when it speaks of stockholders or members of the corporation present or "represented at the meeting." (3) The right to vote by proxy may also be justified on principles of agency. (Art. 1876, Civil Code.) (4) The stockholder may deliver, in person or by mail, his proxy vote directly to the corporation. (SEC Memo. Cir. No. 4, Series of 2004.) The right to vote by proxy necessarily includes the right to solicit proxies and, it goes without saying, the right to have access to the list of the corporation's stockholders or members needed in order to be able to solicit proxies, (see Sec. 74.) Voting by proxy is not allowed in board meetings pursuant to Section 25. W h o m a y be a proxy.

Section 58 imposes no limitation as to the persons who may be appointed as proxy. Hence, a stockholder or member may appoint any person he sees fit to represent him, and by-laws restricting his right in this respect are likewise void. 9

(1) Since a proxy acts for another, he may act as such although he himself is disqualified to vote his shares. Thus, a stockholder disqualified to vote because his stock has been declared delinquent (see Sec. 71.), may vote the stock of his principal which is not delinquent. A stockholder or member who himself is not entitled to vote cannot, of course, vote by proxy. (2) The same person may act as proxy for one or several stockholders or members. '"Absent such designation, the chairman of the meeting shall be deemed authorized and hereby directed to cast the vote as indicated by the voting stockholder or his proxy." (SEC Memo. Cir. No. 4, Series of 2004.)

508


Sec. 58

(3) Directors or trustees cannot attend or vote by proxy at board meetings (Sec. 25, last par.) but they may act as proxies in stockholders' meetings. Nature of proxies.

Proxies shall be in writing, signed by the stockholder or member. (Sec. 58.) The appointment of proxy is, therefore, purely personal and to be valid, a proxy to vote stock must have been given by the person who is the legal owner of the stock entitled to vote the same at the time it is be voted. (SEC Opinion, Dec. 3, 1993, citing 5 Fletcher, Sec. 2053.) It follows that unless the stockholder or member who executed a proxy gives his consent in writing, a designated proxy may not further re-designate another under the same proxy. An alternate proxy can only act as proxy in case of non-attendance of the other designated proxy. Limitations on proxies of s t o c k h o l d e rs or m e m b e r s .

Under Section 58, they are as follows: (1) Proxies must be in writing signed by the stockholder or member and filed before the scheduled meeting with the corporate secretary. Oral proxies are not, therefore, valid; (2) Unless otherwise provided in the proxy, it is valid only for the meeting for which it is intended. The authority may be general or limited; and (3) A continuing proxy must be for a period not exceeding five (5) years at any one time; otherwise, it shall not be valid and effective after such period. Presidential Decree No. 902-A empowers the Securities and Exchange Commission, among others, "to pass upon the validity of the issuance and use of proxies and voting trust agreements for absent stockholders or members." (Sec. 6[g] thereof.) A proxy sold for a consideration is obviously contrary to public policy. Form and execution of proxies.

(1) The Code does not contain express provisions, other than that provided in Section 58, on the "form of proxies of stockhold-

Sec. 58

TITLE VI. MEETINGS

509

ers and members and the manner of voting them," leaving the matter to be provided in the corporate by-laws, (see Sec. 47[4].) (a) In the absence of by-laws provision to the contrary, no particular form or words are necessary to constitute a proxy or extend the authority thereof. All that is necessary is that it shall be in writing and signed by the stockholder or member (Sec. 58.), and shall show an intention to empower the person to whom it is given to act as agent in voting the stock so as to enable the election officers to know who is authorized. (5 Fletcher, p. 176.) (b) In the absence of a provision in the articles of incorporation or by-laws, the board of directors cannot prescribe the form of proxies other than as provided for under Section 58. (SEC Opinion, Oct. 4,1987.) Accordingly, unless expressly so provided, a written proxy even if not notarized, or is without documentary stamps, or is unattested by witnesses, will suffice, as long as it authorizes the person to whom it is given to act as agent for and in behalf of the stockholder or member executing the same. 10

(c) The proxy should be dated. If a duly accomplished and executed proxy is indicated, the postmark or date of dispatches indicated in the election mail, or if not mailed, its actual date of presentation, shall be considered as the date of the proxy. (SEC Memo. Cir. No. 41, Series of 2004.) (d) Neither is a proxy instrument rendered invalid by the fact that it is undated, or the holder's name is in blank," or the "The only adyerse effect of the failure to affix the required documentary stamps is that the proxy cannot be recorded as a public document and cannot be admitted or used as evidence in court until such stamps are fixed and cancelled. (Sees. 241, 250, National Internal Revenue Code.) "If the name of the proxy is left blank, the corporation receiving the proxy is at liberty to fill in any name it chooses. (SEC Opinion, Jan. 4, 1968, citing 1 Corporate Secretary's Encyc, p. 84.) By returning the proxy form unfilled, a stockholder or member is deemed to have constituted the corporation itself as proxy, and, therefore, the latter may fill it up pursuant to the authority given by the stockholder or member. (SEC Opinion, Jan. 11,1961.) To insure the presence of a quorum, corporations usually provide in the proxy form that in case of the non-attendance of the proxy named, the stockholder authorizes the chairman or any officer of the corporation to exercise all the rights as the proxy of the stockholder.

510


Sec. 58

authority was written in ink of different color from that used in the signature of the proxy. (SEC Opinion, July 9,1975.) (e) For corporate members, a board resolution authorizing the signatory to the proxy should be submitted. Being a juridical person, a corporation can only act through its board of directors. In the case of a stock corporation, it would be in order to adopt a resolution authorizing the proxy, and to execute it in a formal corporate manner. (SEC Opinion No. 07-16,. Aug. 18, 2007.) (2) There is a presumption of regularity in the execution of proxies. (a) As a rule, they should be accepted if they have the appearance of prima facie authenticity in the absence of a timely and valid challenge and are signed as the names appear in the record of the corporation. (b) Rules and procedure relating to execution of proxies should be decided before each meeting and stockholders or members should be informed of them for their guidance. Better still, the same should be provided for in the by-laws. Lacking extraordinary circumstances, the trend in court decisions has been toward upholding the ruling of inspectors of election. (SEC Opinion, Jan. 4, 1968, citing Black, Modern Corp. Law, pp. 573-574.) Extent of authority of proxy.

The proxy holder is an agent whose authority may be general or limited. (1) A general proxy confers a general discretionary power of attorney to attend and vote at an annual meeting "with all the powers the undersigned would possess if personally present," to vote for directors and all ordinary matters that may properly come before a regular meeting. It is no authority, however, to vote for a fundamental change in the corporate charter or other unusual transactions such as a merger or consolidation. (Title IX.) (2) A limited proxy, as the name implies, limits the power conferred. It may restrict the authority to vote to specified matters

Sec. 38

TITLE VI. MEETINGS

511

only and may direct the manner in which the vote shall be cast. (Ballantine, pp. 407-408.) A customary form of general proxy may be as follows: That I, the undersigned, a shareholder of ABC Corporation, do hereby nominate, constitute, and appoint Mr. D, or in his absence, Mr. E or Mr. F as my proxy to represent me and vote all shares registered in my name on the books of said corporation or owned by me at any and all regular and special meetings of stockholders of said corporation and adjournments thereof, as fully to all intents and purposes as I might do if present and acting in person. In case of the non-attendance of my above-named proxy at any particular meeting, I authorize and empower the Chairman of the meeting to fully exercise all rights as my proxy at such meeting. This proxy shall continue until such time as the same is withdrawn by me through notice in writing delivered to the Secretary, but shall not apply in instances where I personally attend the meeting. In witness thereof, the undersigned stockholder has executed this proxy this day of , 199 . Signed in the presence of:

Witnesses

Printed name and signature of stockholder

Denial of right to vote by proxy in the by-laws.

(1) In stock corporations, the appointment of proxy is purely personal and an incident of ownership and, therefore, a by-laws provision prohibiting the use of proxy by stockholders is contrary to law and hence, null and void. (2) In non-stock corporations, however, the right to vote by proxy, or even the right to vote itself may be denied to members in the articles of incorporation or the by-laws (Sec. 89, pars. 1, 2.)

512


Sec. 58

as long as the denial is not discriminatory. (SEC Opinion, Nov. 6, 1989.) Restrictions on right to vote by proxy in the by-laws.

The by-laws of a stock corporation (see Sec. 89, par. 1, as to non-stock.) may impose reasonable restrictions on the right to vote by proxy, so long as the restrictions do not conflict with the law or deprive the stockholders of the right thereby given them. Thus, the by-laws may provide a deadline for the submission of proxies before the scheduled meeting (SEC Opinion, Nov. 13, 1972.), or that no proxy shall be valid or voted on after a certain length of time from this date, or that no person shall vote at any meeting by virtue of any proxy executed within a certain period of time prior to such meeting, or that no such proxy shall be used at more than one annual meeting of the corporation. (5 Fletcher, p. 190; Sept. 4,1995.) If there is no deadline for the submission of proxies provided for in the by-laws, the corporation may not fix a deadline for their submission; hence, they may be submitted any time before the meeting. (SEC Opinion, July 3,1990.) Restrictions on the right to vote by proxy shall be void only where they operate unjustly, unreasonably, and oppressively so as to work the disenfranchisement of a majority of the legal voters. (SEC Opinion, July 16,1974, citing 5 Fletcher, p. 211.) Proxy given to t w o or m o r e persons.

(1) A proxy in favor of several persons is presumed by the action of the majority to represent the giver's will, and the dissenting minority of them cannot withdraw and break up the quorum and meeting to effectuate their dissent. It is customary in proxies to three or more persons to authorize a majority of those who attend or, if only one attends, then that one, to exercise the power given him. If it be given to two persons, they or either of them are usually authorized to exercise the power. (SEC Opinion, April 10,1987, citing 5 Fletcher, p. 232.)

Sec. 58

TITLE VI. MEETINGS

513

(2) Where a proxy is given to three persons in one instrument, the three of them must agree upon the vote and in case of conflict, the rule of the majority of the three governs. A proxy, however, may be revoked when it runs to several proxies who cannot agree on a vote. (Ibid., citing 5 Fletcher, p. 275.) (3) Where the corporation receives more than one (1) proxy from the same stockholder and they are all undated, the postmark or electronic dates shall be considered. If the proxies are mailed on the same date, the one bearing the latest time of day indicated in the postmark or latest time of dispatch appearing in the electronic mail, shall prevail. If the proxies are not mailed, then the time of their actual presentation is considered. That which is presented last will be recognized. (4) If the stockholder intends to designate several proxies, the number of shares of stock to be represented by each proxy shall be specifically indicated in the proxy form. If some of the proxy forms do not indicate the number of shares, the total shareholding of the stockholder shall be tallied and the balance thereof, if any, shall be allotted to the holder of the proxy form without the number of shares. If all are in blank, the stocks shall be distributed equally among the proxies. The number of persons to be designated as proxies may be limited by the by-laws. (SEC Memo. Cir. No. 4, Series of 2004.) Revocation of proxies.

Generally, proxies, even those with irrevocable terms, have always been considered as revocable, unless coupled with an interest (see infra.), 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. (Ballantine, p. 409.) (1) Last proxy given revokes all previous proxies. — The last

proxy given is deemed a revocation of all previous proxies. Consequently, when two proxies are offered bearing the same name, then the proxy that appears from the evidence to have been last executed will be accepted and counted under the theory that the latter, being the more recent proxy, constitutes a revocation of the former (SEC Opinion, Oct. 14,1991; 5 Fletcher, p. 343.), with-

514


Sec. 58

out the necessity of informing the former attorney-in-fact of the revocation of his authority. However, to prevent embarrassment on the part of the first appointee, the revocation should be communicated to him. (SEC Opinion, Feb. 7,1961.) (2) Where proxies are undated. — Where a corporation receives

more than one proxy, from the same stockholders and they are all undated, the postmark dates become important. If both were mailed on the same date, the one bearing the latest time of day of postmark is counted. If the proxies were not mailed, then the time of their actual presentation is considered. That which is presented latest is the one counted. However, should there be no sufficient time to verify the proxies, the corporate secretary must refer the matter to the presiding officer whose decisions will be binding or to a special committee of inspectors which is empowered to pass on the validity of proxies. (SEC Opinion, Nov. 13,1972, citing 1 Corporate Secretary's Ency., pp. 85,88.) Duration of proxy.

Proxies expire either by their own terms or at a statutory time after date. (1) Limited and specific proxy. — It cannot be exceeded or

extended if given, and a specific proxy, when required, cannot be implied. (SEC Opinion, May 21, 1985, citing 5 Fletcher 1952 replacement Vol., p. 236, infra.) If the proxy is for a certain meeting, it can only be used at such meeting, and if it is for a time stated, it can be used at any meeting within the period fixed not exceeding five (5) years at any one time. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. (Sec. 58.) (2) Continuing proxy. — It is one which authorizes the holder thereof to vote for the absent stockholder or member at any meeting of stockholders or members for a fixed or an indefinite period of time. If the proxy authorizes the holder to vote "at any and all regular and special meetings," without providing any limitation with respect to the period of activity, it shall be valid only for five (5) years from its date, whether or not it is coupled with an interest. If the stockholder or member does not revoke a continuing proxy, or does not appear at any meeting nor give

Sec. 59

TITLE VI. MEETINGS

515

another proxy to another person, it shall continue to be effective until its expiration. As a matter of policy, the Securities and Exchange Commission is against the use of continuing proxies without specific periods of time. (SEC Opinion, Nov. 17,1975.) A proxy may be renewed for not more than five (5) years for each renewal. It can be both specific and continuing. (SEC Opinion, Feb. 26,1985.) Sec. 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 one 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 cancelled 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 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.

516


Sec. 59

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 purposes 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 cancelled and new certificates of stock shall be reissued in the name of the transferor. The voting trustee or trustees may vote by proxy unless the agreement provides otherwise. (36a) Corporate control devices.

(1) Management control. — A corporation which is not affected by control devices, such as a voting trust, has its management determined by the votes of stockholders cast in person or by proxy at the annual election. Very often the control may lie with the management in office who can obtain proxies from the scattered stockholders to vote for directors selected by management. This results in what is sometimes called "management control." (2) Control over management. — Various expedients have been devised to obtain control with little or no investment. Among the principal control devices by which groups may seek to gain or retain control over the management by a combination of voting power or otherwise are as follows: (a) voting agreements; (b) voting trusts; (c) the classification of common shares into voting and non-voting, with the voting power vested in a small class of "management stock"; (d) management contracts, often with a parent or affiliated corporation; and

Sec. 59

TITLE VI. MEETINGS

517

(e) pyramiding." (Ballantine, pp. 416-417.) Combination and pooling agreements among stockholders. (1) Validity and legality. — It is not in violation of any rule or principle of law nor contrary to public policy for stockholders who own a majority of the stock of a corporation to cause its affairs to be managed in such a way as they may think best calculated to further the ends of the corporation, and for this purpose, to appoint one or more proxies who shall vote in such a way as will carry out their plan. Nor is it against public policy or unlawful per se for stockholders to agree or combine for the election of directors or other officers, so as to secure or retain control of the corporation, at least where the object is to carry out a particular policy with a view to promote the best interest of all of the stockholders and the agreement is fair to all the stockholders alike. And they may do this either by themselves or through their proxies, or they may unite in the appointment of a single proxy to effect their purpose. (2) Test. — According to the weight of authority, the validity and legality of such combinations and pooling agreements" depend rather upon the objects thereby sought to be attained and the acts which are done under them, and the other circumstances. Of course, such combinations or agreements are invalid if in contravention of statutes providing that no proxy shall be voted ^'Pyramiding is the use of holding companies or a series of holding companies piled in tiers, one on top of another, with the former holding controlling shares of the latter. The effect of such a series, each controlling a bare majority of the shares of the one preceding it as a subsidiary, is to give to the holder of a majority of the shares of the last corporation, having perhaps only a small capital investment, the control of the entire system or series with a capital of many millions. (Ibid.) "Pooling or voting agreements are agreements by which two or more stockholders agree that their shares shall be voted as a unit. They are usually concerned with the election of directors to gain control of the management. In close corporations, the validity of stockholders' agreements is expressly recognized in the Corporation Code. (Sec. 100.) There is no reason, however, for denying stockholders of widely-held corporations the right to enter into pooling or voting agreements if these are otherwise valid. In such agreements, the parties thereto remain the legal owners of their stocks with the right to vote them. In a voting trust agreement (infra.), the legal ownership of stock is transferred to a trustee who exercises the voting rights of the beneficial owners for the duration of the trust.

518


Sec. 59

on after a certain length of time from its date, or if they operate as an illegal restraint on the alienation of the stock, (see 5 Fletcher, pp. 249-267; see also 18 C.J.S. 1255-1256.) It is the duty of a stockholder of a corporation, in attendance at meetings of stockholders, to act fairly and in good faith. He is not justified in entering into any agreement to vote so as to perpetrate a fraud upon any other stockholder. (Palmbaum vs. Magulsky, 104 N.E. 746; see W.L. Cary, Cases and Materials on Corporations, p. 380 [1969].) (3) Where consideration for pooling agreement gives private benefit

to stockholder. — There is some authority for holding pooling agreements to be invalid if the consideration for entering into the same gives a private benefit to the stockholder. Typical cases of this sort include: (a) agreement by defendant to vote in certain manner in consideration of promise to cancel his promissory note (Stott vs. Stott, 242 N.W. 747.); (b) agreement by creditor to give shareholder part of amount he expected to receive as creditor after sale of corporate assets, if shareholder would withdraw his opposition to the sale (Brady vs. Bean, 221 111. App. 279.); (c) agreement by property owner to pay shareholder a commission if by vote of himself and others he caused corporation to purchase the property (Dieckmann vs. Robyn, 141 S.W. 717.); and (d) agreement to give defendants control of corporation in consideration of their agreement to vote for directors who would secure to one of plaintiffs a corporate office at a stated salary. (Cone vs. Russel & Mason, 48 N.J. Eq. 208; see W.L. Cary, supra, pp. 375-380.) Voting a n d other rights u n d e r a v o t i n g trust a g r e e m e n t . (1) Control in one person or a few persons. — Sometimes, it is

desired to place the control of all or part of the stock in the hands of one person or of a few persons. This may be done through a voting trust agreement. It may be defined as an agreement in

Sec. 59

TITLE VI. MEETINGS

519

writing whereby one or more stockholders of a stock corporation" transfer their shares to any person or persons or to a corporation having authority to act as a trustee for the purpose of vesting in such person or persons or corporation as trustee or trustees voting or other rights pertaining to the shares for a certain period not exceeding that fixed by the Code and upon the terms and conditions stated in the agreement. (Sec. 59, par. 1.) (2) Status of voting trustee. — A voting trust agreement transfers only voting or other rights pertaining to the shares subject of the agreement, or control over the stock, not the properties or assets of the corporation. (National Investment & Dev. Corp. vs. Aquino, 163 SCRA 153 [1988].) Under such agreement, title to the shares conveyed is transferred to the trustee on the books of the corporation. The certificates of stock covering said shares are surrendered and cancelled and new certificates are issued in the name of the voting trustee in which new certificates as well as in the entry of transfer on the books it shall appear that they are issued pursuant to said agreement. (Ibid.) (3) Status of transferring stockholder. — By its very nature, a

voting trust agreement results in the separation of the voting rights of a stockholder from his other rights. (Lee vs. Court of Appeals, 205 SCRA 752 [1992].) In such agreement, the transferring stockholder of a stock corporation parts with the voting power only but retains the equitable or beneficial ownership of the stock. A voting trustee is only a share owner vested with colorable and fictitious title for the sole purpose of voting upon stocks that he does not own. (SEC Opinion, Aug. 17,1979, citing cases.) Consequently, the transferring stockholder, although he has ceased to be a stockholder of record, retains the right of inspection of corporate books which he can exercise concurrently with "It would seem that Section 59 applies only to stock corporations. As a matter of policy, the Securities and Exchange Commission may allow members of a non-stock corporation to execute and deliver a voting trust agreement in favor of one of its members. (SEC Opinion, July 27, 1964.) The applicability of Section 59 to non-stock corporations may be inferred from Section 6(g) of Presidential Decree No. 902-A, which empowers the Commission "to pass upon the validity of the issuance and use of proxies and voting trust agreement for absent stockholders or members."

520


Sec. 59

the voting trustee, (see Sec. 74, par. 2.), to receive the dividends when they are collected by the trustee, and to recover his stock at the expiration of the trust, and other rights a stockholder may be entitled until the liquidation of the corporation. But a stockholder whose shares are covered by a voting trust agreement is disqualified from being elected as director unless he retains at least one (1) share in his name on the books of the corporation, (see Sec. 23, par. 2.) Voting trust certificates. (1) Execution and delivery. — In return for the certificates of

stock, the voting trustee executes and delivers to the stockholders voting trust certificates to show that the latter are, in reality, the owners of the shares held by the voting trustee. The owners are thus enabled to claim their rights as stockholders. They continue in their ownership of the stock transferred for all but voting purposes. (2) Transfer and effect thereof. — The voting trust certificates

are intended to be and are transferable in much the same way as stock certificates, subject, however, to the trust agreement. (Sec. 59, par. 2.) In other words, a subsequent purchaser of stock with full knowledge of the agreement takes it impressed with the trust and is bound thereby. (Boyer vs. Nesbitt, 227 Pa. 398; 76 A. 103; see Pairing vs. San Jose Petroleum, Inc., 18 SCRA 924 [1966].) But a voting trust agreement made without complying with the statutory requirements does not affect the right of a subsequent transferee, to whom the stock has been transferred on the books of the corporation, to vote the stock himself. (19 Am. Jur. 2d 197.) (3) Cancellation. — Upon the expiration of the agreed period, the voting trust certificates as well as the certificates of stock in the name of the trustee or trustees shall thereby be deemed cancelled and new certificates of stock shall be reissued in the name of the transferors. (Sec. 59, par. 6.) Powers or rights of voting trustees.

Under Section 59: (1) The trustee or trustees shall possess the right to vote and other rights pertaining to the shares so transferred and registered

Sec. 59

TITLE VI. MEETINGS

521

in his or their names subject to the terms and conditions of and for the period specified in the agreement (see par. 1.); (2) The trustee or trustees may vote in person or by proxy unless the agreement provides otherwise (last par.); (3) They may exercise, like the transferor, the rights of inspection of all corporate books and records (par. 3.); and (4) The trustee is the legal title holder or owner of the shares so transferred under the agreement, (see par. 1.) He is, therefore, qualified to be a director. (Sec. 23.) P u r p o s e o f v o t i n g trust a g r e e m e n t .

The ultimate control of a stock corporation depends upon the vote of the stockholders. Voting trust agreements are a device that may be used with the aim of controlling these votes. (1) Principal purpose. — Such an agreement as that authorized by our law makes possible a unified control of the affairs of the corporation and a consistent policy by binding stockholders to vote as a unit. It also makes it possible for a majority group of shareholders who transferred their individual holdings to a voting trustee to dispose of their shares and still retain control of the corporation through the voting trustee (see Fletcher, op. cit., pp. 209-210.) who shall have the power to vote as a unit the shares thus pooled. ILLUSTRATION: Suppose a shareholder owns 51% of the voting share of a corporation. By cumulative voting, he can elect three out of five directors and so control its operation. He may be anxious to sell some of his shares but he cannot do so without changing the controlling vote. Under Section 59, he can transfer all his shares first to a trustee, subject to the condition that the voting power shall at all times be exercised by the trustee in accordance with the instructions of the holders of a majority of the trust certificates. Then, he may sell 49% of the trust certificates and yet retain the power to vote, through the trustee, the whole of the trust shares. By this device, he may elect a majority of its directors and thus control its affairs even after the sale of a large proportion of his shares, (see Ibid.)

522


Sec. 59

(2) Purposes held valid. — Under Section 59, a voting trust agreement may confer upon a trustee not only the stockholder's voting rights but also other rights pertaining to his shares. But the principal purpose of the grant of voting rights is to acquire control of the corporation. The following purposes of a voting trust have been sustained: (a) to assure continuity of policy and management especially of a new corporation desirous of attracting investors; (b) to enable the owners of the majority of the stock of the corporation to control the corporation; (c) to vest and retain the management of the corporation in the persons originally promoting it; (d) to prevent a rival concern from acquiring control of the corporation; (e) to carry out a proposed sale of the corporation's assets and to facilitate its dissolution; (f) to enable two holding companies to operate jointly a corporation controlled by them; (g) to effect a plan for reorganization of a corporation in financial difficulty or in bankruptcy proceedings; and 15

(h) to aid a financially embarrassed corporation to obtain a loan and protect its creditors. (19 Am. Jur. 2d 196.) (3) Purposes held invalid. — Where the purpose of the voting

trust agreement was illegal or improper, it is invalid. Among purposes which have been held to render voting trusts invalid are: (a) to make a profit for participating stockholders through contracts with the corporation; (b) to interrupt the harmonious conduct of the corporate business; (c) to secure employment and salaries for the contracting parties; or "See Ramos vs. Central Bank, 41 SCRA 565 (1971); Central Bank vs. Court of Appeals, 106 SCRA 143 (1981).

Sec. 59

TITLE VI. MEETINGS

523

(d) to force minority stockholders out of a corporation unless they surrender their stock for voting trust certificates which would result in depriving them of their substantial rights in addition to the loss of their right to vote their stock. (Ibid., 196-197.) Limitations on voting trust a g r e e m e n t .

To prevent or minimize the commission of possible abuses because of the transfer of the legal ownership of the shares to the trustee, Section 59 imposes the following limitations: (1) No voting trust agreement shall be entered into: (a) For a period exceeding five (5) years at any one time (i.e., for every voting trust) except in the case of a voting trust specifically requiring a longer period as a condition in a loan agreement, in which case, the period may exceed five (5) years but shall automatically expire upon full payment of the loan (par. 1.); (b) For the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade (par. 5.); (2) The agreement must not be used for purposes of fraud (Ibid.);

(3) The agreement must be in writing and notarized and specify the terms and conditions thereof; (4) A certified copy of said agreement must be filed with the corporation and with the Securities and Exchange Commission; otherwise, it is ineffective and unenforceable (par. 1.); (5) The agreement shall be subject to examination by any stockholder of the corporation in the same manner as any other corporate book or record (par. 3.); and (6) Unless expressly renewed, all rights granted in the agreement shall automatically expire at the end of the agreed period (par. 6.), but in the case of a voting trust required as a condition in a loan agreement, it shall continue until full payment of the loan. (supra.)


524

Sec. 59

Presidential Decree No. 902-A empowers the Securities and Exchange Commission, among others, "to pass upon the validity of the issuance and use of proxies and voting trust agreements for absent stockholders or members." (Sec. 6[g] thereof.) Proxy and voting trust distinguished.

The following are the distinctions: (1) A proxy has no legal title to the shares of the stockholder giving the agency, while a trustee acquires legal title to the shares of the transferring stockholder; 16

(2) A proxy, unless coupled with interest, is revocable at anytime, while a voting trust agreement, if validly executed, is intended to be irrevocable for a definite and limited period of time; 17

18

19

(3) A proxy can only act at the specified stockholders' or members' meeting (if the proxy is not continuing in nature), while a trustee is not limited to any particular meeting; (4) A proxy votes only in the absence of the owner of the stock, while a trustee can vote and exercise all the rights of the transferring stockholder even when the latter is present; (5) A proxy is usually of shorter duration than a voting trust agreement, although under the law the maximum duration of both cannot exceed five (5) years at any one time;

"So, the proxy votes as a mere agent while the trustee, as owner. An agency (proxy) is coupled with interest where the agent (proxy) has parted with value or incurred liability at the principal's (stockholder's) request, looking to the exercise of the power (proxy) as the means of reimbursement or indemnity. (Mechem on Agency, p. 407.) Thus, where D borrows money from C and D pledges his certificates of stock to C for the debt, giving C a written continuing proxy to attend and vote the shares at meetings of stockholders (see Sec. 55.) until the debt is paid (see Sec. 58.), it is clear that D cannot revoke the proxy unless he first pays C. Even though it may in terms be irrevocable. Therefore, proxies constituting an agreement between stockholders to vote their stock in a specified manner or for a specified purpose not supported by any consideration other than a mutual agreement of the stockholders to vote as stated in the proxy would be revocable. (SEC Opinion, Oct. 17, 1988, citing 5 Fletcher [1976 ed.], p. 256.) •The voting trust has been developed precisely to achieve irrevocable proxies. (C. Rohrlich, Law and Practice in Corporate Control, p. 69.) 17

18

Sec. 59

TITLE VI. MEETINGS

525

(6) A proxy need not be notarized nor a copy filed with the Securities and Exchange Commission, while a voting trust must be notarized and a certified copy filed with the Commission; and (7) A proxy does not have a right of inspection of corporate books, while a trustee has such right. — oOo —

Title VII STOCKS AND STOCKHOLDERS Sec. 60. Subscription contract. — Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract, (n) How participation in a corporatio n acquired.

(1) In a stock corporation, a person may become a shareholder: (a) by subscription contract with an existing corporation for the acquisition of unissued shares; 1

(b) by purchase from the corporation of treasury shares; or (c) by transfer from a previous stockholder of the outstanding shares or existing subscription to shares. A corporator in a stock corporation must be a stockholder, (see Sees. 5,10.) Honorary membership in a business corporation is an incongruity and finds no sanction in law or custom. (Wolfson vs. Manila Stock Exchange, 72 Phil. 492 [1941].)

Warrant is a type of security which entitles the holder the right to subscribe to a predetermined number of the unissued capital stock of a corporation (subscription warrant) or to purchase a pre-determined number of issued or existing shares in the future (covered warrant). It is detachable if the warrant may be sold, transferred or assigned to any person by the warrant holder separate from and independent of the corresponding beneficiary securities. The latter are shares of stock or other securities of the issuer which form the basis of the entitlement in a warrant. The warrant is non-detachable, if it may not be sold, etc. (see SEC Rules, Sept. 15,1993.) 526

Sec. 60

TITLE VII. STOCKS AND STOCKHOLDERS

527

(2) In a non-stock corporation, membership is acquired by contract with the corporation, the modes of entering into which vary according to the charter and by-laws of the particular corporation. (12 Fletcher, p. 978.) Subscription contract.

Section 60 lays down the rule of what shall be deemed a subscription. (1) Subject matter. — There can be a subscription only with reference to stock which has never been issued, i.e., to an original issue of stock, or to an increase of capital stock. The subscription in case of the former may be made before or after incorporation but in case of the latter, it is always made after incorporation. (2) Form. — The law does not require that the subscription contract be in writing although it is usual and convenient for it to be in writing. (3) Absence of express contract. — A person who accepts a cer-

tificate of stock from a corporation or who acts as stockholder by participating in stockholders' meetings, making payment, or otherwise, thereby becomes a stockholder, and liable as such not only to creditors, but also to the corporation although there may have been no express contract of subscription. (Spielberger vs. Nelson, 72 Phil. 396 [1941]; SEC Opinion, Aug. 19,1992.) (4) Subscriptions under several contracts. — There is no law

prohibiting a person from subscribing to the capital stock of a corporation under several subscription agreements. On the contrary, it is common practice for a person to enter into several subscription contracts with the same corporation. (SEC Opinion, Oct. 24,1963.) (5) Subscription upon any special terms. — A corporation, under

its general power to contract, has the power to accept subscriptions upon any special terms not prohibited by law or contrary to public policy, provided they do not require the performance of acts which are beyond the powers of the corporation and do not constitute a fraud upon other subscribers or stockholders, or upon persons who are or may become creditors of the corporation. (National Exchange Co., Inc. vs. Dexter, 51 Phil. 601 [1928].)


528

Sec. 60

(6) Citizenship requirement. — Under R.A. No. 7353 (Sec. 4

thereof.), subject to exception, "the capital stock of any rural bank shall be fully owned and held directly or indirectly by citizens of the Philippines or corporations, associations or cooperatives qualified under Philippine laws to own and hold such capital stock." The naturalization of a stockholder as a citizen of another country renders his subscription contract with a rural bank automatically void by operation of law. If he fails to dispose of his shares, the corporation may purchase/reacquire the same. The reacquired shares shall become treasury shares. (SEC Opinion, July 1,1993.) A subscription contract is to be distinguished from a share contract, (see comments under Sec. 62.) Kinds of subscription.

Subscription is an offer to acquire a specified number of unissued shares of an existing corporation or one still to be formed. It may be: (1) Pre-incorporation subscription or one entered into before incorporation. It constitutes a binding contract among the subscribers (Sec. 61.); (2) Post incorporation subscription or one entered into after the 2

incorporation for the acquisition of unissued stock. It shall be deemed a subscription notwithstanding the fact that the parties refer to it as a purchase or some other contract. (Sec. 60.) The subscriber becomes a stockholder upon acceptance by the corporation of the subscriber's offer or by the subscriber of the corporation's offer even though he has not paid for his shares unless the subscription agreement otherwise provides, or when there is a constitutional, statutory, or charter provision to the contrary, or except in instances of increase in authorized capital stock (SEC Opinion, Sept. 20,1988.); (3) Conditional subscription or one which is subject to a condition, which may be a past event unknown to the parties or a A subsequent subscription should be distinguished from pre-incorporation subscription (Sec. 13.) and subscription to an increase in capital stock (Sec. 38.) where initial payment is explicitly required. Except in the two instances, the board of directors has the authority to determine the amount as well as the time and manner of payment of such subscription. (SEC Opinion, April 20, 1988.) 2

Sec. 60

TITLE VTI. STOCKS AND STOCKHOLDERS

529

future, uncertain event, that is, an event which may or may not happen, (see Art. 1179, par. 1, Civil Code.) The subscriber does not become a stockholder until the condition is fulfilled. The subscription is void if the condition is void (Art. 1183, ibid.); (4) Absolute subscription or one which is not subject to any condition and, therefore, the subscriber becomes liable on the subscription and acquires the rights of a stockholder from the time it is accepted; and (5) Subscription with a special term or one where the corpora-

tion agrees to do something, the fulfillment of which not being a condition precedent to the accrual of liability of the subscriber or the acquisition of the rights of a stockholder. It is an absolute subscription. Thus, if X enters into a subscription contract with Y Corporation subject to the special term that the corporation will transfer its principal office at another place, the non-fulfillment of the stipulation does not entitle X to rescind the subscription, his remedy being an action for damages against the corporation. However, if the term is intended by the parties as a resolutory condition (see Art. 1179, ibid.), X has the right to rescind. Subscription and purchase of stock. Under the former law, if the acquisition of unissued shares from a corporation is made after its incorporation, the contract is either a subscription or a purchase of stock depending upon its terms and the intention of the parties. The Code, under Section 60 in denning subscription, abolished the distinction between subscription and purchase of shares

3

A subscriber becomes a stockholder immediately upon acceptance of his subscription even before full payment (except where the subscription contract is subject to a suspensive condition) and may not legally be released by the corporation from the obligation to pay for his shares. In a purchase of shares (under the former law), full payment is necessary before a purchaser becomes a stockholder and the purchaser may be released by the corporation from his obligation, corporate creditors not being a privy to the contract. The corporation can enforce the contract or rescind it for non-payment of the purchase price. These distinctions will now apply only to purchase of treasury shares. It is generally held that a parol subscription for shares is not within the Statute of Frauds as an agreement for the sale of goods or choses in action. It is submitted, however, that oral subscription contracts are subject to the Statute of Frauds. Where the amount involved is P500.00 or more and no partial performance has been made, an oral subscription agreement, in the absence of some written note or memorandum thereof, will be unenforceable, (see Art. 1403[2, d], Civil Code.) For purposes of the civil law, a subscription 3

530


Sec. 60

from an existing corporation by making all such acquisitions a subscription notwithstanding that the parties denominate it as a purchase or sale or some other contract. However, Section 36(6) speaks of the power "to issue or sell stocks to subscribers" as one of the powers of stock corporations. This will embrace the sale of treasury shares. Stock option.

A stock option is a privilege granted to a party to subscribe to a certain portion of the unissued capital stock of a corporation within a certain period and under the terms and conditions of the grant exercisable by the grantee at any time within the period granted. (SEC Rule BED No. 902-A-3, Sec. 1.) The matter of giving certain persons options to subscribe at par to the capital stock of a proposed corporation for a certain period from date of incorporation is not governed by any express provision of the Code. However, articles of incorporation have given promoters and organizers of corporations options to subscribe at par for a certain period to the capital stock thereof. Before allowing such corporation to issue option stocks, however, the Securities and Exchange Commission, as a matter of policy, inquires into the reason or justification therefor and approves the same only when it is satisfied that there is valuable consideration in favor of the corporation for the grant of the right. Thus, in case of promoters and organizers of a corporation, the grant to them of an option to subscribe to its capital stock at par for a certain contract for the acquisition of shares in a corporation is, in essence, a purchase which creates a creditor-debtor relationship between the corporation and the subscriber involving the delivery of personal property and the payment of its price, although the effects of the contract are governed by the Corporation Code. However, to constitute a sale, there must be a transfer of actual ownership interests. In a case, where X exchanged his real properties for original unissued shares of a corporation as a result of which X became the majority stockholder of the said corporation, it was held that X became a stockholder by subscription. The deed of exchange cannot be considered a contract of sale because there was no transfer of actual ownership by X to a third party. X merely changed his ownership from one form to another, the ownership remaining in the same hands. What X really did was to invest his properties and change the nature of his ownership from unincorporated to incorporated form by organizing the corporation to take control of his properties and at the same time save on inheritance taxes. (Delpher Trades Corporation vs. Intermediate Appellate Court, 157 SCRA 349 [1988].) In other words, if there was a transfer of actual ownership interests to a third party, the transaction can be considered a contract of sale.

Sec. 60


531

period is approved on the basis of the reasonable value of their efforts and services in conceiving, forming, and launching the enterprise. The determination of what is reasonable compensation for their efforts in this regard rests largely upon the facts relating to the matter established after proper inquiry. At present, the policy of the Commission on the matter is to permit the grant of option shares at par for a period of three (3) years only from the time the corporation starts commercial production after which the options are required to pay a gradual yearly increase in price of the shares, depending on what may be considered reasonable. (SEC Opinion, Aug. 12,1964.) Rules g o v e r n i n g grant of stoc k options.

Before a corporation shall grant or issue any stock option, it must first secure the approval thereof from the Securities and Exchange Commission. (SEC Rule BED No. 902-A-3, Sec. 1.) The application for authority to issue any stock option shall be in the form of a petition under oath signed by the President of the corporation or any other official thereof authorized by the board of directors, stating the matters mentioned in the Rules. (Ibid., Sec. 2.) In considering petitions for the issuance of stock options, the Commission shall be guided by the following: (1) Stock options granted to stockholders ratably in proportion to their shareholdings may be allowed;

(2) Stock options granted to employees or officials who are not members of the board may also be allowed after a review of the scheme, since it would be in consonance with the policy of the government to widen corporate base and to distribute corporate profits wider and more equitably; (3) Stock options granted to persons who are not stockholders may be granted only upon a showing that the board has been duly authorized to grant the same by its charter or by a resolution of the stockholders owning at least two-thirds of all the outstanding capital stock, voting or non-voting, excluding treasury stock;

532


Sec. 60

(4) Stock options granted to directors or managing groups

and its officers must be approved in a stockholders' meeting by stockholders owning at least two-thirds of all the outstanding capital stock, voting or non-voting, excluding treasury stock. Certification by the corporate secretary as to the number of shares represented in said meeting and the number of votes cast for or against the grant of optional rights to the directors or managing groups and its officers shall be submitted. (5) Exercise of options must be done within a period of three (3) years from approval thereof unless sooner terminated by the Commission. In meritorious cases, where exercise of options could not be done within three (3) years, the same, upon approval by the Commission, may be extended; (6) No transfer of the right to an option shall be made without the approval of the Commission; and (7) In cases of grants under numbers (2), (3), and (4), the Commission shall determine the reasonableness of the plan, scheme, compensation, or consideration. (Ibid., Sec. 3.)

The approval by the Commission of stock options to international development financing institutions shall not be required, provided that the grant or issuance of said stock options shall be approved by the stockholders owning or representing at least a majority of the subscribed capital stock of the corporation, and a certified copy of the stock option plan of agreement shall be submitted to the Commission within thirty (30) calendar days from the date of execution thereof. The notice of the meeting at which the grant or issuance of said stock options shall be presented for consideration and approval by the stockholders shall indicate briefly the name of the grantee of the stock option, the consideration therefor, the duration of the option, and, if readily determinable, the number of shares covered by the option, and the exercise price thereof. (Ibid., Sec. 9.) Liability of stockholder s on u n p a id subscription to corporate creditors.

Corporations trade upon the credit of the fund created by the issue of their shares and the accretions to that fund.

Sec. 60


533

(1) Persons dealing with corporations are presumed to know that they can have recourse only to the property of the corporation and

that if the corporation is unable to meet its obligations, its shareholders cannot be compelled to make good the deficiency. But this exemption depends upon the full discharge of the subscription contract. (2) In consonance with the trust fund doctrine (see Sec. 41.), stock subscriptions are in the nature of a trust fund in the sense

that they are to be maintained unimpaired for the protection of corporate creditors. Subscribers who have not paid in full, unless they have been validly released from their undertaking, are the debtors of the corporation for the balance, and if the corporation does not enforce the liability, its creditors may do so. (see Edward A. Keller & Co., Ltd. vs. COB Group Marketing, Inc., 141 SCRA 86 [1986]; Vda. de Salvatierra vs. Garlitos, 103 Phil. 757 [1958]; 18 C.J.S. 1311-1312.) But to have a cause of action against a stockholder for his unpaid subscription, a corporate creditor must first exhaust his legal remedies against the corporation except where the corporation is insolvent for in such case recourse against the corporation would be useless and a waste of time. (3) The liability of a subscriber for unpaid subscription cannot be compensated or set-off with the value of his shares nor can stock dividends declared be applied as payment for the same. The reason

is that there is no relationship of debtor and creditor between a stockholder and the corporation with respect to his shares of stock. The corporation, however, may apply cash dividends due on delinquent stock to the unpaid balance on the subscription plus costs and expenses and withhold stock dividends from the delinquent stockholder until his stock subscription is fully paid. (Sec. 43, par. 1.) Release of subscriber f r o m liability for unpaid subscription.

An unpaid subscription is an asset to which corporate creditors may look for payment and, as a rule, they are entitled to insist that it be collected (7 R.C.L. Corp., par. 337.) since the unpaid shares are as much a part of the capital stock as the sums which have already been paid. (SEC Opinion, Sept. 1, 1971.)


534

Sec. 60

(1) Trust fund doctrine. — A subscription contract is a contract

not only between the immediate parties — the subscriber and corporation — but also among all the subscribers or stockholders and the corporate creditors by reason of the nature of a subscription contract as a trust fund, (supra.) The doctrine considers the subscribed capital as a fund, which is held in trust as security for satisfaction to creditors in case of corporate liquidation. (a) Hence, a stock corporation has no power to release an original subscriber from paying for his shares without valuable consideration for such release (see P.N.B. vs. Bitulok Sawmill, 23 SCRA 1366 [1968].) or without the unanimous consent of the stockholders and except upon a showing that creditors of the corporation would not be prejudiced (Lingayen Gulf Electric Power Co. vs. Baltazar, 93 Phil. 504 [1953].) and any agreement to do so is void and will not constitute a defense to an action to enforce liability. (Phil. Trust Co. vs. Rivera, 44 Phil. 469 [1923].) 4

(b) A stock subscription is a subsisting liability from the time it is made. The subscriber is as much bound to pay his subscription as he would be to pay any other debt. The right of the corporation to demand payment is no less incontestable (Nava vs. Peer Marketing Corp., 74 SCRA 65 [1976].), and this is true even in the absence of an express promise to pay the amount subscribed. And the fact that another subscriber fails to pay his subscription or that it is impossible to collect from some of them is not a valid defense to discharge a subscriber from his obligation. (Brown vs. Allebach, 166 Fed. 488.) Where the rights of creditors are not involved, a contract of subscription is, at least, in the sense which creates an estoppel, a contract among the several subscribers. For this reason, a subscriber cannot withdraw from the contract without the consent of all the others and thereby diminish without their consent the common fund in which all have acquired an interest. (Lingayen Gulf Electric Power Co. vs. Baltazar case.) Be that as it may, a corporation is now authorized under Section 41 to purchase its own snares with unpaid subscriptions, including delinquent shares, provided they are paid out of its unrestricted retained earnings, even without the consent of the stockholders. The release of an unpaid subscription is very similar to a purchase by the corporation of its own shares, i.e., in both cases, the subscriber or stockholder surrenders his interest in the corporation to the extent of the portion of the subscription released, or of his shareholdings purchased. 4

Sec. 60


535

(c) Until the liquidation of the corporation, no part of the subscribed capital may be returned or released to the stockholder except in the redemption of redeemable shares (Sec. 8.) without violating the trust fund doctrine. Thus, dividends must never impair the subscribed capital. Subscription commitments cannot be condoned or remitted nor can the corporation buy its own shares using the subscribed capital as the consideration therefor. (Phil. Long Distance Telephone Company vs. National Telecommunications Commission, 539 SCRA 365 [2007].) (d) A subscription contract necessarily involves the corporation as one of the contracting parties since the subject matter of the transaction is property owned by the corporation — its shares of stock. An action for rescission for alleged breach of contract is not one of the remedies or instances allowed by the Corporation Code for the distribution of capital assets and property of the corporation since it will violate the Trust Fund Doctrine, (see Sec. 41.) and the procedures for the valid distribution of assets of the corporation, (see Sec. 122.) A contrary rule will allow just any stockholder, for just about any real or imagined offense, to demand rescission of his subscription and call for the distribution of some part of the corporate assets to him without complying with the requirements of the Code. (Ong Yong vs. Tiu, 401 SCRA 1 [2003].) (2) Release through reduction of capital stock. — The release of a

subscriber from the payment of his unpaid subscription may be effected through a reduction of the capital stock, but as against creditors, such reduction can take place only in the manner and under the conditions prescribed by Section 38. (Sec. 122, par. 3.) (3) Amount of liability deducted from value of shares of stockhold-

er with appraisal right. — A stockholder with appraisal right (see Sec. 81.) may be relieved from liability to pay his unpaid subscription the amount of which shall be deducted from the fair value of his shares. (4) Consent to subscription vitiated. — A subscriber who was

induced to take subscription through fraudulent misrepresentation as to vitiate his consent thereto is entitled to annul his subscription (see Arts. 1390-1391, Civil Code.), as where, prior to his subscription, the authorized capital stock has been increased

536


Sec. 60

without notice to him for the increase would dilute his proportionate interest and influence in the corporation without his consent. (National Exchange Co. vs. Dexter, 51 Phil. 610 [1928]; Salmon, Dexter & Co. vs. Unson, 47 Phil. 649 [1925].) (5) Payment tocomefrom dividends not allowed. — Asubscription

agreement whereby the subscriber shall pay the shares subscribed by him from the dividends that may be declared thereon until the full amount of the subscription has been paid is invalid, as it is contrary to the manner of payment prescribed by the Code (see Sec. 62.), and because the agreement imposes no obligation on the subscriber to pay for the shares except as dividends may accrue upon the shares and in the contingency that no dividends are paid, there is no liability at all. The stipulation is discriminatory in favor of the subscriber. (National Exchange Co. vs. Dexter, supra.) Refund of subscription p a y m e n t s in excess of that stated in call.

The general rule on subscription is that unpaid subscriptions are debts owning to the corporation and constitute a portion of its assets to which creditors have a right to look for the satisfaction of their claims. A subscriber remains a debtor to the corporation for the unpaid balance of his subscription and continues to be charged with the obligation of remitting payment thereon, either voluntarily or upon call (see Sec. 67.) until the full payment of his subscription is satisfied. Accordingly, a stockholder who voluntarily remits an amount in excess of that stated in the call is estopped from claiming such excess because once payment is accepted by the corporation, it becomes a part of the assets of the corporation and any reduction thereof would necessarily constitute a violation of the third paragraph of Section 122. Nor has the corporation the power to grant such refund. (SEC Opinion, March 20,1972.) Refund w h e re p r o p o s e d increase in capital stock a b a n d o n e d .

A stockholders' meeting authorizing the increase of the capital stock of a corporation is merely one step in the process of legally effecting such increase. Other steps must be taken, such

Sec. 61


537

as the securing of the minimum amounts of subscriptions and payments to carry out the increase, and getting the government's approval of the increase. Unless all such steps are accomplished, there would be no valid increase in capital stock. Where only the first step has been taken, and the board of directors manifests that it cannot carry out the other steps necessary to effectuate the proposed increase, and it appears that the corporation cannot hold indefinitely or for an unreasonable period of time the payment on subscriptions to the proposed increase, the board of directors, acting in good faith, may authorize the refund of the same to the subscribers. In this case, board authorization would be sufficient to make the refund since it is the board of directors and not the body of stockholders that approves and authorizes the entering into contracts, like subscription agreements, in behalf of the corporation. All matters involving the contract, such as its acceptance or rejection, modification or termination, are decided by the board of directors, not by the stockholders, for it is the former and not the latter that represents the corporation. (SEC Opinion, Feb. 3,1971.) Sec. 6 1 . Pre-incorporation subscription. — A subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at least six (6) months from the date of subscription, unless all of the other subscribers consent to the revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription: Provided, That no pre-incorporation subscription may be revoked after the submission of the articles of incorporation to the Securities and Exchange Commission, (n) Pre-incorporation subscription mandatory.

Under Sections 13 and 14 (last par.), the Securities and Exchange Commission shall not accept the articles of incorporation of any stock corporation unless at least 25% of the authorized capital stock has been subscribed and at least 25% of the total subscription has been fully paid. Pre-incorporation subscriptions are, therefore, mandatory.


538

Sec. 61

Revocability of pre-incorporation subscription contract.

(1) Conditions for revocation. — Section 61 prescribes the conditions for the revocation of a pre-incorporation subscription contract either by the subscriber or the corporation. (2) When irrevocable. — The subscription is irrevocable for a

period of at least six (6) months from the date of subscription, notwithstanding any agreement to the contrary, except in the two instances mentioned. In any case, it cannot be revoked after the submission of the articles of incorporation to the Commission, although beyond the six (6)-month period. (3) Reason for irrevocability. — The irrevocability of pre-

incorporation subscription contracts prevents a subscriber from speculating on the stocks of a proposed corporation. Furthermore, it is to the interest of each subscriber that the others are bound by their subscriptions and the new corporation should have, as operating capital, enforceable subscriptions. Thus, the rule protects the corporation from financially irresponsible subscribers, (see Sec. 13.) Effect of filing of articles of incorporation.

(1) The subscriber is not bound indefinitely, for the period of irrevocability is limited. After submission of the articles of incorporation to the Securities and Exchange Commission, a preincorporation subscription may no longer be revoked although the period of six (6) months has already elapsed. (2) Upon incorporation of a corporation (see Sec. 19.), both the incorporators (who are signatories of the articles of incorporation) and subscribers automatically become shareholders; the subscription, which until that time was merely an offer, becomes a binding contract from which the subscriber cannot withdraw, except in the case of fraud or other matters which may operate to 5

It has been said that "the subscribers to the stock of a proposed corporation before the incorporation is accomplished are partners in the business which they have in hand." (31 Words and Phrases 271 [1957 ed.].) In view of the proviso in Section 61, acceptance by the corporation (when it comes into existence) of a pre-incorporation subscription is not necessary. 5

Sec. 62


539

discharge him from liability on his subscription. (18 Am. Jur. 2d 826.) Thus, a person who subscribes for a stock in a corporation to be formed and who does not consent to any change in the subscription is not liable if the corporation which is afterwards formed, is a different corporation from that contemplated by the subscription. Accordingly, where the authorized capital stock of a corporation was increased (from P250,000.00 to P500,000.00) after the subscription contract was entered into without the knowledge and consent of the subscriber, it was held that the subscriber (for 10 shares at the par value of P10.00 each) was not liable thereon as the change would make him a member of an association in which he never consented to become such. It would change the relative influence and profit (from 1 / 2,500 to 1 / 5,000 part of the capital stock for the 10 shares) of each member. (Salmon, Dexter & Co. vs. Unson, 47 Phil. 649 [1925].) Sec. 62. Consideration for stocks. — Stocks shall not be issued for a consideration less than the par or issued price thereof. Consideration for the issuance of stock may be any or a combination of any two or more of the following: (1) Actual cash paid to the corporation; (2) Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued; (3) Labor performed for or services actually rendered to the corporation; (4) Previously incurred indebtedness by the corporation; (5) Amounts transferred from unrestricted retained earnings to stated capital; and (6) Outstanding shares exchanged for stocks in the event of reclassification or conversion. Where the consideration is other than actual cash, or consists of intangible property such as patents or copyrights, the valuation thereof shall initially be determined

540


Sec. 62

by the incorporators or the board of directors, subject to approval by the Securities and Exchange Commission. Shares of stock shall not be issued in exchange for promissory notes or future services. The same consideration as provided for in this section, insofar as they may be applicable, may be used for the issuance of bonds by the corporation. (16a) The issued price of no-par value shares may be fixed in the articles of incorporation or by the board of directors pursuant to authority conferred upon it by the articles of incorporation or the by-laws, or in the absence thereof by the stockholders at a meeting duly called for the purpose representing at least a majority of the outstanding capital stock. (5a) Sources of corporate capital. (1) Funds furnished by shareholders. — Every corporation must

issue stock, also called equity securities, to persons who want to invest capital in it, for money, property, or services. (Sec. 62.) (a) Equity securities represent ownership rights which, in varying degrees, depending upon the type of the stock, entitle the holder to a right to participate in the earnings of the corporation and upon dissolution, those assets which remain after all corporate debts have been paid. (SEC Opinion, Sept. 12,1991, citing Fletcher, Sec. 2635.) (b) The capital contributed by stockholders in exchange for shares of stock is often referred to as equity capital. (c) The value the corporation receives for stock issued appears in the capital account section of the corporation's balance sheet. (2) Borrowings. — The capital of a corporation may be derived not only from contributions of shareholders received by it as consideration for the issuance of stock. (a) The corporation may also raise capital to finance its business from loans or advances by creditors (stockholders and/or third persons) in return for which the latter get debt securities called bonds for long-term debts. A corporate bond

may be defined as a written promise by a corporation to pay

Sec. 62


541

a definite sum of money at some future date, at a fixed rate of interest, given in return for money or its equivalent received by the corporation, sometimes secured and sometimes not. Bonds issued by a corporation are generally issued for money borrowed, which is necessary, in addition to its capital stock, to support the operations of the company. (9-A Words and Phrases [1960] 381.) The Code expressly empowers a corporation to incur, create, or increase any bonded indebtedness. The corporation can create numerous classes of debt securities giving different creditors different rights depending on the agreement it makes with its creditors, (see Sec. 38.) (b) Debt securities are liabilities of the issuer. They require the issuer to pay the holders the principal amount loaned to the corporation at a fixed maturity date and stated rate of interest. The option given to bondholders to convert their bonds to equity is not an assurance that they will opt for conversion. Hence, the convertibility feature of the bonds to shares of stock does not make them equity securities. Unless actually converted into shares, bonds cannot be classified as capital to form part of the equity portion in the balance sheet. Furthermore, such conversion takes the nature of issuance of shares by way of offset of liabilities which requires prior approval of the Securities and Exchange Commission. (SEC Opinion, Sept. 12,1991.) (3) Profits and stock dividends. — A corporation also get

internal generated funds from its profits or earnings which are reinvested in the business. Sometimes a corporation issues stock to represent the reinvested earnings, that is, stock dividends are declared by means of which the corporation retains part of the corporate earnings. (a) In the balance sheet of a corporation (see Sec. 75.), that portion of the reinvested profits against which no stock has been issued is represented by the "surplus item," while the original investment of the stockholders and that portion of the reinvested earnings against which stock dividends have been declared are represented by the "capital stock item."

542


Sec. 62

(b) The effect of the declaration of stock dividends is to convert the surplus assets into a permanent account forming part of its capital stock. (Sec. 62[5]; see Sec. 43.) Power to issue stock.

Stock corporations have the express and inherent power to issue or sell stocks. (Sec. 36[6].) The word "issue" is generally employed to indicate the making of a share contract, that is, transactions by which a person becomes the owner of shares and by which new shares contracts are created. The word "issue" is often associated with the execution and delivery of a share certificate but the issue of the shares is not dependent on the delivery of a certificate for the shares. (Ballantine, p. 467.) In other words, one can be an owner of shares in a corporation even without any certificate of shares being issued to him. 6

There is no provision in the Code which prohibits a corporation from issuing shares from the unsubscribed portion of its capital stock before the original subscriptions are fully paid. (SEC Opinion, Aug. 9,1984.) Approval of stockholders for issue of s h a r e s .

The power to issue shares of stock in a corporation is not one of those expressly granted to stockholders under the law. It is lodged in the board of directors and no stockholders' meeting or approval is necessary to consider the issuance of shares (see Datu Tagoranao Benito vs. Securities and Exchange Commission, 123 SCRA 722 [1983].) including the unsubscribed portion of the capital stock unless explicitly required under the by-laws. It is only necessary that appropriate resolution of the board of directors (see Sec. 23, par. 1.) approving the issuance be secured. 7

'The terms thereof are found in the articles of incorporation and in the certificate of stock, (see Sec. 6, pars. 1, 5.) In the case of preferred shares, the terms and conditions of the share contract may be fixed by resolution of the board of directors, where authorized in the articles of incorporation. (Ibid., par. 2.) 'A corporation desiring "to issue or sell stocks" (see Sees. 36[6], 60.) out of its unissued or unsubscribed shares of the original or increased capital stock must file with the Securities and Exchange Commission certain documents or papers as per its regulations, (see SEC Opinion, Oct. 27,1975.) The sale of treasury shares (see Sec. 9.) by the corporation is not subject to the requirements relative to the filing of application for registration of securities or their exemption from registration and for its approval by the SEC under Sections 8-10 of the Securities Regulation Code, (see App. "A.")

Sec. 62


543

But the stockholders' approval is necessary to effect an increase of the capital stock. (Sec. 38.) A p p r o v a l o f Securities a n d E x c h a n g e C o m m i s s i o n for issue of s h a r e s . (1) Issuance taken out of an increase of capital stock. — A

corporation may issue shares out of the remaining unissued shares provided that such shares have already been registered with the Securities and Exchange Commission. If the issuance will be taken out of an increase of the capital stock, prior permit/license of the offering of stock must be secured from the Commission. In all cases, unless denied in the articles of incorporation, or the issuance falls under any of the exceptions mentioned in Section 39, all the existing stockholders of record are entitled to exercise their pre-emptive right to subscribe to proposed issuance of shares in proportion to their existing shareholdings. (SEC Opinion, Aug. 17,1991.) (2) Issuance done in course of and as part of process of increasing

capital stock. — The issuance of shares of stock done in the course of and as part of the process of increasing the authorized capital stock is an exempt transaction not subject to the requirement of registration under Section 6(a, 4) of the Revised Securities Act (Part II.), there having been previous examination by the Commission of the financial condition of the corporation when the proposed increase was submitted to it for approval under Section 38. Authorized and unissued shares must first be registered with the Commission or declared exempt from registration by the Commission before they can be issued. (Nestle Philippines, Inc. vs. Court of Appeals, 203 SCRA 504 [1991].) Different m o d e s by w h i c h shares may be issued.

Admittedly, there can be no issuance of stock in any physical sense since as an incorporeal property, it is not capable of manual delivery. The following are the modes by which a corporation may issue shares of stock: (1) By subscription before and after incorporation, to original, unissued stock;

544


Sec. 62

(2) By sale of treasury stock after incorporation for money, property, or service; (3) By subscription to new issues of stock, when all the original stock has been issued and the amount of the capital stock increased; and 8

(4) By making a stock dividend. Original issue of stock c o n t e m p l a t e d .

The word "issue," as used in Section 62, refers to original issue, that is, when the stock first passes from the corporation to the hands of the stockholder. Thus, the stock cannot be sold below par or issued price at the original issue. Treasury shares may be sold for a reasonable price fixed by the board of directors even for less than the par or issued value thereof. (Sec. 9.) Consideration for issue of s t o c k s .

Shares of stocks and bonds may be issued in exchange for any or a combination of any two or more of the considerations enumerated in Section 62.' The limitations must be noted. (1) In view of Nos. (1) and (2), payment for shares of stocks must be actually received by the corporation. Hence, receivables cannot be treated as cash actually received since actual payment has yet to take place in the future. They may, however, be considered as property payment subject to verification by the Securities and Exchange Commission of its existence and collectibility and

"The term "new issues of stock" from the standpoint of the Corporation Code can be construed to include any of the following: (1) original issue(s) to incorporators/subscribers of a new corporation taken from the original authorized capital stock; (2) shares issued from the balance (unissued) of an existing authorized capital stock; (3) shares issued out of an increase in capital stock; and (4) shares issued by way of dividend. (SEC Opinion, April 18,1988.) T h e pricing of shares of stock is a highly specialized field that is better left for experts. It involves an inquiry into the earning potential, dividend history, business risks, capital structure, management, and set values of the company, the prevailing business climate, the political and economic conditions, and a myriad of other factors that bear on the valuation of shares." (Bagatsing vs. Committee on Privatization, 246 SCRA 334 [1995], citing Tan Home, Financial Management and Policy, 652-653 [8th ed.]; Leffler and Farwell, The Stock Market, 573-575 [3rd ed.].)

Sec. 62


545

the condition that the same shall be held in escrow until actual payment of the amount. (SEC Opinion, Dec. 17,1993.) (2) Declaration of stock dividends involves issuance of stocks directly paid from amounts transferred from unrestricted retained earnings to stated capital. (Sec. 62[5].) Since the retained earnings have already been applied as payment to the issuance of shares covering the stock dividend declaration, the same can no longer be reapplied as payment to subsequent subscription rights. (SEC Opinion, Dec. 7,1989.) (3) They shall not be issued in exchange for promissory notes or future services. (4) When the consideration is other than actual cash (Sec. 62[2-4].), or consists of intangible property, the value thereof shall be initially determined by the incorporators or the board of directors, subject to approval by the Securities and Exchange Commission. This means that the payment of such subscription, either at the time of incorporation or thereafter, shall be subject to approval by the Commission. The law being clear and unambiguous, no exception can be read into it. (SEC Opinion, March 28,1985.) (5) A corporation may reclassify its shares by amending its articles of incorporation and exchange outstanding shares of stockholders for stocks reclassified or converted from one class to another. (6) A corporation cannot issue its stock as a gratuity but it is lawful for a corporation to issue bonus stock to officers or employees as incentives or for services actually rendered to the corporation for in such case, the stock cannot be considered gratuitous, (see SEC Opinion, Dec. 1,1988; Sabalvaro vs. Erlanger & Galinger, Inc., 64 Phil. 588 [1937].) The issued price of no par value shares must be fixed as provided in the last paragraph of Section 62. A m o u n t of consideration.

(1) Shares of stock shall not be issued for a consideration less than the par or issued price thereof (see Sec. 65.), except treasury shares so long as the price is reasonable, (see Sec. 9.)

546


Sec. 62

(a) It is implied from Section 62 that a corporation may issue shares of stock at a price above the par or issued value. Such value does not necessarily reflect the true or actual value of stock since book or market value normally fluctuates. (b) Section 62 makes no distinction in respect to the liability of the subscriber, between shares subscribed before incorporation is effected and shares subscribed thereafter. All alike are bound to pay full par or issued value in cash or equivalent, and any attempt to discriminate in favor of one subscriber by relieving him of his liability wholly or in part is forbidden. (National Exchange Co., Inc. vs. Dexter, 51 Phil. 610 [1928].) (c) Stocks issued for a consideration less than their par or issued price are watered stocks, (see Sec. 65.)

(d) Where a corporation offered shares of stock to its shareholders at one (1) share of stock for every two (2) shares held at a price of P0.02 per share, but only a small portion of the stock offered was subscribed, it has been opined that the corporation may properly sell the remaining shares at only P0.01, the amount being the par value of the shares, on the theory that the price of P0.02 in the previous offer must have been fixed, taking into account the then prevailing stock market price of the shares but the corporation cannot legally give one (1) free share to those who paid P0.02 per share as it would violate Section 62. (SEC Opinion, Sept. 13,1972.) (2) Generally, a new issue of capital stock may be issued at a fixed price above par, provided the old stockholders are given the right to purchase their proportionate part of the issue. Thus, an agreement by subscribers to pay more than the par value of their share is not ultra vires or an attempt to increase the par value of the stock. (SEC Opinion, Sept. 23,1987, citing 11 Fletcher, Sec. 5138.) Consideration other t h a n c a s h . (1) Property; service; corporate indebtedness. — If the consider-

ation is other than actual cash (Sec. 62[2-4].), its value must be

Sec. 62


547

worth the value of the stocks issued. Hence, the need of the approval of the valuation by the Commission. (Sec. 62, par. 2.) 10

11

(a) U.S. dollars representing payment on subscription of a proposed corporation should be duly converted into Philippine peso; otherwise, they shall be considered payment by way of property. (SEC Opinion, July 28,1986.) (b) Financial instruments such as notes, shares of stocks and bonds may be classified as personal property; hence, they may be legally accepted as capital contribution. (SEC Opinion, Jan. 25, 1995.) Negotiable instruments other than promissory notes such as checks can be used in payment of stocks but they "shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired." (Art. 1249, Civil Code.) (2) Stock dividends. — Section 62(5) refers to stock dividends. When stock dividends are declared, amounts representing surplus assets are "transferred from unrestricted retained earnings to stated capital." In effect, the additional stocks are paid for by

"This is known as the "true value" rule. The other rule of which Colt vs. Cold Amalgating Co., 119 U.S. 343, 7 S. Ct. 231, 30 L. Ed. 420, is cited as the leading case, is known as the "good faith" rule in which it is recognized that the value is a matter about which men may honestly differ and in which the further questions of intention, good faith, and fraud are submitted to the court. Under this rule, to be sure, no device is tolerated to avoid an honest valuation, yet a margin is allowed for honest differences of opinion, and generally the transaction will be upheld even as against subsequent creditors if the valuation was honestly made, although it appears that there was an error of judgment and that the valuation was in fact incorrect. Of course, the transaction is always impeachable for fraud, and gross or intentional overvaluation is itself proof of fraud. (Clinton Mining & Mineral Co. vs. Jamison, 256 F. 577 [3d Cir. 1919].) Whether or not the "true value" rule has vitality today, serious doubt has been expressed that in actual practice the stockholder receives any different treatment under the "true value" rule than he receives under the New Jersey version of the "good faith" rule. (W.L. Cary, Cases and Materials on Corporations, p. 1096 [1969 ed.], citing 2 Bonbright, Valuation of Property 799.) "Stocks may be issued in consideration of previously incurred indebtedness of the corporation (Sec. 62[4].), subject to the submission of the following requirements: (1) Detailed schedule of liabilities being offset, showing all debts and credits to such liability account, date, nature of account and amount; (2) Deed of assignment executed by the creditor(s) assigning the amount due to him in payment for the unpaid subscription(s); and (3) Company's books of accounts must be kept up to date and be made available for examination by the SEC to determine that the liabilities represent valid and legitimate claims against it. (SEC Opinion, Oct. 2,1992.)


548

Sec. 62

the stockholders in cash or property out of the portion of the corporate earnings so capitalized. (3) Outstanding shares. — Under Section 62(6), a corporation may issue its own stocks in exchange for outstanding shares in case of reclassification or conversion. Thus, a holder of preferred shares with conversion privilege may give his convertible preferred shares as a consideration for the issuance of a certain number of common shares. (4) Receivables. — They may be accepted as payment for shares subject to the following conditions: (a) the SEC is able to verify the existence and collectibility of the receivables; and (b) the shares to be issued will be held in escrow until actual payment or collection of the receivables. (SEC Opinion No. 05-11, July 14, 2005.) Nature of property w h i c h m a y be taken for stock. (1) Necessary or proper in carrying on the corporate business. —

The property which a corporation may accept in exchange for its stock must be of a kind which the corporation may lawfully acquire and hold in carrying out the purposes of its incorporation, and which is necessary or proper for it to own in carrying on its business. It cannot lawfully issue stock for property which its charter does not authorize it to acquire, or for property acquired for an unauthorized purpose. (11 Fletcher, pp. 542-543.) 12

13

Under the National Internal Revenue Code (Sec. 40[c, 2].), "no gain or loss shall be recognized if property is transferred to a corporation in exchange ior stock in such a corporation of which as a result of such exchange said person, alone or together with others not exceeding four persons, gains control (at least 51% of the total voting power) of said corporation." Where shares are issued for property, the accepted procedure would involve a written offer to transfer it to the corporation in consideration of the issuance of a specified number of shares. The minutes should read that the property is necessary to the corporation and its value at least equal to the amount of shares transferred therefor. Acceptance should then be made formally by resolution of the board of directors with the further authorization to the officers to issue the stock upon receipt of the property. (W.L. Cary, op. cit., p. 44.) If the offeror is a director, see Section 32. Under the guidelines of SEC, where the payment is made in the form of land, the corresponding shares of stock to be issued thereon shall be held in escrow by the SEC and shall be released only after proof of the transfer of the Certificate of Ownership thereon in the name of the transferee corporation as submitted to the SEC within 90 days from the date of approval of the application extendible for justifiable reasons. 12

1J

Sec. 62

TITLE VH. STOCKS AND STOCKHOLDERS

549

(a) Thus, real property may be accepted as payment on subscription to the capital stock only when the same can be used in the business of the corporation, as in real estate development, subdivision, agro-industrial business, and the like, as well as for the establishment of offices. But a corporation engaged in the import and export business which does not need much real property, may not accept real properties located in the Philippines in exchange for its stock except only such property that it needs for its operation. (SEC Opinion, Feb. 13,1975.) (b) In view of the generality of Section 36(7) on corporate acquisition of real properties, implying that properties located anywhere may be contributed to the capital of the corporation, properties located abroad as may be needed and necessary to pursue the legitimate corporate objectives may be contributed. However, the place where the property is located should be considered, specifically, as to whether a foreign corporation may own realty in a given state. (SEC Opinion, May 4,1990.) (2) Possesses ascertainable pecuniary value. — The property

must be of substantial nature, having a pecuniary value capable of ascertainment (at a fair valuation equal to the par or issued value of the stock issued), and must be something real and tangible as distinguished from something constructive or speculative. (3) Capable of being transferred and applied to payment of debts. —

Furthermore, it must be of such character that it can be delivered to the corporation, instead of being merely communicated to its officers or employees, and it must be actually transferred to the corporation and capable of being transferred by the corporation. It must also be such as is capable of being applied to the payment of debts and of distribution among the stockholders, (see 11 Fletcher, pp. 544-546; see also 18 C.J.S. 673.) (a) The goodwill of a business purchased by a corporation and paid for by stock is property and is to be taken into consideration in determining the values paid for the stock, and is to be valued on the basis of worth and never arbitrarily. (SEC Opinion, June 20,1988.)

550


Sec. 62

(b) Interest in a co-ownership of property (Art. 493, Civil Code.) may be exchanged for shares of stock subject to the above conditions and Articles 1620 and 1623 of the Civil Code. (SEC Opinion, Nov. 6,1990.) The ownership of a pro indiviso interest in land or any other real property is a real right and, it the same time, a real property which may be conveyed by the co-owner. (SEC Opinion No. 08-02, Jan. 3, 2008.) Services as consideration for stock.

(1) A corporation is allowed to receive as payment for its stocks not only money and property but also labor performed for or services actually rendered to the corporation provided the transaction is in good faith and no fraud is perpetrated upon other stockholders and creditors. (SEC Opinion, Jan. 7, 1982, citing Sterling Varnish Co. vs. Svenson Co., 241 Miss. 810; 133 So. 2d 624.) (a) Compensation payable for services actually rendered to the corporation is credit which is property and whose value is ascertainable. An agreement to issue stock for services before the same is rendered is void and the corporation is not estopped to deny the services constituted payment of the stock subscription even though it has received the benefit thereof." (SEC Opinion, April 2,1976.) (b) It is legally feasible for a corporation to issue shares from the unissued portion of the capital stock to a director or stockholder for mortgaging his real estate as collateral for a loan of the corporation. "A corporation finding it necessary to borrow money for the purposes of its business may "There seems to be no reason why a corporation may not make a substantial advance payment of compensation to a prospective employee. At least under generally accepted accounting principles, such an advance payment would properly be recorded as an asset, reflecting the fact that the corporation has not yet received the benefit of the promised future services. The asset could then be amortized over the period for which the advance payment constituted additional compensation. Admittedly, such advance payments of compensation would be rare. But it would seem not uncommon to offer a cash bonus to a prospective employee in order to induce him to leave other activity and undertake the preferred new employment. Since presumably the corporation could issue stock to a prospective employee for cash and then pay the same amount of cash to him as bonus, it would seem arbitrary to prohibit the corporation from taking the short-cut of issuing stock directly to the prospective employee in consideration of his undertaking employment. (W.L. Cary, op. cit., p. 1068.)

Sec. 62


551

issue stocks in payment for services in procuring it." (Town Country Tractor Sales, Inc. vs. Goodwin, 344 S.W. 2d 338.) The "accommodation" or "service" extended by the director or stockholder for procuring the loan by offering his property as collateral may be considered as a valid consideration for the issuance of shares of stock similar to a guarantee fee charged by banks, subject to certain conditions, such as that the services rendered in exchange of the stocks be fairly and adequately valued in relation to the par or issued value of the stocks issued. (SEC Opinion, Jan. 2,1982.) (2) The corporation must comply with the requirements prescribed by the Securities and Exchange Commission for the issuance of snares out of the unissued capital stock where payment is in the form of labor or service, (see SEC Opinion, Aug. 23, 1990.) Issuance of stock to offset corporation's indebtedness. (1) Section 62(4) expressly allows the set-off or satisfaction of previously incurred indebtedness of a corporation by the issuance of its shares of stock where conflicting rights of creditors are not involved. (a) Even when payment of the debt is in terms required to be made by the corporation in money or cash, a set-off of the debt without going through this unnecessary formality is equivalent to a payment for the stock in cash. (18 C.J.S. 682683.) (b) The set-off is in effect a payment by the creditor for shares of stock of the debtor-corporation in the form of property (Sec. 62[2].) in lieu of cash (Sec. 62[1].) at the option of the corporation; and it is legally feasible to issue stock in favor of a subscriber who paid the obligations of the corporation to a third party. (SEC Opinion, Feb. 15,1974.) Credit in the hands of the creditor is property (City of Manila vs. Gambe, 17 Phil. 677 [1910].), and as any property received for shares of stock, it is subject to the same rule that it be taken at its fair valuation. (2) Should a corporation issue shares of stock in payment of its indebtedness or claims against it, the Securities and Exchange

552


Sec. 62

Commission requires, among others, that the corporation submit a report on the matter indicating the total number of shares and the total amount paid for each claim (SEC Opinion, June 5,1974.) and a deed of assignment executed by the subscriber/creditor applying his claim in consideration for the shares of stock of the corporation. (SEC Opinion, Aug. 1,1990.) Issuance of stocks in consideration of profits.

If stocks are issued in consideration of profits earned by the corporation, but not distributed among the stockholders, such issue is called stock dividends. Such consideration is permitted under Section 62(5). Once declared and issued, stock dividends are fully paid; hence, any sale or transfer thereafter is no longer an original issue and may be disposed of at a price below par value, (see SEC Opinion, April 24,1968.) For when stock has once been issued and fully paid for, there is nothing to prevent a stockholder from returning the whole or a part thereof to the corporation (see Sec. 9.), or to a trustee for its sale, to be disposed of for its benefit. In such a case, the corporation may dispose of the stock at less than its par or issued value without violating Section 62 which regulates the issue of stock and without rendering purchasers thereof liable to creditors beyond the price which they agree to pay. (Ibid., citing 11 Fletcher, p. 719.) Fixing of issued price of no par s h a r e s .

(1) Mode. — If the issued price of no par value shares is not fixed in the articles of incorporation, the board of directors may fix the same only if authorized by the articles of incorporation or the by-laws, or in the absence thereof, by the stockholders. (Sec. 62, last par.) Thus, the issued price of no par shares may vary from time to time as it is usually fixed on the basis of their book value. But they may not be issued for a consideration less than the value of P5.00 per share, (see Sec. 6, par. 3.) (2) Change in value of issued shares. — The stated value of the

issued no par value shares cannot be changed anymore in view of Section 6 (par. 3.) which provides that "shares of capital stock

Sec. 62


553

issued without par value shall be deemed fully paid and nonassessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto." (3) Change in value of unissued shares. — Any change in value

of no par value shares shall apply only to the unissued portion of the capital stock of the corporation. (SEC Opinion, July 31,1979.) C o n s i d e r a t i o n for issue of b o n d s .

Any or a combination of the considerations as provided for in Section 62 insofar as they may be applicable (Nos. 1 to 4 thereof.), may be used for the issuance of bonds by a corporation, (par. 3.) The bonds are subject to approval of the Securities and Exchange Commission which is given the authority to determine the sufficiency of the terms thereof. (Sec. 38, last par.) Some statutes prohibit a corporation from issuing bonds except for money, labor done, or property received. Such a provision is an expression of public policy and is intended to protect creditors to prevent the distribution of worthless securities and to protect the stockholders against spoliation. It is intended to require every issue of bonds to represent substantial values received by the corporation and to impose upon those charged with the disposition of corporate securities the duty to procure a fair and reasonable equivalent in money, labor, or property actually contributed to the corporation. (19 Am. Jur. 2d 515.) Registration a n d sale of securities.

The Securities Regulation Code (SRC) (Appendix "A.") prohibits the sale or offer for sale of any security except an exempt security or one sold in an exempt transaction, unless such security shall have been registered and permitted to be sold by the Securities and Exchange Commission. (1) Registration requirement. — Securities shall not be sold or offered for sale or distribution within the Philippines, without a registration statement duly filed with and approved by the Commission. Prior to such sale, information on the securities, in such form and with such substance as the Commission may prescribe, shall be made available to each prospective purchaser.

554


Sec. 62

(a) The Commission may conditionally approve the registration statement tmder such terms as it may deem necessary. (b) The Commission may specify the terms and conditions under which any written communication, including any summary prospectus, shall be deemed not to constitute an offer for sale. (c) A record of the registration of securities shall be kept in a Register of Securities in which shall be recorded orders entered by the Commission with respect to such securities. Such register and all documents or information with respect to the securities registered therein shall be open to public inspection at reasonable hours on business days. (d) The Commission may audit the financial statements, assets and other information of a firm applying for registration of its securities whenever it deems the same necessary to insure full disclosure or to protect the interest of the investors and the public in general. (Sec. 8, ibid.) (2) Exempt securities. — They are those which are exempt from the provisions of the SRC and, therefore, need not as a general rule, be registered in order to be issued or sold. Under the SRC, the requirement of registration under Section 8 (supra.) shall not apply to any of the following classes of securities: (a) Any security issued or guaranteed by the Government of the Philippines, or by any political subdivision or agency thereof, or by any person controlled or supervised by, and acting as an instrumentality of said Government; (b) Any security issued or guaranteed by the Government of any country with which the Philippines maintains diplomatic relations, or by any State, province or political subdivision thereof on the basis of reciprocity. However, the Commission may require compliance with the form and content of disclosures the Commission may prescribe; (c) Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body; (d) Any security or its derivatives the sale or transfer of which, by law, is under the supervision and regulation of the

Sec. 62


555

Office of the Insurance Commission, Housing and Land Use Regulatory Board, or the Bureau of Internal Revenue; and (e) Any security issued by a bank except its own shares of stock. The Commission may, by rule or regulation after public hearing, add to the foregoing any class of securities if it finds that the enforcement of the SRC with respect to such securities is not necessary in the public interest and for the protection of investors. (Sec. 9, ibid.) (3) Exempt transactions. — The requirement of registration

under Section 8 (infra.) shall not apply to the sale of any security in any of the following transactions: (a) At any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in insolvency or bankruptcy; (b) By or for the account of a pledge holder, or mortgagee or any other similar lien holder selling or offering for sale or delivery in the ordinary course of business and not for the purpose of avoiding the provisions of the SRC, to liquidate a bona fide debt, a security pledged in good faith as security for such debt; (c) An isolated transaction in which any security is sold, offered for sale, subscription or delivery by the owner thereof, or by his representative for the owner's account, such sale or offer for sale, subscription or delivery not being made in the course of repeated and successive transactions of a like character by such owner or on his account by such representative and-such owner or representative not being the underwriter of such security; (d) The distribution by a corporation, actively engaged in the business authorized by its articles of incorporation, of securities to its stockholders or other security holders as a stock dividend or other distribution out of surplus; (e) The sale of capital stock of a corporation to its own stockholders exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale of such capital stock;

556


Sec. 62

(f) The issuance of bonds or notes secured by mortgage upon real estate or tangible personal property, where the entire mortgage together with all the bonds or notes secured thereby are sold to a single purchaser at a single sale; (g) The issue and delivery of any security in exchange for any other security of the same issuer pursuant to a right of conversion entitling the holder of the security surrendered in exchange to make such conversion, provided, that the security so surrendered has been registered under the SRC or was, when sold, exempt from the provisions of the SRC, and that the security issued and delivered in exchange, if sold at the conversion price would, at the time of such conversion, fall within the class of securities entitled to registration under the SRC. Upon such conversion, the par value of the security surrendered in such exchange shall be deemed the price at which the securities issued and delivered in such exchange are sold; (h) Broker's transactions, executed upon customer's orders, on any registered exchange or other trading market; (i) Subscriptions for shares of the capital stock of a corporation prior to the incorporation thereof or in pursuance of an increase in its authorized capital stock under the Corporation Code, when no expense is incurred, or no commission, compensation or remuneration is paid or given in connection with the sale or disposition of such securities, and only when the purpose for soliciting, giving or taking of such subscriptions is to comply with the requirements of such law as to the percentage of the capital stock of a corporation which should be subscribed before it can be registered and duly incorporated, or its authorized capital increased; (j) The exchange of securities by the issuer with its existing security holders exclusively, where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange; (k) The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines during any twelvemonth period; and

Sec. 63


557

(1) The sale of securities to any number of the following qualified buyers: 1) Bank; 2) Registered investment house; 3) Insurance company; 4) Pension fund or retirement plan maintained by the Government of the Philippines or any political subdivision thereof or managed by a bank or other persons authorized by the Bangko Sentral to engage in trust functions; 5) Investment company; or 6) Such other person as the Commission may by rule determine as qualified buyers, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial and business matters, or amount of assets under management. The Commission may exempt other transactions, if it finds that the requirements of registration under this Code is not necessary in the public interest or for the protection of the investors such as by reason of the small amount involved or the limited character of the public offering. Any person applying for an exemption shall file with the Commission a notice identifying the exemption relied upon on such form and at such time as the Commission by rule may prescribe, and with such notice shall pay to the Commission a fee equivalent to one-tenth (1/10) of one percent (1%) of the maximum aggregate price or issued value of the securities. (Sec. 10, ibid.) Sec. 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 indorsed by


558

Sec. 63

the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation so as to show 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) Nature of a certificate of stock. (1) A certificate of stock is a written instrument signed by the

proper officer of a corporation stating or acknowledging that the person named therein is the owner of a designated number of shares of its stock. It indicates the name of the holder, the number, kind and class of shares represented, and the date of issuance. (2) The certificate is not stock in the corporation but is merely evidence of the holder's interest and status in the corporation, his

ownership of the share represented thereby, but is not in law the equivalent of such ownership. It expresses the contract between the corporation and the stockholder. It is based on the number of shares owned by a stockholder. (3) It is not essential to the existence of a share of stock or the

creation of the relation of shareholder (13 Am. Jur. 2d 769; see Tan vs. Securities and Exchange Commission, 206 SCRA 740 [1992].), or the exercise of the rights of a stockholder provided the subscription contract to take stock or the transfer of stock has been duly made and recorded. It is a prima facie evidence that the holder is a shareholder in a corporation. In the absence of the certificate, the ownership of stocks may be shown by the record thereof in the corporate books. (see Sec. 74.) 15

The mere inclusion of a person as a shareholder in the General Information Sheet (GIS) filed with the Commission is insufficient proof that one is a shareholder in corporation where there is no certificate of stock in his name, nor any written document such as a assignment in his favor, duly registered in the stock and transfer book of the corporation. The information in the GIS will still have to be correlated with the books of corporation. As between the GIS and the corporate books, the latter controls. (Lao vs. Lao, 567 SCRA 588 [2008].) 15

Sec. 63


559

(4) A certificate of stock, like the shares it represents, is property, but it has a value separate and distinct from the value of the shares represented. (Ibid.) It may be brought out of the domicile of the

corporation, being a personal property of the owner. (SEC Opinion, July 29,1976; Fletcher, pp. 60-61; see Sec. 63.) (5) It is not a negotiable instrument. (see Sec. 1, Act No. 2031.) 16

Certificates of stock may be issued only to registered owners of stock. The issuance of "bearer" stock certificates is not allowed under the law. (SEC Opinion No. 05-02, Jan. 31, 2005.) Although it is sometimes regarded as quasi-negotiable, in the sense that it may be transferred by indorsement, coupled with delivery, it is well-settled that it is non-negotiable, because the holder thereof takes it without prejudice to such rights or defenses as the registered owner's or transferor's creditor may have under the law except insofar as such rights or defenses are subject to the limitations imposed by the principles governing estoppel. (De los Santos vs. McGrath, 96 Phil. 577 [1957]; Tan vs. Securities and Exchange Comission, 206 SCRA 740 [1992].) Thus, where the owner of a street certificate of stock (one which is indorsed in blank and, therefore, transferable by mere delivery) delivered the certificate to a broker who pledged it to a bank, which had no knowledge that the certificate did not belong to the holder (broker), he is estopped from claiming title or interest therein as against the pledgee bank. A bona fide pledgee or transferee of a stock from the apparent owner is not chargeable with notice of the limitations placed on it by the real owner, or any secret agreement relating to the use which might be made of the stock by the holder. (Santamaria vs. Hongkong and Shanghai Banking Corp., 89 Phil. 780 [1951]; see Bachrach Motor Co. vs. Ledesma, 64 Phil. 681 [1937].) Issuance of certificate of stock.

Every certificate of stock "shall be signed by the president or vice-president of the corporation, countersigned by the cor"Certificates of stocks are expressly declared to be negotiable instruments by the U.S. Uniform Commercial Code. (Sees. 8-105[l] thereof.) Moreover, the Uniform Stock Transfer Act is regarded as giving full negotiability to certificates of stock and it is said that the purpose of such Act is to make the stock certificate, to the fullest extent possible, the representative of the shares. (18 Am. Jur. 2d 887-888.)

560


Sec. 63

porate secretary or assistant secretary, and sealed with the seal of the corporation" and "shall be issued in accordance with the by-laws." (Sec. 63; see Sec. 36[4].) (1) Compliance with requirements. — All certificates of stock

should conform to the above provision of law. Other requirements may be made pursuant to the articles of incorporation or valid by-laws. Accordingly, a typewritten statement advising a stockholder of his ownership in a corporation cannot be a substitute to a formal stock certificate. (SEC Opinion, Oct. 20,1970.) The most, perhaps, is to treat it as a temporary receipt for stock subscription certifying the number of shares. (SEC Opinion, Sept. 21,1970.) (2) Compliance with court order. — A corporation is not liable

to a stockholder for cancelling outstanding certificates and issuing new ones in lieu thereof where it does so in compliance with a lawful requirement. Thus, a corporation having notice is not required to publish a court order for the nullification of shares of stocks and the subsequent issuance of a new certificate in lieu of the nullified one, as such order is binding against any subsequent purchaser of the outstanding certificate of stock without notice of order. (SEC Opinion, March 3,1982.) (3) An internal affair of the corporation. — A corporation does

not have to secure the prior consent of the Securities and Exchange Commission for the issuance of certificates of stock inasmuch as it is a matter which the law (Sec. 47[9].) has left for the corporation to decide. (SEC Opinion, Sept. 29,1964.) It is an internal matter which the corporation can resolve by itself. Only stock corporations can issue stock certificates. (4) Co-owners. — Certificates of stock may be issued with the conjunctive "and/or" placed between the names of the parties who, apparently, are co-owners. It is understood that the above may be transferred upon the indorsement of both stockholders or either of them, and the right to vote the share may also be exercised by both, or all, or any of them. (SEC Opinion, March 14, 1989.) (5) Husband and wife. — Where the property relation between the husband and wife is governed by the system of absolute community of property, the rules on co-ownership shall apply

Sec. 63


561

to the community of property. Accordingly, the spouses, being co-owners thereof, may request the corporate secretary to issue the certificates of stock in the names of both of them. This is true even if the certificates are still in their respective names. However, if the shares are among the excluded properties under Section 92 of the Family Code or where the spouses have chosen a marriage settlement other than the system of absolute community of property, the transfer of shares between the husband and wife shall be recorded in the stock and transfer book only upon compliance with Section 63. As co-owners, they shall be considered as one stockholder. (SEC Opinions, Sept. 4, 1990 and Nov. 15,1991.) 17

Delivery essential to issuance of certificate. Delivery, actual or constructive, is essential to the issuance of a certificate of stock. Making a certificate and mailing it to the stockholder is an issue and delivery thereof. (1) Stock sold through a public instrument. — It has been held

that "a formal contract of purchase and sale set in a notarial document is equivalent to actual delivery of the certificates themselves" (Uy Piaco vs. McMicking, 10 Phil. 286 [1908].), but only as between the parties. (2) Certificate retained by corporation. — There is no issuance of stock certificate (therefore, no delivery) where it is never detached from the stock books although blanks therein are properly filled up, if the person whose name is inserted therein has no control over the books of the corporation. But the issuance and delivery is not essential where it appears that the persons sought to be held as stockholders are officers of the corporation and have the custody of the stock book and can detach the certificate at any "Art. 75. The future spouses may, in the marriage settlements, agree upon the regime of absolute community, conjugal partnership of gains, complete separation of property, or any other regime. In the absence of a marriage settlement, or when the regime agreed upon is void, the system of absolute community of property as established in this Code shall govern. (119a) Art. 90. The provisions on co-ownership shall apply to the absolute community of property between the spouses in all matters not provided for in this Chapter. (Family Code)

562


Sec. 63

time. Where, however, the certificate made out in the name of the subscriber has never been delivered to him but is retained by the corporation as security for notes given by him for the unpaid portion of his subscription, the certificate cannot be considered as issued, and this is true even though the subscriber votes the stock and though dividends are declared on it which are credited on the notes, (see Tuazon vs. La Provisora Filipina, 67 Phil. 36 [1938], citing 11 Fletcher, pp. 324-325.) (3) Certificate returned to transferee after cancellation and

issuance of certificate. — Where as a result of the sale of stock, the corresponding certificate was cancelled and a new certificate was subsequently issued in the name of the transferee, there was already delivery notwithstanding the return of the cancelled certificate to the transferor for his indorsement and his deliberate non-indorsement. In such a case, there is no necessity for the certificate to be indorsed. All the acts required for the transferee to exercise his right over the acquired stock are present and even the corporation is protected from other parties, considering that the said transfer was earlier recorded or registered in the corporate stock and transfer book. (Tan vs. Securities and Exchange Commission, 206 SCRA 740 [1992].) Remedies of stockholders w h e r e corporatio n refuses to issue certificate.

A certificate of stock is not necessary to render one a stockholder in a corporation. Nevertheless, a certificate of stock is the paper representative or tangible evidence of the stock itself and of the various interests therein, and every stockholder has a right to have a proper certificate issued to him as soon as he has complied with the conditions which entitle him to one as by payment for his shares or the like. (11 Fletcher, pp. 329-331.) (1) A suit for specific performance of an express or implied contract and (2) a petition for mandamus when appropriate are the common remedies to compel the issuance of certificates of stock. (3) A stockholder may, however, sue instead for damages where specific performance cannot be granted, or (4) in some instance, may rescind his contract of subscription and recover the consideration paid. (11 Fletcher, p. 330.)

Sec. 63


563

But one who has no subscription contract with a corporation cannot compel the corporation to issue certificates of stock for the shares paid for by him where certificates for the said shares had already been issued in the name of an officer of the corporation with whom the plaintiff had agreed on a joint venture to be conducted in the name of the corporation and to whom the payment was given, his remedy being against such officer. (British American Engineering Corporation vs. Alto Surety & Insurance Co., Inc., 18 SCRA 23 [1966].) Effect of over-issuanc e of s h a r e s .

A corporation cannot issue shares whether in consideration for cash or property, or as stock dividends, in excess of the maximum number authorized in its articles of incorporation for they do not exist. (1) The rule established by the decisions is that over-issued stock is absolutely void. Consequently, the certificate of stock which represents the over-issued stock is also void. The holder of the certificate, whether he be the original holder or a bona fide transferee, regardless of his good faith, does not become a stockholder. He does not acquire any right nor does he incur the liability of a stockholder. (2) An action may be maintained by the corporation to cancel over-issued shares. But the corporation may be held liable in damages or for restitution to one who had innocently advanced money in the belief that the shares were lawfully alloted. (W.L. Cary, op. cit., p. 1129, citing Stevens on Corporations, p. 432.) Unauthorized or f o r g ed certificates. (1) Remedy of corporation. — Certificates of stock may be

cancelled where the stock represented was issued through a mistake of fact or under such circumstances that they are either void or voidable. The corporation may maintain a suit to cancel the certificates and enjoin their transfer, or the voting by the holders, or the payment of dividends on the shares. (SEC Opinion, citing 11 Fletcher, pp. 336, 338.) (2) Rights of holder. — The corporation may or may not be

bound to make good such certificates.

564


Sec. 63

(a) One who acquires a stock certificate knowing that it was fraudulently issued by officers of the corporation, or with knowledge of facts sufficient to charge him with notice of the fraud, is entitled to no rights as a stockholder. (b) It is held, however, that if a fraudulently issued stock has reached the hands of a bona fide holder for value and the number of shares represented thereby will not cause an overissue, the corporation will be held bound to make good such certificate to the extent of any shares owned by the company, provided that the stock was issued by officers or agents held out by the corporation as having the authority to do so. Fraudulent stock certificates are not, however, certificates in legal contemplation and give no rights of their own force. The act of the corporation in issuing them, where they have been accepted and acted upon in good faith by another, is deemed merely to estop the corporation from denying their validity. (c) Under the U.S. Uniform Commercial Code (Sees. 8-206 thereof.), the lack of genuineness is a complete defense even against a purchaser for value and without notice. However, a forged or unauthorized signature on the issue of a stock certificate is effective in favor of a purchaser for value without notice where the signing is done by persons entrusted with the signing and handling of the certificates. (18 Am. Jur. 2d 775-776.) Requirements for transfer of stock. Section 63 expressly authorizes the transfer of the shares represented by the certificate by its indorsement by the owner or his agent and delivery, so indorsed, to the transferee. Such delivery is the operative act of transfer of title to the shares from the lawful owner to the transferee. (Rural Bank of Lipa City, Inc. vs. Court of Appeals, 366 SCRA 188 [2001]; Bitong vs. Court of Appeals, 292 SCRA 503 [1998]; Rivera vs. Florendo, 144 SCRA 643 [1986].) The failure to deliver the stock certificates representing the shares purchased amounts to a substantial breach of contract which gives rise to a right to rescind the sale. (Raquel-Santos vs. Court of Appeals, 592 SCRA 169 [2009].)

Sec. 63


565

(1) Where no certificate has as yet been issued or where for some reason it is not in the possession of the stockholder, fully (or partially) paid shares may be transferred by means of a deed of assignment duly recorded in the books of the corporation. (2) Any sale or transfer of shares from stockholders of a corporation to third parties need not be reported to nor require an authority from the Securities and Exchange Commission, (see Trueste, Sr. vs. Sandiganbayan, 145 SCRA 508 [1986].) However, to be valid against the corporation and third parties, such transfer must be recorded in the stock and transfer book of the corporation. (3) The transferee must present the indorsed stock certificate to the secretary of the corporation who shall effect the transfer in the corporate books, issue a new stock certificate in favor of the transferee, and cancel the former certificate. A corporation has no authority to cancel a certificate which is not in its possession or to which it has no right. It will be liable to a bona fide holder of the old certificate if, without demanding of said certificate, it issues a new one. (4) While transfer of shares ordinarily does not require prior approval of the Commission, the issuer corporation is required to have its entire authorized capital stock registered pursuant to Section 8 of the Securities Regulation Code (Appendix "A.") where the outstanding shares are to be sold to the public, that is, a number of persons indiscriminately (SEC Opinion, Dec. 14, 1994.) unless it can be shown that the transaction is expressly exempt under Section 10 of the Code. Right to transfer fully paid shares of stock.

As a general rule, shares of stock can be transferred only by the registered owner or an authorized person, (see Sec. 68.) (1) Right inherent as an incident of ownership. — Shares of

stock are personal property and the owner, as in the case of other personal property, has an absolute and inherent right as an incident of his ownership, to sell and transfer the same at will, except insofar as the right may be reasonably restricted by

566


Sec. 63

the articles of incorporation, or by a valid by-law, or by a valid agreement between him and the corporation. In the absence of such restrictions, a bona fide transfer does not require the consent of the corporation, and cannot be prevented by it or by its officers. (12 Fletcher, pp. 206-207; see Remo, Jr. vs. Intermediate Appellate Court, 172 SCRA 405 [1989].) (2) Legal limitation. — 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 such restrictions must have their source in the law as the corporation itself cannot create such impediment. In the absence of such power, it cannot ordinarily inquire into the legality of the transfer nor question the consideration upon which the sale is based. (Rural Bank of Salinas, Inc. vs. Court of Appeals, 210 SCRA 510 [1992].) Sale of subscription rights.

The rule is different where only the right to subscribe is assigned by the subscriber to another. (1) Consent of corporation. — Assuming there is no restriction on the transfer of shares, a stockholder may transfer or assign shares of stock forming part of his partially paid stockholdings. (a) It is necessary, however, to secure the consent of the corporation, by way of resolution of the board of directors, to the transfer or assignment of shares which are not fully paid so that the transfer may be recorded in the stock and transfer book of the corporation (SEC Opinion, July 22, 1965.), since the transfer constitutes a novation (i.e., substitution of debtor) of the contract of subscription between the corporation and the transferor which requires the consent of the creditor, (see Art. 1293, Civil Code.) The corporation can accept or refuse to accept the transferee. It alone is the judge of the financial responsibility of the transferee. (SEC Opinion, Nov. 12,1976, citing Butts vs. King, 125 Atl. 654.) (b) The acceptance by the corporation of the transferee as a subscriber in the place of the original subscriber need not be by formal action of the corporation expressed by vote or

Sec. 63


567

otherwise, but instead may be implied from acts and course of conduct of the corporation. (12 Fletcher, p. 301.) Thus, should the corporation record the assignment of subscribed shares of stock in its stock and transfer book, it can be treated as an implied consent to such assignment. (SEC Opinion, Nov. 12,1976.) (c) It is only upon full payment of the whole subscription that a stockholder can transfer the same to several transferees. However, the entire subscription, although not yet fully paid, may be transferred with the consent of the corporation. The Securities and Exchange Commission only allows transfer to a single transferee provided that the transfer is approved by the board of directors and accompanied by an affidavit of assumption of the unpaid balance by the transferee. (SEC Opinion, March 8, 1990 and Sept. 17, 1990.) It is only upon full payment of the whole subscription that a stockholder can transfer the same to several transferees. (SEC Opinion, June 3,1994.) (2) Consent of creditors. — It is not necessary to secure the

actual consent of the creditors because transfers made and accepted by the corporation in prejudice to the rights of the creditors can be set aside on the ground of fraud. (Ibid., citing Butts vs. King, 125 Atl. 654.) Restrictions on transfer of stock.

(1) In general. — The law (Sec. 47[9].) grants to stock corporations the authority to determine in the by-laws "the manner of issuing certificates" of shares of stock. However, the power to regulate is not the power to prohibit, or to impose unreasonable restrictions on the right of stockholders to transfer their shares, (see Tan vs. Securities and Exchange Commission, 206 SCRA 740 [1992].) It merely authorizes the corporation to adopt regulations as to the formalities and procedure to be followed in effecting transfer. Furthermore, the power to impose restrictions on transfer of shares cannot be exercised unless conferred upon the corporation by law or its articles of incorporation (see Nava vs. Peers Marketing Corporation, 74 SCRA 65 [1976].), and the restrictions

568


Sec. 63

must be stated in the certificate of stock to bind third persons, (see Sec. 6, pars. 1, 5.) The reason is that such restrictions are essentially contractual in nature between the stockholders and the corporation and hence, must be embodied in their contract — the articles of incorporation — and furthermore, the shares of stock burdened with such restrictions may fall into the hands of innocent purchasers. (SEC Opinion, Jan. 13,1994.) (2) Where transfer subject to approval or prohibited. — A by-

law which prohibits a transfer of stock without the consent or approval of all the stockholders or of the president or board of directors is illegal as constituting undue limitation on the right of ownership and in restraint of trade. (Fleishcer vs. Botica Nolasco Co., Inc., 47 Phil. 583 [1925]; In re Klus, 67 Wis. 401.) A provision in the certificate that it is transferable only to some person first approved by the board of directors unreasonably restricts the right of the stockholder to dispose of his shares. (Douglas vs. Aurora Daily News Co., 160 111., A. 506.) For the same reason, the condition "non-transferable" appearing on certificates of stock is null and void. (Padget vs. Babcock & Templation, Inc., 59 Phil. 232 [1933].) (3) Where transfer subject to "first refusal." — Provisions in

articles of incorporations requiring stockholders desiring to sell their stocks to offer them first to the corporation or to the existing stockholders at a given reasonable date before disposing of them to third persons may be considered valid and enforceable. (SEC Opinion, Feb. 23, 1993.) (a) But where the purpose of the transfer is merely to qualify the nominee as director without transferring the beneficial ownership of the share, the transfer need not comply with the "first refusal" provision in the articles of incorporation (infra.), for to rule otherwise would create an injustice to corporate stockholders who, under the law, have the right to be represented in the board. Such transfer would be more of a trust and not a transfer of ownership. The transferee should be described in the corporate books and the certificate to be issued merely as nominee or trustee of the transferor. The notation shall serve as notice to both the corporation and third parties that the transferee only holds

Sec. 63


569

the share as nominee for the benefit of the real owner. (SEC Opinion, Feb. 15,1991.) (b) It has been opined that a holder of stock as a mere trustee for the real owner cannot exercise the option in his own right. Thus, where eight (8) directors of X Corporation were elected to their position upon transfer to them of one (1) share each of X Corporation's stock in trust for Y Corporation in order to qualify them as members of the board, said directors cannot exercise the option granted to the stockholders (and the Corporation). The directors are trustees of the stockholders for the benefit of Y Corporation, the cestui que trust. However, should the bona fide stockholders and the corporation fail to exercise their respective option to purchase the offered stock within the period prescribed, then the directors may so purchase in their own right. (SEC Opinion, June 13, 1985.) (4) Where suspension of power for a certain period has a benefi-

cial purpose. — Where "the suspension of the power to sell has a beneficial purpose, results in the protection of the corporation as well as the individual parties to the contract, and is reasonable as to the length of time of the suspension," the restriction is valid and binding upon the stockholder. Thus, in a case where two of the creditors who took over the business of a company in financial distress and accepted stocks therein in payment of their respective credits, entered into an agreement, after becoming the two largest stockholders of the new corporation, that, in view of the fact "that the success of said corporation depends, now and for at least one year next following, in the larger stockholders retaining their respective interests in the business of said corporation," neither of the two would "sell, transfer, or otherwise dispose of their present holdings of stock" in said company, "till after one year from the date hereof," with a stipulation for the payment of liquidated damages by the violator, the agreement suspending the power to sell the stocks referred to was upheld as against the contention that it was illegal, was in restraint of trade, and, therefore, offended public policy. (Lambert vs. Fox, 20 Phil. 588 [1911].)

570


Sec. 63

(5) Where certain percentage of Filipino ownership prescribed.

— Corporations which will engage in any business or activity reserved for Filipino citizens are required to indicate in the articles of incorporation and in all the certificates the restriction against the "transfer of stock or interest which will reduce the ownership of Filipino citizens to less than the required percentage of the capital stock as provided by existing laws x x x." (Sec. 15 [eleventh].) (6) Where shares registered with the Revised Securities Act. —

Where the shares held by the public are registered under the Revised Securities Act (Part II.), an investor wishing to acquire said shares is subject to the provisions of said act relative to "tender offers," particularly Section 33 thereof. (SEC Opinion, Sept. 2,1991.) (7) Where restrictions not clearly expressed. — Stock transfer

restrictions impair property rights of stockholders so that any restriction to be valid and binding, should be clearly and explicitly stated in the articles of incorporation, and in case of doubt, the same should be construed in favor of the transferor. Accordingly, a restriction expressed only as one on sale should be construed as applicable only to transfer by sale and not to other forms of transfer not expressly included therein. Thus, it was held that a gift of corporate stock does not constitute sale within the meaning of a corporation's right of first refusal in case of sale of stock. (SEC Opinion, March 21,1991, citing 12 Fletcher, Cyc. Corps., Sec. 5416.5.) Option to purchase s h a r e s offered for sale.

(1) Close corporations. — In such corporations, restrictions reasonably protecting existing stockholders in their interests by giving them or the corporation the option to purchase stock offered for sale, or the right of first refusal in case of sale of stock are lawful as promotive of good management and sound business enterprise, (see Casper vs. Kaltz-Simmer, 150 N.W. 1101.) Such restrictions must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock; otherwise, the same shall not be binding on any purchaser in good faith. (Sec.

Sec. 63


571

(2) Widely-held corporations. — Even in such corporations, the same restriction is legally permitted provided it is stated in the articles of incorporation (see Sec. 6, par. 1.) and the option period is not too long. A period of one (1) month is sufficient for the stockholders or the corporation to signify their or its desire to buy the shares of stock being offered for sale by a stockholder. (SEC Opinion, Oct. 13, 1964.) Considering that shares of stock burdened with restrictions on transferability may fall into the hands of innocent purchasers, the Securities and Exchange Commission, as a matter of policy, also requires that the restrictions be printed also on the corresponding stock certificate (SEC Opinion, Oct. 13, 1964.); otherwise, the restriction is unavailing as against a transferee in good faith and for a valuable consideration without notice. M o d e s of stock transfer. (1) Indorsement and delivery of stock certificate. — Section 63

provides that shares of stock "may be transferred by delivery of the certificate indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer." 18

(a) The law is clear that in order that a transfer of stock certificate is to be effective, the certificate must be properly indorsed and that title to such certificate of stock is vested in the transferee by the delivery of the duly indorsed certificate (Razon vs. Intermediate Appellate Court, 207 SCRA 234 19

Certificates of stock may be issued with the conjunctive "and/or" placed between the names of the parties, who apparently, are co-owners of said shares. In the issuance of the same, it is understood between the corporation and the stockholders whose names appear on the certificate, that the shares of stock may be transferred upon the indorsement of and the right to vote the share may also be exercised by both (or all) or either (or any one) of them. (SEC Opinions, June 13, 1973 and Aug. 27, 1974.) The corporation, however, may adopt a policy requiring the indorsements of all the persons whose names appear on the certificates of stock issued with the conjunctive "and/or" provided such policy applies prospectively not only in fairness to the stockholders who may be adversely affected but also on the ground of the implicit understanding between the corporation and the stockholders that the former will honor the indorsement signed by only one of the latter. (SEC Opinion, Nov. 15, 1974.) •TJearer form of shares of stock transferable without indorsement by delivery is not allowable under Section 63 and Section 74 (par. 4.). (SEC Opinion, Sept. 1, 1995.) In the absence of delivery, the transferee as mere assignee, cannot enjoy the status of stockholder insofar as the assigned shares are concerned. (Republic vs. Estate of Hans Menzi, 476 SCRA 20 [2005].) ,8

572


Sec. 63

[1992].), even without executing a deed of assignment or sale of the shares which is necessary only when no certificate of stock has as yet been issued or where the same is not in the possession for whatever reason of the transferor. The delivery of the stock certificate which represents the shares to be alienated is essential for the protection of both the corporation and the stockholder concerned. (Nava vs. Peers Marketing Corp., 74 SCRA 65 [1969].) A corporation is not bound to record in its books a transfer of stock and to issue a new certificate unless the original certificate is surrendered for cancellation or is clearly shown to have been lost, stolen, or destroyed. (Sec. 73.) 20

(b) The usual practice is for the stockholder to sign the form on the back of the stock certificate. The usual stock certificate contains on its back a printed assignment or endorsement and also a power of attorney in blank, like the following: "For value received, I hereby assign the within named shares to , and appoint my attorney to make the transfer on the books of the company." The certificate may thereafter be transferred from one person to another. If the holder of the certificate desires to assume the legal rights of a shareholder to enable him to vote at corporate elections and to receive dividends, he fills up the blanks in the form inserting his own name as transferee. Then he delivers the certificate to the secretary of the corporation so that the transfer may be entered in the corporation's books. The certificate is then surrendered and a new one issued to the transferee. (Hager vs. Bryan, 19 Phil. 138 [1911].) This procedure cannot be followed with respect to shares not covered by any certificate of stock or for which no certificate of stock has as yet been been issued. (2) Transfer made in a separate instrument. — The use of the

word "may" indicates that the transfer may be effected in a ^The matter of keeping and destroying cancelled stock certificates depends on the internal policies of a corporation. There is no law requiring corporations to preserve cancelled stock certificates within a certain period. After issuance of a new certificate and its notation in the stock and transfer book, the old certificate becomes a worthless paper. The corporation may microfilm certificates before destruction. (SEC Op inions, March 6, 1984 and Aug. 21,1985.)

Sec. 63


573

manner different from that provided for in the law. (Chua vs. Samahang Magsasaka, 62 Phil. 472 [1935]; Tan vs. Securities and Exchange Commission, 206 SCRA 740 [1992].) While it is usual to effect the transfer of shares by indorsement on the certificate, a conveyance may be made by an assignment or sale in a separate instrument (Uy Piaco vs. McMicking, 10 Phil. 286 [1907]; Rivera vs. Florendo, 144 SCRA 643 [1986].) in lieu of the indorsement of the certificate, unless the by-laws expressly provide that the transfer shall be made exclusively in the manner authorized by the statute. (Fisher, op. cit., p. 149.) The execution of such instrument is equivalent to an indorsement of the certificate. A registered owner of shares may dispose of the same even in the absence of the stock certificate. 21

While an assignment may be valid and binding between the parties despite non-compliance with the requisite endorsement and delivery, it does not necessarily make the transfer effective, for the assignee cannot enjoy the status of a stockholder, and the assignor cannot, as yet, be deprived of his rights as stockholder, until and unless the issue of ownership and transfer of the shares in question is resolved with finality. (Rural Bank of Lipa City, Inc. vs. Court of Appeals, 366 SCRA 188 [2001].) (3) judicial or extra-judicial settlement of the estate. — In case

the stockholder dies intestate, a judicial or extra-judicial partition of his estate is necessary to transfer the shares of stock in favor of his heirs; otherwise, it will be necessary to wait for the termination of the testamentary proceedings and the final adjudication of the shares in accordance with the will of the decedent. (SEC Opinions, Feb. 9,1961 and May 12, 1988.) 22

(a) Where the stockholder, before his death, requested in a letter to the corporation to transfer his shares to his son, and there is no indication that the certificates covering the SEC Memo. Cir. No. 17 (Nov. 4, 2004) provides that deeds of assignment of shares of stock shall no longer be accepted by SEC for acknowledgment and recording purposes unless required by and/or submitted to the SEC as supporting documents for applications for registration. ^The National Internal Revenue Code requires a certification from the Commissioner of Internal Revenue of actual payment of the corresponding estate tax by the heirs before any transfer of stock in their favor can be recorded in the books of the corporation. (Sec. 119[C] thereof.) 21

574


Sec. 63

shares were indorsed to the latter, the transfer can no longer be effected after his death on the basis of the letter because on the death of a stockholder, his administrator or executor becomes vested with the legal title to the stock, and until a settlement and division of the estate is made, the stock of the deceased belongs to said administrator or executor as his personal representative. (SEC Opinion, June 24,1988.) (b) Where the requirements for a judicial or extra-judicial partition of a deceased stockholder's estate has been complied with, it would be a ministerial duty on the part of the corporation to register the transfer in the name of the legal heir. If the corporation wrongfully refuses to do so, it may be compelled by suit in equity for specific performance or mandamus. (SEC Opinion, June 23,1993.) (c) Where shares of stock are in the name of a deceased person, no final determination can be had without his estate being impleaded in the suit. His estate is an indispensable party with respect to the cause of action dealing with the registration of the shares in the names of the heirs. (Gochan vs. Young, 354 SCRA 207 [2001].) Validity of stock transfer.

(1) As between the parties, the requisite for a valid transfer is merely the delivery of the certificate indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. (Sec. 63.) (a) Registration is not necessary to enable the transferee to acquire the right of a stockholder as against the transferor. The law provides in effect that an unregistered transfer shall not be valid "except as between the parties." The inference is that, as between the parties, it is valid. It is the conveyance, not the act of registration, which gives title to the transferee. (Fisher, op. cit, p. 151.) As between the parties, the title passes by contract, and not by record. (Scripture vs. Longmount Supply Ditch Co., 50 N.H. 571.) (b) The parties may agree that shares of stock sold would be registered in the name of the seller until the price has been fully paid. Such agreement is valid. (C.N. Hodges vs. Lezama, 14 SCRA 1030 [1965].)

Sec. 63


575

(2) In order to be valid as against third persons and the

corporation, the transfer of shares must be entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred. (Sec. 63.) When the stock transfer is entered in the corporate books, the buyer or transferee becomes a stockholder of record entitled to enjoy all the privileges of a stockholder. (a) A corporation is not required to secure the prior approval of the Securities and Exchange Commission for the transfer of shares of stock because the question of whether or not such transfer should be recorded in its books is one that the law has left for the corporation to decide. (SEC Opinion, Sept. 29, 1964.) It is an internal affair which can be resolved by the corporation itself. (SEC Opinion, July 6, 1988.) (b) As far as the corporation is concerned, the stockholder acquires voting and other rights only when the shares to be voted are registered in his name in the stock and transfer book (see Sec. 74, par. 4.) of the corporation. Thus, one purpose of registration is "to inform the corporation of any change in share ownership so that it can ascertain the persons entitled to the rights and subject to the liabilities of a stockholder." (De Erquiaga vs. Court of Appeals, 178 SCRA 1 [1989], citing Corporation Code, Comments, Notes and Selected Cases, by Campos & Lopez-Campos, p. 838, 1981 ed.) A non-recorded transfer is non-existent as far as the corporation is concerned. (c) A bona fide transfer of shares of a corporation not registered or noted in the books of the corporation, is invalid as against a subsequent lawful attachment or execution of said shares regardless of whether the attaching creditor had actual notice of said transfer or not; and indeed, as to all persons interested, except the parties to such transfers. (Lim vs. Court of Appeals, supra; Uson vs. Diosomito, 61 Phil. 535 [1935].) (d) The transfer of title by means of succession though valid and effective between the parties involved (i.e., between the decedent's estate and heirs) does not bind the corporation and third parties. The transfer must be registered

576


Sec. 63

in the books of the corporation to make the transferee-heir a stockholder entitled to recognition as such both by the corporation and third parties. (Reyes vs. Regional Trial Court, 561 SCRA 553 [2008].) (e) Section 63 strictly requires the recording of the transfer in the books of the corporation, and not elsewhere, to be valid against third parties. (Lim vs. Court of Appeals, supra.) The transfer or disposition of shares of stock which constitute part of the community property or conjugal partnership property is subject to the pertinent provisions of the Family Code. (Exec. Order No. 209.)

23

Reasons for requiring registration of stock transfer. The reasons for this requirement have been stated as follows: (1) to enable the corporation to know at all times who its actual stockholders are because mutual rights and obligations exist between the corporation and its stockholders; (2) to afford to the corporation an opportunity to object or refuse its consent to the transfer in case it has any claim against the stock sought to be transferred, or for any valid reason; and (3) to avoid fictitious or fraudulent transfers. (Escano vs. Filipinas Mining Corp., 74 Phil. 711 [1944].) The purpose of registration, it has been said, is two-fold: to enable the transferee to exercise all the rights of a stockholder, including the right to vote and be voted for, and to inform the ^ n d e r Articles 96 and 125 of the Family Code, the administration and enjoyment of the community property or conjugal partnership property shall belong to both spouses jointly. "In case of disagreement, the husband's decision shall prevail, subject to recourse to the court by the wife for a proper remedy, which must be availed of within five years from the date of the contract implementing such decision. "In the event that one spouse is incapacitated or otherwise unable to participate in the administration of the common properties, the other spouse may assume sole powers of administration. These powers do not include disposition or encumbrance without authority of the court or the written consent of the other spouse. In the absence of such authority or consent, the disposition or encumbrance shall be void. However, the transaction shall be construed as a continuing offer on the part of the consenting spouse and the third person, and may be perfected as a binding contract upon the acceptance by the other spouse or authorization by the court before the offer is withdrawn by either or both offerors."

Sec. 63


577

corporation of any change in ownership so that it can ascertain the person entitled to the rights and subject to the liabilities of a stockholder. (Batangas Laguna Tayabas Bus Co. vs. Bitanga, 362 SCRA 635 [2001], citing Campos, The Corporation Code Comments, Notes, Selected Cases, 1990 ed., Vol. 2, p. 301.) It has also been said that such a requirement is intended for the benefit and protection of persons who may deal with the corporation and become its creditors so that they may know who are its stockholders, and as such liable to them. (12 Fletcher, p. 307.) Right of corporatio n to refuse registration of transfer.

There is no doubt that the requirement for the registration of transfers of shares in the corporate books is intended principally for the benefit and protection of the corporation so that it may know who are its stockholders to whom it must accord the right granted to them by law and against whom it can enforce any liability that may arise from ownership of stock. The registration of transfers of shares of stock in the stock and transfer book of the corporation is a function which usually pertains to that of the corporation secretary or the transfer agent of the corporation. (Tim Tay vs. Court of Appeals, 293 SCRA 634 [1998].) (1) Validity of transferee's title. — The duty of the corporation

secretary to record transfer of stock is ministerial. However, he cannot be compelled to do so when the transferee's title to said shares has no prima facie validity or is uncertain. More specifically, a pledgee, prior to foreclosure and sale, does not acquire ownership over the pledged shares and thus, cannot compel the corporation secretary to record his alleged ownership of such shares on the basis merely of the contract of pledge. (Ibid.) (2) Breach of restriction on transfer. — The corporation may

refuse to record any transfer if there is a clear breach of reasonable and valid restrictions on the power to transfer shares of stock. But it waives the requirement of registration by failure or refusal to register a valid transfer without legal or good cause (see Salvador vs. Mencias, [CA] 55 O.G. 6405; Lorenzo vs. Genato Commercial Corp., [CA] 45 O.G. 2972 [1958].), such

578


Sec. 63

as existence of claim arising from unpaid subscriptions, failure of transferee to present evidence of payment of corresponding taxes or certificate of exemption therefrom, failure of transferee to comply with registration requirements prescribed in the articles of incorporation, and existence of conflicting claims as to the right of the transferee in which case the corporation may legally refuse to register until the right has been settled by interpleader or otherwise. (SEC Opinion, Nov. 6,1987.) (3) Legality or propriety of transfer. — Sections 35 and 52 (now

Sees. 63 and 72.) which require that all transfers to be valid as far as the corporation is concerned must be entered and noted on the books of the corporation, contemplate no restriction as to whom the shares may be transferred. (C.N. Hodges vs. Lezama, 8 SCRA 717 [1963].) A corporation cannot inquire into the legality or propriety of a transfer of its shares from one person to another. In case of conflicting claims, the corporation, for its protection, may demand security or require all known claimants to interplead, (see Rules of Court, Rule 63, Sec. 1.) Basis of transferee's right to registration.

The right of a transferee/assignee of shares of stock of a corporation to have the transfer/assignment to him registered in the stock and transfer book in his name is a contractual one. It is likewise an inherent right flowing from his ownership of the shares. Subject only to the limitation imposed by the second paragraph of Section 63. (1) The corporation, in effect, agrees to make the transfer to a bona fide transferee on demand and presentation of the corresponding certificate of stock; and having represented to its stockholders and to all who may desire to purchase its stocks that it will invest the purchasers thereof with all the rights of stockholders by making a record on its books of the fact of each transfer as made, it would be highly inequitable to permit it to repudiate this representation to the prejudice of innocent purchasers. (2) Without such right, the sale of stocks would be injuriously hampered resulting in much commercial and industrial inconveniences and embarrassment, (see 12 Fletcher, pp. 392-394.)

Sec. 63


579

(3) Even a corporation under receivership for tremendous losses may not legally refuse to register transfer of shares. A trial court has jurisdiction to order a receiver of a corporation under receivership to do any act so as to protect and preserve its properties, and to that end, it may order the secretary of the corporation to do an act within the internal affairs of the corporation aimed at protecting the interests of the stockholders. The obligation to register is a ministerial one, and if it refuses to make such transfer, it may be compelled to do so by mandamus. (Rural Bank of Salinas, Inc. vs. Court of Appeals, 210 SCRA 510 [1992].) R e m e d y o f s t o c k h o l d e r w h e r e corporation refuses to register transfer.

Transferees of shares of stock who desire to be recognized as and accorded the rights of stockholders must secure a standing as such by having the transfer recorded in the books of the corporation. In case of wrongful refusal of the corporate secretary to record the transfer, specific performance and mandamus are the common remedies within the law that may be availed of to compel the registration. (SEC Opinion, Feb. 12,1993.) One cannot use the flimsy excuse for not complying with the requirements of the law, for example, that it would have been vain attempt to force the incumbent corporate secretary to register the assignment or transfer in the stock and transfer book because the latter belongs to the opposite faction. (Torres, Jr. vs. Court of Appeals, 278 SCRA 793 [1997].) (1) Mandamus generally not available. — By the weight of

authority, it is held that mandamus will not lie in ordinary cases to compel a corporation or its officers to transfer stock on its books and issue new certificates to the transferee. (a) The writ (in such case) is purely a private one, and there is generally an adequate remedy by an action against the corporation for damages. (b) Furthermore, to permit the writ of mandamus to issue for the purpose of compelling the officers of a corporation to transfer stock upon the books of the corporation might, under certain circumstances, require such officers to transfer stock against which the corporation holds unpaid claims.

580


Sec. 63

(Sec. 63, par. 2.) These claims might easily arise between the time of the issuance of the writ and the service of the same upon such officers. There is no need of the extraordinary remedy by mandamus in so ordinary a case. (Hager vs. Bryan, 21 Phil. 523 [1912].) (c) Mandamus will not issue to establish a right but only to enforce one that is already established. (TCL Sales Corporation vs. Court of Appeals, 349 SCRA 35 [2001]; Lim Tay vs. Court of Appeals, 293 SCRA 634 [1998].) (2) When remedy available. — The remedy of mandamus will lie

only if the following requisites are present: (a) Due application therefor has been made; (b) Said application has been denied; (c) There are no unpaid claims against the stock by the corporation; (d) An ordinary action for damages against the corporation would be inadequate; and (e) An action in the nature of a suit in equity to secure a decree ordering the transfer would also be inadequate. (Hager vs. Bryan, 19 Phil. 138 [1912].) Mandamus will lie if the transferee seeking relief has performed and complied with all the statutory requirements for valid transfer of shares. (SEC Opinion, Feb. 12,1993.) (3) Authority from registered owner to register transfer. — It has

been held that under the provisions of Sections 35 and 36 (now Sees. 63 and 59.) of the Corporation Law, the mere indorsement of stock certificates does not in itself give to the indorsee such a right to have a transfer of the shares of stock on the books of the corporation as will entitle him to the writ of mandamus to compel the corporation and its officers to make such transfer at his demand because, under such circumstances, the duty, the legal obligation is not so clear, and indisputable as to justify the issuance of the writ. As a general rule, as between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of

Sec. 63


581

determining who its shareholders are, so that a mere indorsee of a stock certificate claiming to be the owner, will not necessarily be recognized by the corporation and its officers, in the absence of express instructions of the registered owner to make such transfer to the indorsee, or a power of attorney authorizing such transfer. (Hager vs. Bryan, 19 Phil. 138 [1912].) (4) Administrative mandamus. — The Securities and Exchange

Commission, by express mandate, has "jurisdiction and supervision over all corporations" (SRC, Sec. 5[a]; Pres. Decree No. 902-A, Sec. 3.) and is called upon to enforce the provisions of the Corporation Code, among which is the stock purchaser's right to secure the corresponding certificate in his name under Section 63. Any problem encountered in securing the certificate of stock representing the investment made by the buyer must be expeditiously dealt with through administrative mandamus proceedings with the Commission rather than through the usual tedious regular court procedure. A transfer or assignment of stock need not, therefore, be registered first before the Commission may take cognizance of a case seeking to enforce his rights as such stockholder. (Abejo vs. De la Cruz, 149 SCRA 654 [1987]; TCL Sales Corporation vs. Court of Appeals, supra.) (5) Civil remedies. — In case the corporation is the transferor, the stockholder may choose between two remedies: complaint for specific performance (fulfillment) of the contract with damages, or complaint for rescission of the contract, also with damages, (see Art. 1191, Civil Code.) Only absolute transfers need be registered.

The requirement that the transfer shall be recorded in the books of the corporation to be valid as against third persons has reference only to absolute transfers or absolute conveyance of the ownership or the title to a share. Consequently, the entry or notation on the books of the corporation of pledges, chattel mortgages, or attachments of shares is not necessary to their validity (although it is advisable to do so) since they do not involve absolute alienation of ownership of

582


Sec. 63

stock. (Monserrat vs. Ceron, 58 Phil. 469 [1933]; Chua Guan vs. Samahang Magsasaka, Inc., 62 Phil. 472 [1935]; Chemphil Export & Import Corp. vs. Court of Appeals, 251 SCRA 257 [1996].) To affect third persons, it is not enough that the date and description of the shares pledged appear in a public instrument. (Art. 2096, Civil Code.) With respect to a chattel mortgage constituted on shares of stock, what is necessary is its registration in the Chattel Mortgage Registry. (Act No. 1508 and Art. 2140, Civil Code.) Effects of an unregistered transfer of shares.

The following are the effects of the failure to register a transfer of shares: (1) It is valid and binding, as between the transferor (record owner) and the transferee (beneficial owner) (Sec. 63; De los Santos

vs. McGrath, 96 Phil. 577 [1955].), where neither the corporation nor third persons are involved, and the death of the transferor before the transfer is recorded does not affect the transferee's right to have the transfer recorded and to have a new certificate issued to him. (12 Fletcher, p. 288; Navarro vs. Suntay, [CA] 48 O.G. 5335 [1952].) Unless the transfer is annulled, the rights of the transferee under the contract must be respected and upheld. (2) It is invalid or ineffective as to the corporation (Uson vs. Diosomito, 61 Phil. 535 [1935]; Batangas Laguna Tayabas Bus Co. vs. Bitanga, 362 SCRA 635 [2001].) except when notice is given to the corporation for purposes of registration. (Lorenzo vs. Genato Commercial Corp., [CA] 45 O.G. 2972 [1958].) Notice given to the corporation of the sale of shares and presentation of the certificates for transfer is equivalent to registration. There is no requirement that a stockholder of a corporation must be a registered one, i.e., the transfer or assignment of stocks must first be registered, in order that the Securities and Exchange Commission may take cognizance of a suit seeking to enforce his rights as such stockholder. Any problem encountered in securing certificates of stock representing the investment made by the buyer must be expeditiously dealt with through administrative mandamus proceedings with the SEC rather than through the usual tedious regular court procedure. (Abejo vs. De la Cruz, 149 SCRA 654 [1987].)

Sec. 63


583

(a) The transferor has the right to vote and be voted for, and until challenged in a proper proceeding, he has the right to participate in any meeting and, in the absence of fraud, any action at such meeting cannot be collaterally attacked by reason of such participation. (Price & Sulu Dev. Co. vs. Martin, 58 Phil. 707 [1933]; see De Erquiraga vs. Court of Appeals, 178 SCRA 1 [1989].) (b) The transferor has the right to dividends as against the corporation but the transferor, as the nominal owner of the shares, is the trustee for the benefit of the real owner. As between the pledgor and the pledgee where the pledge earns dividends, the pledgee has no right to collect the dividends as against the corporation (see Art. 2102, Civil Code.) without notice of the pledge. (c) A person who has purchased stock, and who desires to be recognized as a stockholder for the purpose of voting, must secure such a standing by having the transfer recorded on the corporate books. Until the transfer is registered, the transferee is not a stockholder but an outsider. (Batangas Laguna Tayabas Bus Co. vs. Bitanga, supra; Rivera vs. Florendo, 144 SCRA 652 [1986].) (3) It is invalid as against corporate creditors, and the transferor

is still liable to the corporation. (Uson vs. Diosomito, supra.) The transfer of stock by a shareholder does not relieve him from liability to creditors of the corporation for unpaid subscription until the transfer is perfected by being registered in the books of the corporation. (12 Fletcher, p. 357.) (4) It is invalid as to the attaching or executing creditors of the transferor, as well as subsequent purchasers in good faith without notice of the transfer, and indeed, as to all persons interested, except the parties to such transfers. (Uson vs. Diosomito,

supra; see Lim vs. Court of Appeals, 323 SCRA 102 [2000].) Non-transferability of unpaid stock on corporate books.

Under Section 63, shares of stock against which the corporation holds any unpaid claim arising from any unpaid subscription (not from any other indebtedness) shall not be transferable

584


Sec. 64

on the books of the corporation. There are no unpaid claims against the stock when there are no unpaid subscriptions due and payable, (see Sec. 67, par. 2.) (1) Consent of corporation to registration of transfer. — The

proviso in Section 63 does not mean that a stockholder cannot transfer his unpaid shares. He can, but since such transfer shall not be recorded in the books of the corporation by reason of being delinquent in the payment of unpaid subscription (Ibid.), the same is valid only between the transferor and the transferee but not insofar as the corporation and third persons are concerned. The transfer may be allowed provided it is approved by the board of directors and accompanied by an affidavit of assumption of obligation to pay the unpaid balance by the transferee. (SEC Opinion, March 8,1990.) (2) Sale of stock not covered by any certificate. — A corporation

cannot be compelled by mandamus on the petition of the purchaser to register in its stock and transfer book (see Sec. 74.) a sale made by a subscriber of shares (e.g., 20 shares forming part of his subscription of 80 shares) where such shares were paid by the seller without any certificate of stock issued to him and the corporation has an unpaid claim for the balance (60 shares) due on the whole subscription (80 shares). As a rule, the shares which may be alienated are those covered by certificates of stock. (Nava vs. Peers Marketing Corp., 74 SCRA 65 [1976].) (3) Sale of stock burdened with other indebtedness. — For any in-

debtedness other than for unpaid subscriptions, the corporation has no right to refuse registration of transfer. A corporation has no lien upon stock for debt not arising from unpaid subscription. Such lien may, however, be created in the articles of incorporation pursuant to Section 6, which provides that "shares of stock corporations x x x may have such x x x restrictions as may be stated in the articles of incorporation." (see SEC Opinion, April 13,1981.) Sec. 64. Issuance of stock certificates. — No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares) if any due, has been paid. (37a)

Sec. 64


585

Full p a y m e n t of subscription required for issuance of certificate of stock.

The certificate of stocks may be issued to the subscriber or to the duly appointed nominee of the subscriber upon the latter's instruction. (1) Pro rata application of partial payments not allowed. — Section

64 prohibits the issuance of certificate of stock to a subscriber who has not paid "the full amount of his subscription together with interest and expenses (in case of delinquent shares), if any is due." According to the SEC, the provision enunciates the doctrine that a subscription is one, entire and indivisible contract and, therefore, it cannot be divided into portions, so that the stockholder shall not be entitled to certificate of stock until he has paid the full amount of his subscription together with interest and expenses, if any is due. 24

All partial payments on one subscription shall be deemed applied proportionately among the number of shares. Therefore, to permit the issuance of stock certificate for payment of a subscription that does not cover the entire number and value of the shares subscribed would be violative of the above provision. (SEC Opinions, Sept. 12,1989 and Nov. 12,1993.) Consistent thereto, Section 67 prescribes that "failure to pay on such date shall render the entire balance due and payable x x x. If within thirty (30) days from the said date no payment is made, all the stocks covered by such subscription shall thereupon become delin-

quent and be subject to sale x x x." (SEC Opinion, Feb. 23,1982.)

If the stockholder has not paid the full amount of his subscription, he cannot transfer part of it, or the entire subscription to several transferees without the consent of the corporation (SEC Opinion, Sept. 12,1989.) in view of the indivisible nature of a subscription contract. The reason behind the principle disallowing transfer of not fully paid subscription to several transferees is that it would be difficult to determine whether or not the partial payments made should be applied as full payment for the corresponding number of shares which can only be covered by such payment or as proportional payment to each and all of the entire number of subscribed shares. Consequently, it would be difficult to determine the unpaid balance to be assumed by each transferee. (SEC Opinions, March 8, 1990 and Oct. 9, 1995.) However, the entire subscription, although not yet fully paid, may be transferred to a single transferee who must assume the unpaid balance. Again, it is necessary to secure the consent of the corporation since the transfer of subscription right contemplates a novation which under Article 1293 of the Civil Code cannot be made without the consent of the creditor. (SEC Opinion, April 11, 1994.) 24

586


Sec. 64

(2) Contrary view. — In case of partial payments on a subscription, said payments should be deemed pro-rated among all the shares subscribed and, therefore, no certificate of stock can be issued showing any of the shares to be fully paid up until the entire subscription is paid, (see Fua Cun vs. Summers, 44 Phil. 705 [1923].) But unless prohibited by its by-laws, certificates of stock may be issued for less than the number of shares subscribed provided the par value of each of the stocks represented by said certificate has been fully paid. (Baltazar vs. Lingayen Gulf Electric Co., 14 SCRA 522 [1965].) In other words, in the absence of provisions in the by-laws to the contrary, a corporation may apply payments made by subscribers on account of their subscriptions, either as: (a) full payment for the corresponding number of shares, the par value of which is covered by such payment, or (b) as payment pro rata to each and all the entire number of shares subscribed for. This rule applies to all kinds and classes of stock corporations. Obviously, the two (2) alternatives cannot be availed of by the corporation at the same time. Once an alternative is chosen, it must be applied uniformly to all stockholders similarly situated, and, therefore, it cannot be changed without the consent of all the stockholders who might be affected. (SEC Opinion, Feb. 7,1968.) ILLUSTRATION: Assume that S subscribed to 100 shares at par value of P10.00 each share of X Corporation or a total subscription of P1,000.00. S made an initial payment of P500.00. In this case, the board of directors of X Corporation, at its option, may either apply the P500.00 as full payment for 50 shares and issue a certificate of stock for the 50 shares, or as payment pro rata for the entire 100 shares so that each share is paid P5.00 in which case no certificate shall be issued until the balance is fully paid. The first alternative cannot be adopted when prohibited by the by-laws. 25

A c t i o n 64 of the Code was taken from Section 37 of the former Corporation Law. »e latter provision reads as follows: "Sec. 37. x x x. No certificate of stock shall be issued a subcriber as fully paid up until the full par value thereof, or the full subscription in case

Sec. 64


587

P u r p o s e of prohibition in Section 64.

The purpose of the prohibition is to prevent the partial disposition of a subscription which is not fully paid, because if it is permitted, and the subscriber subsequently becomes delinquent in the payment of his subscription, the corporation may not be able to sell as many of his subscribed shares as would be necessary to cover the total amount due from him, which is authorized under Section 68. Such partial disposition of the subscription would be possible if the stock certificates are issued covering partial payments, because the subscriber will not be restrained to sell the same as the transfer can be recorded in the stock and transfer book of the corporation. If no stock certificates are issued covering the partial payments, the subscriber will have difficulty in selling his equity, because the corporation may refuse to record the transfer in its book unless the entire subscription is fully paid. (SEC Opinion, Oct. 24,1963.) Nature of relation of stockholder to the corporation.

The relation of the stockholder to the corporation may be described as follows: (1) Relation based on contract. — The relation between the

corporation and its shareholders is contractual. This relation is within the protection of the Constitution prohibiting legislation impairing the obligation of contracts. (Art. Ill, Sec. 10 thereof.) of no par stock has been paid by him to the corporation, x x x." Section 64 requires the payment by the subscriber of the full amount of his subscription before a certificate of stock shall be issued to him. It would seem that Section 64 prohibits the issuance of certificate of stock where the subscription is only partially paid notwithstanding that the payment fully covers the shares for which the certificate is issued. According to the SEC, since subscription is one indivisible whole contract, it cannot be divided into portions so that the stockholder shall not be entitled to a certificate of stock until he has paid the full amount of his subscription. (SEC Opinion, Sept. 12, 1989.) The deliberation on Section 64 shows that the legislative intention is to abandon the ruling in Baltazar. (SEC Opinion, Nov. 12,1993.) Nonetheless, there is nothing wrong or immoral nor is it prejudicial to corporate creditors or contrary to any public policy to adopt the first alternative. Since the subscriber is still liable for his unpaid subscription, no prejudice is caused to the corporation or to corporate creditors. Therefore, it is believed that the ruling in the Baltazar case is still applicable but only if allowed by the by-laws.

588


Sec. 64

(2) Share not indebtedness to stockholder. — A share of stock or

the certificate of a share is not an indebtedness to the stockholder nor evidence of indebtedness and, therefore, is not credit. (a) In other words, the holder of stock, whether common or preferred, in a corporation is not, by reason of his ownership of the stock, a creditor of the corporation. He is a risk taker who invests capital in the corporation and who can look only to what is left after corporate debts and liabilities are fully paid. Hence, shares cannot be issued entitling the holders thereof to a fixed interest instead of dividends, to insure the return of his investment, inasmuch as this will constitute the contract of subscription as one of loan, making the corporation a debtor of the subscriber. (SEC Opinion, Feb. 10,1969.) Neither has the stockholder the right to compel the corporation to return his investment, (see Sec. 41.) (b) There is, however, one sense in which stockholders, common as well as preferred, are creditors. It is in the sense that a corporation includes all its capital stock among its liabilities, but it is a liability which is postponed to every other liability. As such a creditor, a stockholder is subordinate to every other creditor of the corporation. (18 Am. Jur. 2d 982.) (c) While there is no relationship of debtor and creditor between the corporation and the stockholder with respect to his shares of stock, a subscriber becomes a debtor to the corporation for the amount or price of the shares subscribed by him. (3) Corporation owns its property as a distinct entity. — A cor-

poration is a legal entity with a personality distinct and separate from the body of its shareholders. (Sec. 2.) Properties registered in the name of the corporation are owned by it as an entity separate and distinct from stockholders or members. Consequently: (a) The shareholders have no title, legal or equitable, to the property which is owned by the entity known as the "corporation" but the shares represent integral parts of the whole and proportional shares of the dividends declared or to be declared and of the net assets upon its dissolution. (Pascual vs. Del Saz Orosco, 19 Phil. 83 [1911]; 13 Am. Jur. 465.)

Sec. 64


589

(b) He is not a co-owner of the corporate property. (c) Nor is he entitled to the possession of any definite portion of its property or assets. (Stockholders of R Guanzon & Sons, Inc. vs. Register of Deeds, 6 SCRA 373 [1962].) (4) Where stockholder unknown. — For stocks where owners

cannot be located, a trust relation is impliedly created between the corporation and the unknown stockholder. Such shares may be entered in the corporate books and shall stand in the name of the corporation as "trustee" or said holder may be described as "trustee" in the certificate. The fact that a stock stands on the corporate books in the name of a person as a trustee in the certificate is notice to both the corporation and to the persons who may purchase such shares from the trustee that the latter does not hold the shares in his own right. (SEC Opinion, Dec. 1,1988.) It is the duty of the corporation to exhaust all available means in locating the whereabouts of owners of its subscribed/issued shares and if the search proves futile, it is nonetheless the fiduciary duty of the corporation to continuously hold said shares as trustee for the owners thereof, unless otherwise escheated in accordance with law. (SEC Opinion, July 10,1990.) Rights a n d r e m e d i e s of stockholders in general.

The theory of a corporation is that the stockholders may have all the profits but shall turn over the complete management of the enterprises to their representatives or agents called directors. (Ramirez vs. Orientalist, 38 Phil. 634 [1918]; Wolfson vs. Araneta Stock Exchange, 72 Phil. 492 [1941].) The stockholders, however, as part owners of the corporation, are given certain rights by the corporation law so that they can protect themselves from the possibility of misuse of corporate funds and mismanagement by those directly involved in corporate affairs. These rights may be 26

^ i n c e the stockholder has no title, legal or equitable, to the corporate property, it is evident that what he does have with respect to the corporation and his fellow stockholders, are certain rights sui generis. These rights are generally enumerated as being, first, to have a certificate or other evidence of his status as stockholder issued to him; second, to vote at meetings of the corporation; third, to receive his proportionate share of the profits of the corporation; and lastly, to participate in the distribution of corporate assets upon the dissolution or winding up. (Pascual vs. Del Saz Orosco, 19 Phil. 82 [1911].)

590


Sec. 64

summarized as follows: (1) Right to attend and vote in person or by proxy at stockholder's meetings (comments under Sees. 50, 58.); (2) Right to elect and remove directors (Sees. 24, 28.); (3) Right to approve certain corporate acts (see comments under Sec. 52.); (4) Right to adopt and amend or repeal the by-laws or adopt new by-laws (Sees. 46,48.); (5) Right to compel the calling of meetings of stockholders when for any cause there is no person authorized to call a meeting (Sec. 50, last par.); (6) Right to issuance of certificate of stock or other evidence of stock ownership and be registered as shareholder (see comments under Sec. 63.); (7) Right to receive dividends when declared (see comments under Sec. 43.); (8) Right to participate in the distribution of corporate assets upon dissolution (see comments under Sees. 118-119.); (9) Right to transfer of stock on the corporate books (see comments under Sec. 63.); (10) Right to pre-emption in the issue of shares (see comments under Sec. 39.); (11) Right to inspect corporate books and records (Sec. 74.); (12) Right to be furnished the most recent financial statement upon request and to receive a financial report of the corporation's operations (Sec. 75.);

Stockholders who are not corporate officers do not have a fiduciary duty to the corporation as they are not in a position to misuse corporate property. They may, therefore, compete with the corporation (which has a separate legal existence) and transact business with it. The rights of the stockholders have been classified as follows: (1) rights as to control and management (Nos. 1-5, 15, 17); (2) proprietary rights (Nos. 6-10); and (3) remedial rights. (Nos. 11-14, 16) Included in proprietary rights is the privilege of immunity from personal liability for corporate debts, subject to judicial limitations against abuse of this privilege, (see Ballantine, p. 375.)

Sec. 64


591

(13) Right to bring individual and representative or derivative suits (infra.); (14) Right to recover stock unlawfully sold for delinquency (Sec. 69.); (15) Right to enter into a voting trust agreement (Sec. 59.); (16) Right to demand payment of the value of his shares and withdraw from the corporation in certain cases (see comments under Sees. 41 and 81.); and (17) Right to have the corporation voluntarily dissolved, (see comments under Sees. 118-119.) Most of these rights have already been discussed in the preceding chapters while the others (Nos. 8, 11, 1 2 , 1 4 , 1 6 , and 17.) are discussed subsequently. Only the right to bring representative or derivative suits (No. 13.) will be discussed here. Rights of heirs of deceased stockholders. Upon the death of a stockholder, the heirs do not automatically become stockholders of the corporation and acquire the rights and privileges of the deceased as stockholder of the corporation. The shares must be distributed first to the heirs in estate proceedings, and the transfer of the shares must be recorded in the books of the corporation. Section 63 provides that no transfer shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation. During such interim period, the heirs stand as equitable owners of the shares, the executor or administrator duly appointed by the court being vested with the legal title to the shares. Until a settlement and division of the estate is effected, the shares of stock of the decedent are held by the administrator or executor. Consequently, during such time, it is the administrator or executor who is entitled to exercise the rights and privileges of the deceased stockholder. Section 74 enumerates the persons who are entitled to the inspection of corporate books. The stockholder's rights of inspection of the corporation's books and records is based upon his ownership of shares in the corporation and the necessity for self-protection. Similarly, only stockholders of record are entitled to receive dividends declared by the corporation (Sec. 43.), a

592


Sec. 64

right inherent in the ownership of the shares. In the absence of transfer of the shares of the deceased stockholder to the heir/s in the corporation's transfer book, the said heir/s would have no right to inspect its books and receive dividends. (Musni vs. Puno, 599 SCRA 585 [2009].) Rights of stockholders may be c h a n g e d or restricted. (1) Rule of majority governs. — Any person "who buys stock

in a corporation does so with the knowledge that its affairs are dominated by a majority of the stockholders and that he impliedly contracts that the will of the majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted by-laws and not forbidden by law." To this extent, therefore, the stockholders may have considered to have "parted with his personal right or privilege to regulate the disposition of his property which he has invested in the capital stock of the corporation and surrendered it to the will of the majority of his fellow incorporators, x x x It cannot, therefore, be justly said that the contract, express or implied, between the corporation and the stockholders is infringed x x x by any act of the former which is authorized by the majority x x x." (Gokongwei, Jr. vs. Securities and Exchange Commission, 89 SCRA 336 [1979], citing 6 Thompson 369, Sec. 4490.) (a) Pursuant to Section 16, any corporation may amend its articles of incorporation. If the amendment changes or restricts the rights of existing stockholders, then the dissenting minority under Section 81 has only one right, viz.: to demand payment of the fair value of his shares. (b) Under Section 48 (par. 1.), the corporation may amend or repeal any by-law or adopt new by-laws by the prescribed vote of the board of directors and the stockholders. (2) Ownership of stock confers no vested right. — In fine, a

stockholder does not acquire any vested right by his ownership of stock. It cannot be said, therefore, that a stockholder who claims that prior to the amendment of the by-laws he had all the qualifications to be a director of a corporation, has a vested

Sec. 64


593

right to be elected director and that the amendment deprived him of such right, in the face of the fact that the law at the time he became a stockholder "contained the prescription that the corporate charter and the by-law shall be subject to amendment, alteration, and modification." (Ibid.) Rights of dissenting minority.

Minority stockholders (or members), however, are required to submit to the will of the majority only so long as the majority act in good faith and within the limitations of the law. (1) In some instances, minority stockholders objecting to certain corporate action may demand appraisal and payment of their stock (see Sec. 81.), and thus terminate their relation with the corporation. (18 Am. Jur. 2d 991.) (2) In other instances, they may bring actions at law (e.g., for damages, injunction) in their names to preserve and protect their interests or in the name of the corporation to redress wrongs committed solely against the corporation, (infra.) The majority stockholders (members) owe the minority stockholders the duty to exercise good faith, care, and diligence to protect the interest of the minority in the corporation. They have a fiduciary duty to minority stockholders to use their control of the corporation in the best interests of all stockholders. A c t i o n s by stockholders or m e m b e r s .

Actions by stockholders (or members) may be divided into three general categories: (1) derivative actions; (2) individual actions; and (3) representative actions. (19 Am. Jur. 2d 60.) (1) Action in behalf of corporation generally brought through board

of directors/trustees. — Corporations represent their stockholders (or members) in all matters within the scope of their corporate powers. This is true respecting litigations as well as in other matters. As a result of the separate identities of the corporation and its stockholders, it follows that any wrong or injury done directly against the corporation gives rise to a cause of action on the part of the corporation through the board of directors (or trustees) and not primarily of an individual stockholder.

594


Sec. 64

Furthermore, to allow stockholders to directly recover damages for themselves for wrongs committed against the corporation would result in the distribution among them of part of the assets of the corporation before its dissolution which, as a rule, is prohibited to protect the prior rights of corporate creditors, (see Sec. 122, last par.) (2) Derivative suit brought by stockholder in behalf of corporation.

— But, whenever the officials of a corporation refuse to bring suit to redress the wrong, such as when they are the ones to be sued, a stockholder may maintain a derivative suit to enforce the corporate right of action in behalf of himself, the other stockholders, and for the benefit of the corporation. And the fact that no other stockholder has made common cause with the suing stockholder is irrelevant because the smallness of his stockholding is no ground for denying relief. (Republic Bank vs. Cuaderno, 19 SCRA 671 [1967].) In such a suit, the corporation is the real partyin-interest while the suing stockholder, on behalf of the corporation, is only a nominal party. (Filipinas Port Services, Inc. vs. Go, 518 SCRA 453 [2007]; Hi-Yield Realty, Inc. vs. Court of Appeals, 590 SCRA 548 [2009].) Derivative suit e x p l a i n e d.

A derivative suit is thus defined as one brought by one or more stockholders or members in the name and on behalf of the corporation to redress wrongs committed against it or to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold control of the corporation. It is a remedy designed by equity for those situations where the management through fraud, neglect of duty, or other cause, declines to take the proper and necessary steps to assert the corporation's rights. (Commart [Phils.], Inc. vs. Securities and Exchange Commission, 198 SCRA 73 [1991].) (1) Stockholder, a nominal party with corporation real party in

interest. — The right of a stockholder to bring derivative suits is impliedly recognized by Sections 31, 34, and 65. In such action, the suing stockholder who actually instituted it is regarded as a nominal party with the corporation as the real party-ininterest, and the fact that the plaintiff was not authorized by

Sec. 64


595

the corporation to sue is of no moment as any such authority could not be expected since the suit is aimed at nullifying the action taken by the officials of the corporation. (Republic Bank vs. Cuaderno, supra; Gamboa vs. Victoriano, 90 SCRA 40 [1979]; Yu vs. Yukayguan, 589 SCRA 588 [2009].) (2) Corporation, joined either as plaintiff or defendant. — In a de-

rivative suit filed by a stockholder, it is not important whether the corporation should be joined as a plaintiff or defendant, (see Rule 3, Sec. 3, Rules of Court.) What is important is that the corporation should be made a party in order to make the court's judgment binding upon it and thus bar future litigations of the issues. (Republic Bank vs. Cuaderno, supra.) It is a condition sine qua non that the corporation be impleaded as a party. (Asset Privatization Trust vs. Court of Appeals, 300 SCRA 579 [1998].) It has been held that a suit against corporate officers in their official capacity is considered a suit against the corporation. (E. Cano Enterprises, Inc. vs. Court of Industrial Relations, 13 SCRA 290 [1965].) A derivative suit has been the principal defense of a minority shareholder against abuses of the majority. (Commart [Phils.], Inc. vs. Securities and Exchange Commission, supra.; Western Institute of Technology, Inc. vs. Salas, 278 SCRA 216 [1997]; Lim vs. Lim-Yu, 352 SCRA 216 [2001].) Nature of derivative suit.

(1) A derivative suit is in the nature of a representative action (infra.), the stockholder (or member) bringing the action in the name and in behalf of the corporation, for a wrong done to the corporation, and not one done to himself, being in fact its representative and any relief obtained belongs to the corporation and not to the stockholders, individually or collectively (13 Fletcher, pp. 422,440-441.) but the plaintiff is entitled to reimbursement at least of legal expenses. It is a suit by a stockholder to enforce a corporate cause of action. (2) The cause of action when a stockholder brings a derivative suit is dual in composition. It consists of a basic cause of action, which pertains to the corporation and on which it might have sued, and the derivative cause of action, which pertains to the

596


Sec. 64

stockholder consisting in the fact that the corporation will not or cannot sue for its own protection. (Ibid., p. 429.) Hence, the name of the remedy because he derives his right from the corporation. (3) A derivative suit is fundamentally distinct and independent from liquidation proceedings under Section 122. (Yu vs. Yukayguan,

589 SCRA 588 [2009].) (4) 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. Hence, a stockholder may sue for mismanagement, waste or dissipation of corporate assets because of a special injury to him for which he is otherwise without redress. In effect, the suit is an action for specific performance of an

obligation owed by the corporation to the stockholders to assist its rights of action when the corporation has been put in default by the wrongful refusal of the directors or management to make suitable measures for its protection. The basis of a stockholder's suit is always one in equity. However, it cannot prosper without first complying with the legal requisites for its institution. (Ibid.) Importance of derivative suits.

If the duties of care and loyalty which directors (or trustees) owe to their corporation could be enforced only in suits by the corporation, many wrongs done by directors would never be remedied. Where the majority of the shareholders (or members) benefit by the directors' breach of duty, they will normally continue to elect the same directors or others who can be relied on not to institute litigation designed to remedy the wrong. Even where the shareholders do not benefit by the directors' wrongdoings, the difficulty of so organizing the majority shareholders to cause them to oust the wrongdoing directors from office and elect new directors who will institute litigations against their predecessors is often insuperable. The minority shareholders' suit is a procedural device designed to facilitate holding wrongdoing directors

Sec. 64

T I T L E VII. S T O C K S A N D S T O C K H O L D E R S

597

and majority shareholders to account, and also to enforce corporate claims against third persons. (W.L. Cary, op. cit., p. 868.) Type of w r o n g c o n t e m p l a t e d .

It is obvious that the wrongful act by directors or other managers may result in direct injuries to individual shareholders entitling the latter to sue in their own right and for their own benefit. Of such wrongful character are the wrongful failure to permit a shareholder to vote and to permit a transaction of shares on the corporation's books. On the other hand, many wrongful acts or omissions of directors or other managers injure the shareholders only indirectly through depleting the corporate assets or using them in a manner contrary to the provisions of the articles of incorporation. Shareholders' derivative suits are concerned with this latter type of wrong (Ibid.), allowing a stockholder to enforce rights which are derivative or secondary in nature. It requires that the injury alleged be indirect as far as the stockholders are concerned and direct only insofar as the corporation is concerned. (R.N. Symaco Trading Corporation vs. Santos, 467 SCRA 312 [2005].) However, the removal of a stockholder (particularly a majority stockholder) from the management of the corporation and / or the dissolution of a corporation in a derivative suit filed by a minority stockholder is a drastic measure which should be resorted only when the necessity is clear. (Chase vs. Buencamino, Sr., 136 SCRA 385 [1985].) Requisites for bringing derivative suit.

Before a stockholder or member may sue in behalf of the corporation, the following requisites must exist: (1) There must be an existing cause of action in favor of the corporation, as where the board of directors (or trustees) wastes or dissipates the funds of the corporation, fraudulently disposes of its property, or perform ultra vires acts (Angeles vs. Santos, 64 Phil. 697 [1927].) and not in favor of the particular stockholder bringing the suit; (2) The stockholder or member must first make a demand upon the corporation or the management to sue, unless such a

598


Sec. 64

demand would be futile or useless (Reyes vs. Tan, 3 SCRA 198 [1961]; Pascual vs. Del Saz Orosco, 19 Phil. 82 [1911].), and the corporation refuses or fails to sue notwithstanding such demand. This is known as exhausting intra-corporate remedies; (3) The stockholder or member must have been such at the time of the objectionable acts or transactions, as well as at the time the action was filed and during the pendency of the action (Gochan vs. Young, 354 SCRA 207 [2001].), "unless such transactions continue and are injurious to him or affect him especially or specifically in some other way" (Pascual vs. Del Saz Orosco, supra.); and

(4) The action must be brought by the stockholder or member in the name and for the benefit of the corporation. (Evangelista vs. Santos, 86 Phil. 388 [1950].) The bona fide ownership by a stockholder of stock in his own right suffices to invest him with a standing to bring a derivative suit for the benefit of the corporation. The number of his shares is immaterial since he is not suing in his own behalf, or for the protection or vindication of his own particular right, or the redress of a wrong committed against him, individually, but in behalf and for the benefit of the corporation. (San Miguel Corporation vs. Kahn, 176 SCRA 447 [1989]; Reyes vs. Regional Trial Court of Makati, 561 SCRA 593 [2008].) The personal injury suffered by the stockholder cannot disqualify him from filing a derivative suit in behalf of the corporation. It merely gives rise to an additional cause of action for damages against the erring corporate officers. In short, the allegations of injury to the stockholder in the complaint can co-exist with those pertaining to the corporation. (Gochan vs. Young, supra.)

Among the basic requirements for a derivative suit to prosper is that the minority stockholder 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 wish to join him in the suit. A case which is merely an appeal on the civil aspect of a criminal case for estafa and falsification of public documents filed against the majority and controlling

Sec. 64


599

members of the board is not a derivative suit. (Western Institute of Technology vs. Salas, 278 SCRA 216 [1997]; Tarn Wong Tek vs. Makasiar, 350 SCRA 475 [2001].) The Interim Rules of Procedure Governing Intra-Corporate Controversies (Appendix "C".), include the following requirements: (1) the plaintiff must be a stockholder or member at the time the acts or transactions subject of the action occurred; (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. (Sec. 1, Rule 8 thereof.) Exhaustion of intra-corporate remedies. In addition to the existence of grievances which call for this kind of relief, it is equally important that before the shareholder (or member) is permitted, in his own name to institute and conduct a litigation which usually belongs to the corporation, he should show to the satisfaction of the court that he has exhausted all the means within his reach to attain within the corporation itself, the redress of his grievances, or action in conformity to his wishes. (1) He must make an earnest, not simulated, effort, with the managing body of the corporation, to induce remedial action on their part. He must show, if he fails with the directors (or trustees), that he has made an honest effort to obtain action by the stockholders as a body in the matter of which he complains. (Pascual vs. Del Saz Orozco, supra, citing Hawes vs. Oakland, 14 Otto, 104 U.S. 450, 456.) 27

(2) A request upon the stockholders as a body to bring suit has been required: ''Under the new Rules of Procedure in the SEC, it seems that this requirement in previous Supreme Court rulings is not mandatory as exhaustion of intra-corporate remedies is not included in the grounds for motion to dismiss an action or suit before it. (see Sec. 1, Rule VI thereof.)


600

Sec. 64

(a) where demand upon the directors or officers is excused as where it would be unavailing to protect the rights of the stockholders because the officers of whose management or misconduct a plaintiff stockholder complains of, are in control of the corporation; or 28

(b) where the subject matter of his complaint is within the immediate control of the stockholders. (3) A stockholder need not seek action by the stockholders as a body, where under the facts he cannot do so or it would be unreasonable or useless to require it. Thus, if the body of stockholders has no adequate power or authority to remedy the wrong asserted by the individual stockholders, an application to it to redress the wrong before bringing a representative action is unnecessary. (19 Am. Jur. 2d 77-79.) Reasons given for not allowing direct individual suit.

The reasons given are: (1) The universally recognized doctrine that a stockholder in a corporation has no title, legal or equitable, to the corporate property; that both of these are in the corporation itself for the benefit of the stockholders. In other words, to allow shareholders to sue separately would conflict with the separate corporate entity principle; (2) The prior rights of the creditors may be prejudiced. Thus, our Supreme Court held in the case of Evangelista vs. Santos, that "the stockholders may not directly claim those damages for themselves for that would result in the appropriation by, and the distribution among them of part of the corporate assets before the dissolution of the corporation and the liquidation of its debts and liabilities, something which cannot be legally done"; l n a case, the Supreme Court ruled out laches, holding "that the Board of Directors under the by-laws of the corporation, had the control of the affairs of the corporation and it is not to be expected that the board would sue its members to recover the sums of money voted by and for themselves (as compensation). Thus, under the circumstances, where the corporation was virtually immobilized from commencing suit against its directors, laches does not begin to attach against the corporation until the directors cease to be such." (Central Cooperative Exchange, Inc. vs. Enciso, 162 SCRA 706 [1988].) a

Sec. 64


601

(3) The filing of such suits would conflict with the duty of the management to sue for the protection of all concerned; (4) It would produce wasteful multiplicity of suits; and (5) It would involve confusion in ascertaining the effect of partial recovery by an individual on the damages recoverable by the corporation for the same act. (Asset Privatization Trust vs. Court of Appeals, 300 SCRA 579 [1998], citing Agbayani, Commercial Law of the Phils., Vol. Ill, p. 566, citing Ballantine, pp. 366-367.) Individual suit e x p l a i n e d .

When a wrong is directly inflicted against a shareholder, the latter can maintain an individual or direct suit in his own name against the corporation. Stockholder's individual suit is, therefore, an action brought by a stockholder against the corporation for direct violation of his contractual rights as such individual stockholder, such as the right to vote, the right to share in the declared dividends, the right to inspect corporate books and records and similar other examples. In a derivative suit, the wrong is inflicted directly on the corporation and indirectly upon the stockholders. (Republic vs. Cuaderno, supra; Gamboa vs. Victoriano, supra.) Individual suits have likewise been permitted upon a wrong which although against the corporation, also violates a duty owing directly to the stockholder or member. (General Rubber Co. vs. Benedict, 125 N.Y. 18.) Any recovery by a stockholder in an individual suit belongs to him. Authorization from the board of directors of a corporation is not necessary where a stockholder is not acting in behalf of the corporation but in his own personal capacity. (CMH Agricultural Corporation vs. Court of Appeals, 378 SCRA 545 [2002].) Derivative suit a n d individual suit distinguished.

If the injury is one to the plaintiff as a stockholder (or member) and to him individually, and not to the corporation, as where the action is based on a contract to which he is a party, or on a right belonging severally to him, or on a fraud affecting him directly, it is an individual action.

602


Sec. 64

On the other hand, if the wrong is primarily against the corporation, the redress for it must be sought by the corporation, except where a derivative action by a stockholder is allowable, and the stockholder cannot sue as an individual. The action is derivative, i.e., in the corporate right, if the gravamen of the complaint is injury to the corporation or to the whole body of its stock or property without any severance or distribution among individual holders, or if it seeks to recover assets for the corporation or to prevent the dissipation of its assets. (13 Fletcher, pp. 367-373.) If the action is successful, the judgment rendered shall be in favor of the corporation. Representative suit explained.

When a wrong is committed against a group of stockholders, a stockholder may bring a suit in behalf of himself and all other stockholders who are similarly situated. This is called a shareholder's representative suit which is a kind of class action. It saves the persons involved in the action substantial time and money. Thus, suppose a group of stockholders has been denied the right to vote. On the ground of economy, a stockholder may file a suit in behalf of himself and all the others because (1) the questions of law and fact involved are common to all of them and (2) the parties are so numerous that it is impracticable to bring them all before the court. (Rule 12, Sec. 13, Rules of Court.) But the right of pre-emption (see Sec. 39.), it has been said, is personal to each stockholder; and while a stockholder may maintain a suit to compel the issuance of his proportionate share of stock, it has been ruled, nevertheless, that he may not maintain a representative action on behalf of other stockholders who are similarly situated. No stockholder has any right to, or any interest in, the stock to which another is entitled. (Mathay vs. Consolidated Bank and Trust Co., 58 SCRA 559 [1974].) A representative suit is also the method used by minority stockholders to compel the declaration of dividends. Derivative suit a n d representative suit distinguished.

A representative suit, strictly speaking, is one brought by a person in his own behalf and on behalf of all similarly situated.

Sec. 64


603

A derivative suit, on the other hand, is one brought by a person as a representative of another. A suit by a stockholder (or member) as a representative of the corporation is a derivative action, although often, and properly, referred to as a representative suit in the sense that he sues as a representative of the corporation. However, an action by a stockholder may be representative and yet not derivative as where an action is brought by a stockholder as an individual in his own right but in behalf of himself and other stockholders similarly situated. (13 Fletcher, pp. 364-365.) Jurisdiction over intra-corporate controversies.

Under Section 5(a, b, c) of Presidential Decree No. 902-A, as amended, the Securities and Exchange Commission is given original and exclusive jurisdiction to hear and decide cases involving intra-corporate controversies. (1) Meaning of an intra-corporate controversy. — It is one which

arises between a stockholder and the corporation or among the stockholders involving internal affairs of the corporation. Thus, the issue of whether or not a corporation is bound to replace a stockholder's lost certificate of stock is a matter purely between the stockholder and the corporation, belonging exclusively to the jurisdiction of the Commission even if there is a claim for damages for refusal of the corporation to issue a replacement certificate. The question of damages raised is merely incidental to the main issue. (2) Intent of the law. — The intent is to segregate from the general jurisdiction of the regular courts controversies involving corporations and stockholders and to bring them to the SEC for exclusive resolution, in much the same way that labor disputes are now brought to the Department of Labor and Employment and the National Labor Relations Commission and not to the courts. (Philex Mining Corporation vs. Reyes, 118 SCRA 602 [1982].) (3) Controversies covered. — The provision of the law is broad

and covers all kinds of controversies between stockholders and corporations. There is no distinction, qualification, nor


604

Sec. 64

any exemption whatsoever. (Ibid.) However, if the controversy involves a violation of any of the provisions of the Corporation Code and the action is criminal in nature the purpose of which is the imposition of the penalty prescribed by the Code, it is the regular courts that have jurisdiction, (see Sec. 144.) Section 3 of Presidential Decree No. 902-A gives the Commission jurisdiction, supervision, and control over all corporations, partnerships or associations, which are the grantees of primary franchise and/or a license or permit issued by the Government to operate in the Philippines. In the light of the nature and function of the Commission, its regulatory and adjudicatory functions insofar as intra-corporate controversies are concerned, come into play only if a corporation exists. Thus, where the corporation whose properties are being contested no longer exists, it having been completely dissolved, the supervisory authority of the Commission over the corporation has likewise come to an end. (Pascual vs. Court of Appeals, 339 SCRA 117 [2000].) (4) Transfer of jurisdiction. — Pursuant to the Securities

Regulation Code (R.A. No. 8799.) which took effect on August 8, 2000, the jurisdiction of the SEC to decide cases involving intra-corporate disputes was transferred to courts of general jurisdiction and in accordance therewith, all cases of this nature with the exception only of those submitted for decision, were transferred to the regular courts. 29

Liabilities of stockholder.

Stock ownership in a corporation results in certain rights. Assuredly, it also places certain liabilities upon the stockholder. These liabilities which are discussed under the corresponding sections indicated, may be grouped into the following: "The Commission's jurisdiction over all cases enumerated under Section 5 of Presidential Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court: Provided, That the Supreme Court in the exercise of its authority may designate the Regional Trial Court branches that shall exercise jurisdiction over these cases. The Commission shall retain jurisdiction over pending cases involving intra-corporate disputes submitted for final resolution which should be resolved within one (1) year from the enactment of this Code. The Commission shall retain jurisdiction over pending suspension of payments/rehabilitation cases filed as of 30 June 2000 until finally disposed." (Sec. 5.2 thereof.) M

Sec. 65


605

(1) Liability to the corporation for unpaid subscription (Sees. 60, 67-70.); (2) Liability to the corporation for interest on unpaid subscription (Sec. 66.); (3) Liability to creditors of the corporation on unpaid subscription (Sec. 60.); (4) Liability for watered stock (Sec. 65.); (5) Liability for dividends unlawfully paid (Sec. 43.); and (6) Liability for failure to create corporation. (Sec. 10.) While a stockholder has no personal liability for the debts of the corporation beyond the amount of his capital investment, he is personally liable for the above obligations. In addition, he may become personally liable for damages or otherwise for any wrongful disposition of corporate assets, breaches of fiduciary duties, fraud, gross negligence, unauthorized acts, violations of law, or improper use (e.g., to defraud his creditors to escape personal debts) of the corporate form. Sec. 65. Liability of directors for watered stocks. — Any director or officer of a corporation consenting to the issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value, or who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary, shall be solidarily liable with the stockholder concerned to the corporation and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same. (16, 2nd par.) Watered stock defined.

Watered stock is stock issued not in exchange for its equivalent either in cash, property, share, stock dividends, or services, (see Sec. 62.) It includes stock: (1) issued without consideration (bonus share); or (2) issued as fully paid when the corporation has received a lesser sum of money than its par or issued value (discount share); or

606


Sec. 65

(3) issued for a consideration other than actual cash, such as property or services, the fair valuation of which is less than its par or issued value; or (4) issued as stock dividend when there are no sufficient

retained earnings or surplus (see Sec. 43.) to justify it. ILLUSTRATION: Where the par value of par value shares or the issued value of no par value shares is P100.00 and only P80.00 is paid to the corporation but the share is issued as fully paid, the share is considered "watered" or "fictitiously paid up" to the extent of P20.00, which is the difference between the consideration paid and the par value or issued value of the share taken. In such case, the subscriber is liable for the difference of P20.00. The issue itself is not void, but the agreement that the shares shall be paid for less than its par or issued value is illegal and void and cannot be enforced. (Phil. Trust and Company vs. Rivera, 44 Phil. 470 [1923].) Issue of watered stock prohibited.

Section 65 prohibits the issuance of watered stock to protect persons who may acquire stock and the creditors of the corporation particularly those who may become such on the faith of its outstanding capital stock being fully paid. The prohibition secures equality among subscribers and prevents discriminations against those who have paid in full the par or issued value of their shares. (1) As to the corporation, the issuance of watered stock is not merely ultra vires but is illegal per se as it is a violation of Section 62.

(2) As to creditors, the law makes no distinction between those who became such prior and subsequent to the issuance of watered stock. The liability attaches whether or not creditors have relied on an over-valuation of corporate capital. (3) As to the Securities and Exchange Commission, whether or not an issuance would amount to an issue of watered stock is well within its authority to inquire into in view of its power and duty to enforce all laws affecting corporations, (see Securities and Exchange Commission vs. Pimentel, 90 Phil. 702 [1951].)

Sec. 65


607

Basis or theor y of liability.

Apart from statute, the view has been taken that one who acquires stock from a corporation in exchange for property or services at an over-valuation or at a discount is liable to respond to creditors, upon the principle that one giving credit to a corporation is entitled to rely upon its ostensible capitalization as the basis for the credit given. Where the corporation issues watered stock and thereby assumes an ostensible capitalization in excess of its real assets, the transaction necessarily involves the misleading of subsequent creditors, and whether done with that purpose actually in mind or not, is at least a constructive fraud upon creditors. Hence, it is held that recovery may be had by a creditor in such case, even though the corporation itself has no cause of action against the stockholders. Some of the earlier decisions put the right of recovery in such a case upon the so-called "trust fund doctrine." In any view of the matter, however, the creditors' right of action to compel the making good of the representation as to the corporation's capital is based on fraud, and the trust fund doctrine is only another way of expressing the same underlying idea. (19 Am. Jur. 2d 250.) Prohibition refers to original issue.

The prohibition to issue "watered stock" refers only to the original issue of stocks but not to a subsequent transfer of such stocks by the corporation, for then it would no longer be an "issue" but a sale thereof. (Rochelle Roofing Co. vs. Burley, [Mass.] 115 N.E. 478.) Hence, treasury shares may be sold for less than their par or issued value for they have already been issued and paid for, provided the price is reasonable. (Sec. 9.) They may be given out in the form of bonuses as additional compensation for satisfactory service rendered by the grantee. (SEC Opinion, July 13, 1993.) Liability for watered stock.

Under Section 65, not only the corporate creditors but also the corporation itself or any dissenting stockholder, for and in behalf of the corporation in case the corporation refuses to

608


Sec. 65

claim the difference not received, can set up the inadequacy of the consideration for the issuance of stocks. (Pascual vs. Del Saz Orosco, 19 Phil. 83 [1911]; Everett vs. Asia Banking Corp., 49 Phil. 512 [1926].) (1) Consenting director or officer. — The liability of the consent-

ing director or officer for the "water" in the stock is solidary (see Arts. 1207, 1208, Civil Code.) with the participating stockholder. Note that the fair value of the stock is determined at the time of its issuance so that the subsequent increase in value of property given as consideration will not eliminate the "water" in the stock and relieve the director or officer and stockholder from liability. (Sec. 65.) (2) Subscriber. — In view of the provision of Section 62 that "stocks shall not be issued for a consideration less than the par or issued price thereof," persons to whom watered stock is issued are not only liable to be called upon to contribute, if necessary, for the benefit of creditors to the extent of the difference between the amount paid and the par or issued value of the shares but are also liable for the purpose of adjusting the rights of the stockholders inter se. (see 11 Fletcher, pp. 679-681.) The holder of watered stock cannot escape liability by transferring the same to an irresponsible person or to a bona fide purchaser. A creditor cannot, however, recover against a holder of watered stock fraudulently represented as having been fully paid unless and until he has been actually injured. He is interested only in the collection of his debt when due; if it is paid in full at maturity, he is not injured by any misrepresentation made with respect to watered stock and, therefore, has no right of action against those to whom such stock was issued. (19 Am. Jur. 2d 250.) (3) Subsequent transferee. — A transferee of stock in a corporation occupies the same position as his transferor with respect to the right to complain of an issue of watered stock, and is, therefore, estopped to complain if his transferor was estopped. This is true notwithstanding the fact that he purchased the stock in good faith and in ignorance of the fraudulent or unlawful issue. (U Fletcher, p. 687.)

Sec. 65


609

There is a contrary view. It holds that a transferee is not liable unless he either was a party to the transaction in the first instance or has in effect in some manner made himself a party since. The liability of a holder of watered stock to pay to creditors the difference between the par value and the amount actually paid is not based upon his relationship to the corporation as a stockholder but upon a fraudulent transaction. So, a purchaser in the open market of stock purporting to be fully paid who has no notice that it is in fact not fully paid, is not liable for the unpaid amount. He cannot be compelled to make good the false representation as to the capital of the corporation, which he had no part in making and the responsibility for which he has done nothing to assume. (19 Am. Jur. 2d 254.) (4) Transferor or party to the fraud. — In any event, a purchaser

without notice may maintain an action to recover damages sustained by him, either against the transferor, if the latter knew the character of the stock, or against the directors or other officers who issued the same, or against the corporation itself if it can be regarded as a party to the fraud. (11 Fletcher, pp. 687-688.) Suit by t h e State.

(1) Quo warrranto. — When a corporation is guilty of ultra vires or illegal acts which constitute an injury to or fraud upon the public or which will tend to injure or defraud the public, the State may institute quo warranto proceedings to forfeit its charter for the misuse or abuse of its franchises. The Solicitor General, therefore, may institute such proceedings to enforce a forfeiture of the charter of a corporation for an ultra vires, or illegal issue of watered or fictitiously paid-up stock, and the court will decree forfeiture if the circumstances are such as to bring the case within the general principles governing the forfeiture of charters. (2) Injunction. — If a threatened act of a corporation will constitute a public nuisance, and prompt action is necessary to prevent injury to the public therefrom, the Solicitor General may proceed for an injunction. It is perhaps safe to say, however, that this principle does not authorize a suit by the Solicitor General to enjoin the issue of watered stock. The State cannot maintain a suit to enjoin or cancel an issue of watered or fictitiously paid-up

610


Sees. 66-67

stock, where private rights only will be affected. (11 Fletcher, pp. 670-672; 14 C.J. 457-459.) Sec. 66. Interest on unpaid subscriptions. — Subscribers for stock shall pay to the corporation interest on all unpaid subscriptions from the date of subscription, if so required by, and at the rate of interest fixed in, the by-laws. If no rate of interest is fixed in the by-laws, such rate shall be deemed to be the legal rate. (37) Liability of stockholder for interest on unpaid subscriptions.

(1) When liable. — In the meantime that the entire amount on stock subscription has not been paid, subscribers for stock shall be liable to the corporation for interest from the date of subscription, but only if so required by the by-laws or subscription contract. Under Section 66, a subscriber is liable to pay interest only "if so required by the by-laws." A mere resolution of the board of directors to that effect would not make the subscribers liable unless the board is empowered by the by-laws to charge interest on unpaid subscriptions. But even if not so required by the bylaws, a delinquent stockholder shall be liable to pay interest from date of delinquency, (see Sec. 68.) (2) Rate of interest. — If the rate of interest is fixed in the bylaws, then such rate shall be paid; otherwise, such rate shall be deemed to be the legal rate. By virtue of Central Bank Circular No. 416 (July 29,1974.), the legal rate is now 12% per annum, (see Sec. 3, Act No. 2655 [the Usury Law], as amended by Pres. Decree No. 116.) (3) Waiver of interest. — The corporation may waive the right to collect interest on the unpaid subscriptions, if it so desires, because it is a right which could be waived (SEC Opinion, March 11, 1969.) provided, of course, that no corporate creditors are prejudiced by such waiver. But if the payment of interest is required by the by-laws, waiver may only be done by amending the by-laws. (SEC Opinion, March 20,1980.) Sec. 67. Payment of balance of subscription. — Subject to the provisions of the contract of subscription, the board of

Sec. 67


611

directors of any stock corporation may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock and may collect the same or such percentage of said unpaid subscriptions, in either case with interest accrued, if any, as it may deem necessary. Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, shall be made on the date specified in the contract of subscription or on the date stated in the call made by the board. Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is provided in the by-laws, computed from such date until full payment. If within thirty (30) days from the said date no payment is made, all stocks covered by said subscription shall thereupon become delinquent and shall be subject to sale as hereinafter provided, unless the board of directors orders otherwise. (38a) R e m e d i e s t o enforc e p a y m e n t of stock subscription.

Section 67 applies to a stock corporation's recourse on unpaid subscription. The remedies are: (1) Extra-judicial sale at public auction. — This is the first and

most special remedy and it consists in permitting the corporation to put up unpaid stock for sale and dispose of it for the account of the delinquent subscribers. In this case, the provisions of Sections 67 to 69, inclusive, are applicable and must be followed, (see Velasco vs. Poizat, 37 Phil. 302 [1917].) A stock becomes delinquent and shall be subject to extra-judicial

sale at public auction, unless the board of directors orders otherwise, upon failure of the stockholder to pay the unpaid subscription or balance thereof within the grace period of 30 days from the date specified in the contract of subscription (without need of prior call or board action demanding payment) or in the absence of a date fixed in the contract of subscription, from the date stated in the call made by the board of directors. The delinquency takes place automatically after such failure (Sec. 67, par. 2.); and (2) Judicial action. — This other remedy is by court action

under Section 70. The statutory right to sell the subscriber's stock

612


Sec. 67

is merely a remedy in addition to that which proceeds by action in court. (Ibid.)

Sections 67 to 70 provide ample remedies for the payment of stock subscriptions. Hence, reversion of the stock to the corporation in case of non-payment thereof is contrary to said provisions. (SEC Opinion, Dec. 29,1976.) The corporation may, at its discretion, pursue either remedy (sale of the unpaid stock or action in court), though not both (4 Fletcher, p. 651; see De Silva vs. Aboitiz & Co., 44 Phil. 755 [1923].); and (3) Collection from cash dividends and withholding of stock divi-

dends. — This is authorized by Section 43. (infra.) Statutory sanctions on stock delinquency. (1) Rights denied to stockholder. — Under Section 71, a stock

delinquent for unpaid subscription shall not be voted or be entitled to vote or to representation at any stockholders' meeting, nor entitle the holder thereof to any of the rights of a stockholder except the right to dividends subject to the provisions of Section 43. At all elections of directors, it is expressly declared by Section 24 "that no delinquent stock shall be voted." (2) Right given to corporation.

— Under Section 43, the

corporation has the right to first apply cash dividends due on delinquent stock to the unpaid balance on the subscription plus cost and expenses, while as to stock dividends, to withhold the same from the delinquent stockholder until his unpaid subscription is fully paid. This right may be exercised by the corporation although it is not provided in its by-laws. Remedies limited to delinquent s u b s c r i p t i o n .

The power or right of corporations to sell shares for the payment of stockholders' debts should be considered subject to the procedure laid down in Sections 67 to 69, or enforceable by judicial action as provided in Section 70. This being so, such power or right is limited to delinquent subscription and does not extend to any other debt of stockholders to corporations. (1) Obligations other than unpaid subscriptions. — To hold that

under said sections, corporations may sell shares of stockhold-

Sec. 67


613

ers for the satisfaction of the latter's debt to the former, would in effect make corporations the sole judges of the merits of their claims against stockholders and would deprive the latter of the opportunity to pay the debt before the sale of stock and of the right to defend themselves and be heard, and to have the sale of stock made to the highest bidder, substantial and fundamental proprietary rights that cannot be ignored and set aside for the advantage and benefit of corporations. (2) Lien upon stock for said obligations. — A lien upon stock

in favor of corporations for debt or liability of stockholders other than unpaid subscription due and payable would be an obstacle to the trading of shares. Before accepting a transfer of corporate shares, a prospective transferee would have to inquire into unregistered claims against said shares in favor of the corporation. (Bank of P.I. vs. Caridad Estates, C.A.-G.R. No. 16, Aug. 22,1939.) A provision creating a lien upon shares of stock for unpaid debts, liabilities, or assessment of stockholders to the corporation should be embodied in the articles of incorporation, and not merely in the by-laws, because Section 6 (par. 1.) prescribes that the shares of stock of a corporation "may have such rights, privileges or restrictions as may be stated in the articles of incorporation." (SEC

Opinion, April 13,1981.) Section 91, dealing with termination of membership in a non-stock corporation, specifically states that the manner and causes for such termination shall be provided in the articles of incorporation or the by-laws. P a y m e n t of unpaid subscription or percentage thereof.

(1) When to be made. — Under Section 67 (par. 2.), the payment of any unpaid subscription or any percentage thereof, together with interest, if any, shall be made: (a) on the date specified in the contract of subscription; or (b) in the absence of any specified date in the contract of subscription, on the date stated in the call made by the board of directors.

614


Sec. 67

The contract of subscription or the call by the board of directors, as the case may be, may require the payment of the entire unpaid subscription or only a certain percentage thereof on the date specified for payment. (2) Effect of failure. — Failure to pay on such date shall render the entire balance due and payable and make all the stocks covered by the said subscription delinquent and subject to sale at public auction. This means that the delinquent shares shall cover not only the unpaid portion of the stockholder's subscription but his entire subscription consistently with the doctrine that a subscription is one, entire, indivisible, whole contract, (see Sec. 64.) The stockholder shall also be liable for interest at the legal rate (see Sec. 66.) on such balance, unless a different rate of interest is provided in the by-laws, computed from such date until full payment. (Sec. 67, par. 2.) Call and a s s e s s m e n t defined and distinguished.

(1) A call is a declaration officially made by a corporation usually expressed in the form of a resolution of the board of directors requiring the payment of all or a certain prescribed portion of a subscriber's stock subscription. (2) The term assessment is used with reference to both paid and unpaid subscriptions. (a) As to paid subscriptions, it means a levy made upon the stock of a corporation, generally for the purpose of correcting an impairment of the capital and indicates the proportionate amount required to be paid by each stockholder. (b) With reference to unpaid subscriptions, the term is used interchangeably with "call" or "installment." (18 Am. Jur. 2d 861.) In the absence of statutory authority, a corporation does not possess the power to assess fully paid stock. As a rule, stockholders are not liable beyond the extent of their unpaid subscriptions. (Ibid., 495.) Requisites for a valid call.

The requisites for a valid call are intended to safeguard

Sec. 67


615

the rights of stockholders and subject them only to equality of assessments. (SEC Opinion, July 21,1976.) These requisites are: (1) It must be made in the manner prescribed by law; (2) It must be made by the board of directors; and (3) It must operate uniformly upon all the shareholders. (Clark on Corporations, Sec. 123.) It has been held that a call made upon some of the subscribers is void (Seybreth vs. American Commander Min. & Mill. Co., Idaho 254.) or which requires some to pay a higher rate than the others. (Great Western Peleg. Co. vs. Burnham, 79 Wis. 47.) A call cannot be of such a character as to permit the directors to practice favoritism or act oppressively. (North Milwaukee Town Site Co. vs. Bishop, 103 Wis. 492.) The call cannot operate on stock which has not been subscribed at the time the call is made. Hence, a subscriber is not liable for calls made prior to his subscription. It is not, however, a defense that the corporate liability which necessitates the call was incurred prior to the subscriber becoming the owner of the stock. (18 Am. Jur. 2d 867.) Power of board of directors to make call. (1) As to date of payment. — The board of directors may at any time declare due and payable unpaid subscriptions. (Sec. 67, par. 1.) This power of the directors is no longer absolute as it can be limited by the subscription contract (Ibid.), such that the directors may not disregard the amount to be paid and the period for payment fixed in the subscription contract and make a call earlier. The board of directors may make a call "anytime" only where no date is specified in the contract of subscription; otherwise, the balance shall be payable on a date or dates fixed in the contract without need of call, (see Sec. 13.) (2) As to necessity, wisdom, or advisability of call. — Such

question arising in any particular case of a call, if within the power of the board of directors to make, is to be determined by the directors and their motive or judgment is not open to attack by the stockholders if it is in good faith and for the purpose of

616


Sec. 67

the corporation, (see Nashua Savings Bank vs. Anglo-American Land Mortgage & Agency Co., 189 U.S. 240.) The directors need not even show that the call is made for a corporate purpose or that the business of the corporation requires it to be made and paid. (18 Am. Jur. 2d 864-865.) Unless expressly required by the articles of incorporation, a call by the board of directors does not need stockholders' approval. Necessity a n d purpose of call.

(1) The necessity for calls depends upon the provisions of the contract of subscription, (see Sec. 67, par. 1.) Call is necessary when required by the subscription agreement. If no time is fixed for payment in the agreement, the subscription is payable only upon call by the board of directors which may be made "at any time" as the board may decide. The date specified in the board resolution is the date of the call for payment of unpaid subscription, not the date approving the resolution. 30

(2) The amount that may be called also depends upon the terms of the contract. In the absence of provisions as to the percentage of the unpaid subscription that shall be paid, the board may call for payment in full or at one time, or in such amounts as it may see fit to call. The purpose, therefore, of a call is to fix the time of payment of unpaid subscription and the percentage thereof to be paid when they are not fixed in the subscription contract. W h e n call not necessary.

(1) When insolvency supervenes upon a corporation, the payment of stock subscription may be enforced without the necessity of a prior call. (2) The same is true where the subscriber becomes insolvent. (4 Fletcher, p. 689; Velasco vs. Poizat, 37 Phil. 802 [1917].) ^The word "call," according to an English case, is capable of three (3) meanings. It may either mean the resolution, or its notification, or the time when it becomes payable. (SEC Opinion, Aug. 31,1995.)

Sec. 67


617

(3) Also, no call is necessary to fix the subscriber's liability when the subscription is payable not upon call or demand by the directors but immediately or on a specified day on or before a specified day, or when it is payable in installments at specified times. In any such case, it is the duty of the subscriber to pay the subscription or installment thereof as soon as it is due, without any call or demand, and if he fails to do so, an action may be brought at any time (Miranda vs. Tarlac Rice Mill Co., 57 Phil. 619 [1932].) after the expiration of the 30-day grace period from the specified date for payment, (see Sec. 67, par. 2.) P a y m e n t w i t h o u t call.

A stockholder can pay his subscribed shares of stock even if there is no call for their payment. 31

The subscription contract creates a creditor-debtor relationship between the corporation and the subscriber. As such debtor, the subscriber can pay his unpaid subscription any time as to discharge his obligation. The corporation, as creditor, cannot refuse a valid tender of payment offered to it. (SEC Opinion, Sept. 12,1989.) Necessity of notice of call.

Where call is necessary, notice must be given to the stockholder concerned. A call without notice to the subscriber is practically no call at all. (Pike vs. Dangar Co., Short Line R.R., 68 Me. 445.) The notice is regarded as a condition precedent to the right of recovery. It must, therefore, be alleged and proved to maintain an action for the call. (Baltazar vs. Lingayen Gulf Electric Power Co., Inc., 14 SCRA 522 [1965].) Thus, an obligation arising from non-payment of stock subscriptions to a corporation cannot be set-off against the money claim (i.e., wages and other benefits)

A stockholder who voluntarily remits an amount in excess of the percentage called by the board of directors cannot ask for a refund of such excess payment because once payment is accepted by the corporation, it becomes part of the assets of the corporation and any reduction thereof violates Section 16 (now Sec. 43, part of Sees. 14, 62, and 65.) of the Corporation Law. (SEC Opinion, April 7,1972, SEC Bulletin, Oct. 1982, p. 89.) 31

618


Sec. 68

due an employee against the corporation-employer. Such set-off is without lawful basis. In the absence of notice of call for the payment of unpaid subscriptions, the same is not yet due and payable. Furthermore, such deduction is not allowed by Section 113 of the Labor Code which allows a deduction from wages of the employee only in three instances mentioned therein. (Apodaca vs. National Labor Relations Commission, 172 SCRA 442 [1989].) The right to notice of call, however, may be waived by the subscriber. Sec. 68. Delinquency sale. — The board of directors may, by resolution, order the sale of delinquent stock and shall specifically state the amount due on each subscription plus all accrued interest, and the date, time and place of the sale which shall not be less than thirty (30) days nor more than sixty (60) days from the date the stocks become delinquent. Notice of said sale, with a copy of the resolution, shall be sent to every delinquent stockholder either personally or by registered mail. The same shall furthermore be published once a week for two (2) consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located. Unless the delinquent stockholder pays to the corporation, on or before the date specified for the sale of the delinquent stock, the balance due on his subscription, plus accrued interest, cost of advertisement and expenses of sale, or unless the board of directors otherwise orders, said delinquent stock shall be sold at public auction to such bidder who shall offer to pay the full amount of the balance on the subscription together with accrued interest, cost of advertisement and expenses of sale, for the smallest number of shares or fraction of a share. The stock so purchased shall be transferred to such purchaser in the books of the corporation and a certificate for such stock shall be issued in his favor. The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares.

Sec. 68


619

Should there be no bidder at the public auction who offers to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share, the corporation may, subject to the provisions of this Code, bid for the same, and the total amount due shall be credited as paid in full in the books of the corporation. Title to all the shares of stock covered by the subscription shall be vested in the corporation as treasury shares and may be disposed of by said corporation in accordance with the provisions of this Code. (39-46a) P r o c e d u r e for t h e sale of delinquen t stocks.

Briefly, the procedure is as follows: (1) Resolution declaring unpaid subscriptions payable. — The

board of directors passes a resolution declaring payable the whole or a certain percentage of the unpaid subscriptions, stating the date fixed for payment. If the date for payment is specified in the contract of subscription, no call is necessary, (see Sec. 67, par. 1.) (2) Notice to stockholders of resolution. — The stockholders are

given notice of the resolution by the secretary of the corporation either personally or by registered mail. (Sec. 68, par. 1.) The publication of the notice of call is not required. If the stockholders do not pay within 30 days from the date specified in the contract of subscription or on the date stated in the call made by the board, all the stocks covered by the subscription shall thereupon become delinquent and be subject to sale. (Sec. 67, par. 2.) Conversely, unpaid shares which are not delinquent are not subject to sale, (see Sec. 72.) In view of the proviso "unless the board of directors orders otherwise," in Section 67 (par. 2.), the board may order the removal of the delinquent status of unpaid subscription. The moment the unpaid subscription becomes delinquent, its delinquent status remains for as long as the stockholder does not pay in full his subscription, unless the board orders otherwise. Hence, subsequent call is not necessary. But if the stock, after a postponement of its sale, will again be subjected to delinquency

620


Sec. 68

sale, the manner required by Section 68 for the notice of delinquency sale must be observed. (SEC Opinion, Sept. 30,1991.) (3) Resolution ordering sale of delinquent stocks. — The board of

directors, by resolution, orders the sale of the delinquent stocks, stating the amount due and the date, time, and place of sale with notice to the delinquent stockholders which notice of sale shall be published. (Sec. 68, pars. 1, 2.) This means that it is the board of directors that has the authority to fix and determine the selling price of the delinquent stocks. (SEC Opinion, Feb. 23, 1982.) The requirements as regards personal notice and publication are mandatory, not only to assure notice to all subscribers, but also to assure equality and uniformity of assessments on stockholders. (Lingayen Gulf Electric Power Co., Inc. vs. Baltazar, 93 Phil. 404 [1953].) (4) Notice and publication of delinquent sale. — The phrase "un-

less the board of directors otherwise orders" (par. 2.) means that the board of directors may order the extension of the time and date of sale. However, if the prescribed 60-day period shall be extended, notice of such extension must be again served and published in the same manner required by law for the notice of delinquency sale. (SEC Opinion, Sept. 30,1991.) (5) Sale of delinquent stocks. — On the date of the sale, so many

shares of the stock as may be necessary to pay the amount due on subscription, with the accrued interest, costs of advertisement and expenses of sale, will be sold at public auction to the highest bidder for cash. (Sec. 68, par. 3.) Unless there was an agreement beforehand that the dividends earned by the delinquent stock before the delinquency sale was effected shall inure to the winning bidder, the same belong to the delinquent stockholder. (SEC Opinion, Nov. 12,1980; see Sec. 43.) Strict compliance with the formalities of sale is necessary, the power to make the sale being merely granted by law and an extraordinary one. (4 Fletcher, p. 670.) Unless the delinquent shares are sold in accordance with Section 68, the stockholder remains the owner of the same. Meaning of highest bidder.

The highest bidder is the person offering at the sale to pay the full amount of the balance on the subscription together with accrued

Sec. 68


621

interest, if any (see Sees. 66, 67.), cost of advertisement and expenses of sale, for the smallest number of shares or fraction of a share. (Sec. 68, par. 3.) Thus, the subscriber cannot incur any deficiency liability because the highest bid must not be less than the full amount due. 32

Only the number of shares which the bidder is willing to buy shall be transferred to the highest bidder. ILLUSTRATION: Suppose X subscribed 5 shares of stock with a par value of P100.00 each, paying P300.00 as his initial payment. The balance of P200.00 was called in. X failed to pay; hence, his stock was declared delinquent. The interest, expenses, and cost of sale amount to P50.00, thereby making a total of P250.00. A, B, and C are the bidders. A offers to pay P250.00 for 2 shares, B, P250.00 for 3 shares and C, P250.00 for 4 shares. In this case, A is the highest bidder; X retains 3 shares and A will own 2 shares. All the 5 shares will be deemed fully paid. A is entitled to issuance, after payment of his bid, of a certificate of stock for 2 shares and X, for the remaining 3 shares. But B is the highest bidder if the bids are as follows: A, P200 for 2 shares; B, P250 for 4 shares; and C, P240 for 3 shares. In this case, X retains 1 share. B is still the highest bidder if his bid is P250.00 for 5 shares because he is the only one who offers to pay the full amount due. In this case, all payments made by X on his subscription are deemed forfeited. Right of corporation to reject highest bid.

Under Section 68 (par. 2.), the delinquent stock shall be sold to the highest bidder "unless the board of directors otherwise orders." This means that the board is not bound to accept the highest bid unless the contrary appears. The reason is that in a public sale, the corporation is not making the offer to sell. In reality, the bidder is the one making the offer to purchase which the corporation is free to accept or reject. Art. 1325. Unless it appears otherwise, business advertisements of things for are not definite offers, but mere invitations to make an offer, (n) 32

622


Sec. 68

Under Article 1326 of the Civil Code, it is expressly provided that "advertisements for bidders are simply invitations to make proposals, and the advertiser is not bound to accept the highest or lowest bidder, unless the contrary appears." Purchase by the corporation of delinquent Stock.

In the absence of bidders (or the highest bidder), the corporation may purchase for itself the delinquent stock. In such case, the delinquent subscriber shall also be released from liability with regard to his subscription which is deemed fully paid, for "the total amount due shall be credited as paid in full in the books of the corporation." (Ibid., last par.) Of course, the purchase by the corporation must be made out of net earnings in view of the trust fund doctrine, (see Sec. 41 [2].) Title to all the shares purchased shall be vested in the corporation as treasury shares and may be disposed of for a reasonable price fixed by the board of directors. (Sec. 68, last par., 9.) Forfeiture of delinquent stock not a u t h o r i z e d .

Forfeiture of delinquent stock, without the corporation paying for it under Section 68, is not authorized under the Code. Accordingly, in case there is no bidder after complying with all legal requirements in the sale of delinquent shares under Section 68, the corporation cannot forfeit in its favor delinquent shares to be taken up in the corporation's books as treasury shares. However, the corporation can bring an action in court to recover unpaid subscriptions under Section 70. Shares to be sold in c a s e of delinquency.

The unpaid subscription must be paid by the subscriber pursuant to the terms and conditions of the subscription contract with the corporation. Where the subscription contract fails to fix the time and amount to be paid, the same may be fixed in the notice of call pursuant to a resolution of the board of directors. The corporation is allowed two alternatives in applying payments made by subscribers on their subscriptions, (see Sec. 64.) (1) If it applies the partial payments pro rata to each and all the entire number of shares subscribed for, all the shares are unpaid

Sec. 69


623

and are covered by a declaration of delinquency; hence, can be sold at public auction. Even if the partial payment is applied to some of the shares but for which no certificates of stocks have been issued, the entire subscription (i.e., all the shares subscribed) shall become delinquent and shall be subject to sale at public auction. (Sec. 67, par. 2.) The reason is that a subscription is "one, entire and indivisible whole contract" as set forth in Section 64. Thus, where the stockholder subscribed 100 shares at P10.00 par value, and paid P200.00, in case of delinquency, all the 100 shares covered by his subscription shall be subject to sale. (2) Nevertheless, if allowed by its by-laws, a corporation may issue certificates of stock corresponding to partial payments made on account subscriptions. If the unpaid portion for which no certificates of stock have been issued is declared delinquent, only the unpaid shares covered by the declaration can be sold at public auction. (Baltazar vs. Lingayen Gulf Electric Co., 14 SCRA 522 [1965]; see, however, Sec. 64.) Sec. 69. When sale may be questioned. — No action to recover delinquent stock sold can be sustained upon the ground of irregularity or defect in the notice of sale, or in the sale itself of the delinquent stock, unless the party seeking to maintain such action first pays or tenders to the party holding the stock the sum for which the same was sold, with interest from the date of sale at the legal rate; and no such action shall be maintained unless it is commenced by the filing of a complaint within six (6) months from the date of sale. (47a) Recovery of stock unlawfully sold.

The grounds for the recovery of stock unlawfully sold for delinquency are: (1) irregularity or defect in the notice of sale; and (2) irregularity or defect in the sale itself of the delinquent stock. Irregularity or defect in the call for unpaid subscription or in the notice of delinquency is no longer included among the grounds for questioning the sale.

624


Sec. 70

Note that under Section 69, the action for the recovery of stock unlawfully sold may be maintained, provided: (1) "the party seeking to maintain such action first pays or tenders to the party holding the stock, the sum for which the same was sold, with interest from the date of sale at the legal rate"; and (2) such action "is commenced by the filing of a complaint within six (6) months from the date of sale." The owner of stock lawfully sold at public auction for delinquency is not given the right of redemption. Section 69 refers to unpaid subscription to capital stock, the sale of which is governed by Section 68. These provisions cannot be applied where the stock was fully paid. Instead, Article 1140 of the Civil Code on filing within eight (8) years of action to recover movables (in this case share of stock) applies. (Calatagan Golf Club, Inc. vs. Clemente, Jr., 585 SCRA 300 [2009].) Sec. 70. Court action to recover unpaid subscription. — Nothing in this Code shall prevent the corporation from collecting by action in a court of proper jurisdiction the amount due on any unpaid subscription, with accrued interest, costs and expenses. (49a) Judicial r e m e d y to recove r unpaid subscription. (1) Necessity of prior call. — The statutory authority for the

recovery of unpaid subscription including pre-incorporation subscription (see Sec. 61.) through judicial action is found in the above provision. As a general rule, a corporation may not maintain a suit for the enforcement of unpaid subscription without first making a call as provided by law. (see Sec. 67; see Art. 1169, Civil Code.) (2) Prescriptive period. — The judicial action to recover unpaid subscription based on a written subscription contract must be brought within ten (10) years from the time the right of action accrues (Art. 1144[1], Civil Code.); or within six (6) years if based on a verbal subscription contract. (Art. 1145[1], Ibid.) Generally, the prescriptive period begins from the date demand is made of the subscriber by the corporation to pay the balance of the subscription, (see Garcia vs. Suarez, 67 Phil. 441 [1959]; see also Art. 1169, Civil Code.)

Sec. 71


625

(3) Amount recoverable. — The judicial remedy is limited to "the amount due on any unpaid subscription with accrued interest, costs and expenses." Therefore, the corporation cannot recover any other claim against the subscriber. The foregoing is also true in case of the extra-judicial sale at public auction of delinquent shares. (Sec. 68, par. 3.) (4) Nature of controversy. — Section 70 qualifies Section 5(b) of Presidential Decree No. 902-A which confers on the Securities and Exchange Commission original and exclusive jurisdiction over controversies arising out of intra-corporate relations between the corporation and the stockholders. An action against a delinquent stockholder to collect the amount due on unpaid subscription involves an intra-corporate dispute, (see Sec. 141.) The Corporation Code was enacted later than Presidential Decree No. 902-A and the amendments thereto. 33

Sec. 7 1 . Effects of delinquency. — No delinquent stock shall be voted for or be entitled to vote or to representation at any stockholders' meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder except the right to dividends in accordance with the provisions of this Code, until and unless he pays the amount due on his subscription with accrued interest, and the costs and expenses of advertisement, if any. (50a)

Effects of stock delinquency. (1) Stock delinquency shall deprive the stockholder the right to be voted for or be entitled to vote or to representation at any stockholders' meeting as provided above and in Section 24. Section 67 (par. 2.) expressly provides that the delinquent stockholder loses his rights pertaining to a stockholder the moment the unpaid subscription becomes delinquent. Thus, the prohibition to vote applies even if the delinquent status of the unpaid subscription occurs after the record date has been fixed. To rule otherwise would, in effect, allow delinquent shares to The question is now only of academic interest. The Securities Regulation Code (Sec. 5.2, R.A. No. 8799.) has transferred jurisdiction to decide cases involving intra-corporate disputes to courts of general jurisdiction. 33

626


Sec. 71

vote and would tolerate continuance of the delinquency status of the subscription since the delinquent stockholder would have no more interest in paying the unpaid balance. (SEC Opinion, March 13, 1998.) (2) Delinquent stock is not to be included in determining the existence of a quorum. (3) Quo warranto proceedings may be instituted against directors elected by delinquent stockholders. (SEC Opinion, Jan. 8,1976.) (4) A delinquent stockholder shall not be entitled to any of the rights of a stockholder but he shall still be entitled to receive dividends, subject to the provision of Section 43 which restricts the right to dividends by requiring that the cash dividends due shall first be applied to the unpaid balance while stock dividends shall be withheld until the unpaid balance is fully paid. (5) Delinquent stocks shall be subject to delinquency sale as provided by Section 68. Upon full payment by the delinquent stockholder of his unpaid subscription together with accrued interest, cost, and other expenses, he shall be restored to all the rights of a stockholder including the right to be issued other certificates of stock evidencing his subscription. Denial of voting rights.

Delinquent stock is denied voting rights because, if it shall be allowed to have the same rights as non-delinquent stock, stockholders of good standing will cease to have interest in paying their subscriptions promptly, and that will be inimical to the best interest of the corporation. The same observation applies with respect to payment of dues by members of non-stock corporations, (see SEC Opinion, June 14, 1972.) But delinquent members may still be allowed to vote depending upon the provisions of their by-laws. (SEC Opinion, April 8,1976.) 34

In a case, the corporation refused to count the votes by a stockholder in a stockholders' meeting maintaining that she *See SEC Opinion, March 10,1987 under Section 46.

Sec. 72


627

had forfeited her right to vote because she had mismanaged the corporation, had attempted to sell her stock in violation of the corporate charter, and the sheriff had seized her stock for nonpayment of debts. The court held that none of these matters were sufficient grounds to deny her of the right to vote her shares. The other stockholders had recourse against her in other ways such as a suit for violation of her duties to the corporation and to the stockholders. (Foreman vs. Hines, 314 So. 2d 460 [Ct. App. La. 1975].) Sec. 72. Rights of unpaid shares. — Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder, (n)

Rights of unpaid shares. (1) Before delinquency. — Before unpaid shares become delinquent, the holder thereof is not considered to have violated any contract with the corporation and, as a general rule, he has all the rights of a stockholder, which rights include the right to vote and to participate in dividends based on his total subscription. Such rights commence from the time his subscription is accepted by the corporation or if the offer to subscribe is made by the corporation, from the time such offer is accepted by the subscriber. However, he is liable for interest on his unpaid subscription if so required by the by-laws. (Sec. 66.) (a) Under Section 72, full payment of subscription is not required to make one a stockholder. It should not be construed, however, to preclude the implementation of the policy of the Central Bank relative to the registration of foreign investments for purposes of repatriation and/ or remittances of earnings. It is the Central Bank's position that foreign investors' subscriptions are not entitled to any dividends prior to actual remittance of the full payment of their subscriptions. (SEC Opinion, Dec. 14,1989.) (b) Where the subscription contract is subject to a suspensive condition of full payment, a subscriber is not entitled to the rights of a regular stockholder before the fulfillment of the condition.

628


Sec. 73

(c) Where the consideration for the shares subscribed is other than cash, the valuation thereof shall be subject to approval by the Securities and Exchange Commission, (see Sec. 62.) This means that before such approval, the subscriber cannot exercise the rights of a stockholder. (2) After delinquency. — The moment the unpaid subscription becomes delinquent, the holder loses the right to vote the shares covering the entire subscription, (see Sec. 64.) Section 67 (par. 2.) states when an unpaid subscription is considered delinquent. In non-stock corporations, whether or not a delinquent member is still entitled to exercise his voting rights is to be determined by the provisions of the articles of incorporation and the by-laws. Where partial payment on a subscription is applied as full payment for the corresponding number of shares for which the subscriber is issued certificates of stock, a call for payment of the unpaid portion of the subscription and its subsequent declaration of delinquency will not affect the fully paid-up stock but only the unpaid shares for which no certificates of stock have been issued. (Baltazar vs. Lingayen Gulf Electric Co., 14 SCRA 522 [1965]; see, however, Sec. 64.) Sec. 73. Lost or destroyed certificates. — The following procedure shall be followed for the issuance by a corporation of new certificate(s) of stock in lieu of those which have been lost, stolen or destroyed: 1. The registered owner of certificate(s) of stock in a corporation or his legal representative shall file with the corporation an affidavit in triplicate setting forth, if possible, the circumstances as to how the certificate(s) were lost, stolen or destroyed, the number of shares represented by each certificate, the serial number(s) of the certificate(s) and the name of the corporation which issued the same. He shall also submit such other information and evidence which he may deem necessary; 2. After verifying the affidavit and other information and evidence with the books of the corporation, said corporation shall publish a notice in a newspaper of general circulation published in the place where the corporation has its principal office, once a week for three

Sec. 73


629

(3) consecutive weeks at the expense of the registered owner of the certificate(s) of stock which have been lost, stolen or destroyed. The notice shall state the name of said corporation, the name of the registered owner and the serial number(s) of said certificate(s), and the number of shares represented by such certificate(s), and that after the expiration of one (1) year from the date of the last publication, if no contest has been presented to said corporation regarding said certificate(s) of stock, the right to make such contest shall be barred and said corporation shall cancel in its books the certificate(s) of stock which have been lost, stolen or destroyed and issue in lieu thereof new certificate(s) of stock, unless the registered owner files a bond or other security in lieu thereof, as may be required, running for a period of one (1) year for a sum and in such form and with such sureties as may be satisfactory to the board of directors, in which case a new certificate may be issued even before the expiration of the one (1)-year period provided herein: Provided, That if a contest has been presented to said corporation or if an action is pending in court regarding the ownership of said certificate(s) of stock which have been lost, stolen or destroyed, the issuance of the new certificate(s) of stock in lieu thereof shall be suspended until the final decision by the court regarding the ownership of said certificate(s) of stock which have been lost, stolen or destroyed. Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought against any corporation which shall have issued certificate(s) of stock in lieu of those lost, stolen or destroyed pursuant to the procedure above-described. (R.A. No. 201a.) Lost, stolen, or destroyed stock certificates.

Section 73 prescribes the procedure to be followed for the issuance by a corporation of new certificate(s) in lieu of those which have been lost, stolen, or destroyed. (1) The provision of Section 73(2) with respect to notice of loss is mandatory in nature. Thus, all the facts required to be stated should be included in the notice. However, a corporation may

630


Sec. 73

adopt a "notice of loss" which need not follow the exact letters of the law as long as substantial compliance of the required facts are included in the notice. (SEC Opinion, July 12,1993.) (2) The board of directors is given the power to determine the amount of the bond to be filed by the owner of lost, stolen, or destroyed certificate of stock so that a new certificate may be issued before the expiration of the one (l)-year period provided in said bond. (a) Considering the nature of a bond, which is to protect the corporation against loss or damage from any source growing out of the issuance of the duplicate certificate including liability to the holder of the original certificate or to innocent holders of certificates based on the duplicate (11 Fletcher, p. 510.), it is the board of directors that can best determine the form and the identity of the surety, the kind of surety bond and the amount sufficient for the protection of the corporation. (SEC Opinion, April 1,1987.) (b) It has been said that the amount will depend upon the rights sought to be exercised by the stockholder who seeks issuance of a new stock certificate. The bond posted should be in an amount adequate to protect the corporation against any loss sustained thereby. (18 Am. Jur. 2d 796.) (3) The corporation is not liable to any person prejudiced by the issuance of new certificate(s) of stock pursuant to the procedure described except in case of fraud, bad faith, or negligence on the part of the corporation and its officers, (par. 2.) New certificates issued because of misrepresentation of the registered owner are invalid, (see Red Grande Estate Co., Inc. vs. Board of Liquidators, 104 SCRA 963 [1978].) (4) The issue of whether or not a corporation is bound to replace a stockholder's certificate is an intra-corporate one, the jurisdiction of which belongs to the Securities and Exchange Commission even if there is a prayer for damages for the question of damages is merely incidental to the main issue. (Philex Mining Corporation vs. Reyes, 118 SCRA 602 [1982]; see Sec. 141.) (5) The expenses attendant to the issuance of a replacement certificate shall be borne by the registered owner unless fault can be attributed to the corporation or its officers.

Sec. 73


631

W h e n publication requiremen t may be dispensed with.

(1) The procedure prescribed in Section 73 is not applicable in a proceeding to compel issuance of a certificate to one in whose favor none was ever issued by the corporation where upon the facts, the certificate was lost by the corporation. (2) The provision of Section 73 appears to be mandatory. The conditions prescribed therein are for the protection of the corporation which cannot be made liable to any claimant of the shares until the procedure provided for has been complied with. Nevertheless, a corporation may be compelled to issue a new certificate if a bond or indemnity is given or it might do so voluntarily; and it could be compelled to issue a new certificate without any indemnity where, upon the facts, it is reasonably certain that the original certificate will not reappear, as where there is clear proof that the original had been destroyed, or where the certificate was lost by the corporation itself by carelessness, or if the corporation was otherwise protected, for in such a case the corporation could not incur any liability by reason of the original certificate. (SEC Opinions, Jan. 8,1990 and June 11,1990, citing 11 Fletcher, Sec. 5180; see, however, SEC Opinion, March 29, 1990 to the effect that the publication requirement cannot be dispensed with.) When the stock and transfer book has been lost or destroyed, and the corporation decides to issue new certificates of stock in lieu of the old certificates held by existing stockholders, the procedure or formalities prescribed under Section 73 are not applicable, for the stockholder should not be made to suffer the consequences on account of the negligence of the corporation. (SEC Opinion, Jan. 12,1994.) — oOo —

Title VIII CORPORATE BOOKS AND RECORDS Sec. 74. Books to be kept; stock transfer agent. — Every corporation shall, at its principal office, keep and carefully preserve a record of all business transactions, and minutes of all meetings of stockholders or members, or of the board of directors or trustees, in 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 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 meeting shall be open to the inspection of any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in 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, trustee, 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, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code: Provided, That if such refusal is pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be 632

Sec. 74

T I T L E VIII. C O R P O R A T E B O O K S A N D R E C O R D S

633

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 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 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 corporation or in the office of its stock transfer agent and shall be open for inspection of 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 transfer 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 fixed by the Commission, which shall be renewed 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; P.D. No. 268.) Books and records to be kept by corporations. (1) Under the Corporation Code. — Section 74 requires every

private corporation, stock or non-stock, to keep books and records as follows: (a) A record of all business transactions; (b) Minutes of all meetings of stockholders or members;

634


Sec. 74

(c) Minutes of all meetings of directors or trustees (par. 1.); and (d) Stock and transfer book, in the case of stock corporations, (par. 4.) All the above books and records must be kept at the principal office of the corporation (par. 1.), except that the stock and transfer book may be kept in the principal office of the corporation or in the office of its stock transfer agent, if one has been appointed by the corporation, (par. 4.) A corporation which has been dissolved 1

2

'Without the signature of the board secretary, the alleged minutes of a board meeting taken by a mere clerk, although it was part of the latter's duties to take down stenographic notes of the discussions in board meetings, have neither probative value nor credibility. (Union of Supervisors [R.B.]-NATU vs. Secretary of Labor, 109 SCRA 139 [1981].) The minutes are a brief statement not only of what transpired at a meeting, usually of stockholders / members or directors / trustees, but also at meeting of an executive committee. The minutes are usually kept in a book especially designed for that purpose, but they may also be kept in the form of memoranda or in any other manner in which they can be identified as minutes of a meeting. (People vs. Dumlao, 580 SCRA 409 [2009], citing the Corporation Code of the Phils. Annotated [1994] by R.N. Lopez, Vol. 2, p. 871.) Essentially, a clearing house is an agent of the stock exchange and its members, and the transfer agent is an arm or agent of an issuer corporation listed on the exchange and its members. If the jobs of the auditor, clearing house, and transfer agent are lodged in one and same person, all measures of checks and balances become ineffective, conflicts of interest may come into play, and laxity in the proper performance of each work will not be remote. (SEC Opinion, Oct. 29, 1971.) Transfer agents handle for a corporation all matters pertaining to the transfer by stockholders or bondholders of their securities to other persons, (see the Revised Securities Act [B.P. Big. 1781, Sec. 2(p}], Appendix "B.") A transfer agent may, in addition to keeping the current stock and transfers book, keep the stockholders' ledger, in which case he prepares a list of stockholders for the use of the corporation whenever needed for the payment of dividends, the issue of stock warrants, stockholders' meetings, and other corporate purposes. He may also distribute the dividends, warrants, and so forth. (E.L. Kohler, op. cit., p. 472.) In addition to the records required to be maintained pursuant to Section 74, RSA Rule 40-5 requires every transfer agent to make and retain for a period of five (5) years the following books and records relating to its transfer agent activities: (1) its rules and procedures; (2) policy of financial institution bond coverage; (3) exception reports filed with the Commission pursuant to RSA Rule 40-3; (4) complaint log as required to be maintained under RSA Rule 40-3; (5) reports to the issuers for whom the firm acts as transfer agent as required under RSA Rule 40-3; and (6) annual report on SEC Form 40-AR. Every transfer agent shall make available any or all of its books and records upon request of an authorized representative of the Securities and Exchange Commission. Failure to do so shall result in an immediate suspension of the transfer agent's registration. Such suspension shall continue until such time as the books and records are made available to the SEC. (For rules on registration of and reports from clearing agencies and transfer agents, see RSA Rules 40-2, 3, 4.)

Sec. 74

TITLE VIII. CORPORATE BOOKS AND RECORDS

635

must continue to preserve them until the final settlement and liquidation of its affairs. The "records of all business transactions" would include the journal, ledger, financial statements, income tax returns, vouchers, receipts, contracts and all papers pertaining to the operation of the corporation of interest to its stockholders. (SEC Opinion, March 15,1991.) The minutes of board meetings should be signed by the corporate secretary. Without such signature, neither probative value nor credibility could be accorded such minutes. (Union of Supervisors [R.B.]-NATU vs. Secretary of Labor, 109 SCRA 139 [1981].) (2) Under special laws. — In addition, corporations must keep other books and records required by special laws like the Public Service Act, General Banking Law, National Internal Revenue Code, Labor Code, and others. They may also keep such optional records and subsidiary books as the needs of their business may require. Practical necessity of k e e p i n g b o o k s .

The language of Section 74 imposing upon corporations the duty of keeping books and records is imperative and mandatory.

3

Among the corporate records which are required by the SEC to be kept and/or registered by corporations include the following: (1) Books of account and stock and transfer books. — Within thirty (30) days from date of registration of the articles of incorporation, the corporation must set up its books of accounts, duly registered with the Bureau of Internal Revenue, wherein the paid-up capital as well as other funds received and all disbursements made thereon are immediately recorded and must set up and register with the Commission its stock and transfer book. (2) List of members in non-stock corporation; list of stockholders. — Within thirty (30) days from the date of registration, all non-stock corporations must set up and register with the Commission their Membership Book. All stock corporations must prepare a list of stockholders as of the date of the next annual or special stockholders' meeting, showing the names of stockholders, address, nationality, number of shares subscribed, and amount subscribed by each which shall be made available for inspection by any stockholder of record. Non-stock corporations must prepare a list of members as of the date of the next annual or special meeting of the members showing the name of the members, address, and nationality which shall be made available for inspection by any member. All corporations must submit said list within five (5) days from the date of the stockholders' / members' meeting. However, in the case of corporations where the stockholders/members entitled to vote are as of a date prior to said meeting, the corporation must submit to the Commission within five (5) days before the date of the said meeting the list of stockholders/members showing the information stated above duly certified by the corporate secretary and/or the transfer agent concerned. Corporations having 10,000 or more stockholders must submit a certification under oath by the corporate secretary or transfer agent stating among others the total number 3

636

Sec. 74


Aside from this legal duty, corporations are under the practical duty imposed by necessity and convenience of keeping adequate books and records, if for no other reason than because it is advisable as a measure of precaution, expediency and convenience, since they provide the only certain and accurate method of establishing the various corporate acts and transactions and of showing the ownership of the stock and like matters. (See SEC Opinion, Feb. 19,1975, citing 5 Fletcher, p. 509.) 4

Entries to be m a d e in stock and transfer book.

Stock corporations must keep a "stock and transfer book" in which must be kept a record of all stocks containing the entries required by Section 74 to be made and such as other entries as the by-laws may prescribe, (par. 4.) (1) Transfers contemplated to be recorded. — The "alienation,

sale, or transfer of stock" that is supposed to be recorded in the stock and transfer book as contemplated in Section 74 (par. 4.) refers generally to shares which may be alienated, and they are those covered by certificates of stock. (Nava vs. Peer Marketing Corp., 74 SCRA 65 [1970]; see Sec. 63, par. 2.) As a general rule, only those whose ownership of stock is duly recorded or registered in the stocks and transfer book are considered stockholders of record and are entitled to all the rights of a stockholder. (2) Where failure to make entry attributable to the corporation. —

Where a stockholder in good faith sells his stock, does all that he believes is necessary to effect a transfer and requests the corporate of shares subscribed, total amount subscribed, and total amount paid and the distribution of the ownership thereof by citizenship classified into Filipino, American, Chinese, Japanese, and others, in lieu of the list of stockholders mentioned in the preceding paragraph. The membership book /stock and transfer book including loose leaf ledgers and computer records being kept by the corporations concerned or the records of the transfer agents as the case may be must at all times be made up-to-date and shall be subject to inspection by this Commission or any interested stockholder/member of record. (3) Financial records. — All corporations, whether domestic or foreign, transacting business in the Philippines, shall keep proper books of accounts and other financial records, vouchers and papers, showing all business transactions including the receipts and disbursements of funds, the purposes for which they have been spent and the authorization therefor. •Lanuza vs. Court of Appeals, 454 SCRA 54 (2005), citing HECTOR S. DE LEON, The Corporation Code of the Philippines Annotated, 1999 Ed., p. 606.

Sec. 74


637

officers having charge of the books, to do all that is necessary to that end, he is released from statutory liability, if any, to creditors (Braken vs. Nicol, 124 Ky. 628, 4 L.R.A. [N.S.] 818.), although the corporation does not keep a stock book as required by the statute and hence, the transfer was not recorded therein. Even in those states in which the sale of shares is ineffectual against the claims of attaching creditors of the vendor until transferred to the vendee on the books, the rule is otherwise when the failure to make the transfer is attributable only to the corporation and its officers. (Fisher, op. ext., pp. 150-151.) Neither the transferor nor the transferee can be adversely affected by the failure to make an entry of the transfer on the books of the corporation. (Earle vs. Carson, 188 U.S. 42, 44; 47 L. ed. 373.) (3) Entry where stockholder unknown or cannot be located. —

Where the stockholder is unknown or cannot be identified or located (see Sec. 122, par. 3.), a trust relation is impliedly created between the corporation and the unknown stockholder. In such case, his shares of stock shall be entered in the corporate books and in the certificate of stock in the name of the corporation as "trustee." The corporation shall continue to hold the stock in a fiduciary capacity, until the real owner appears or the stock is escheated in accordance with law. (SEC Opinions, Dec. 1, 1988; July 13,1993.) B o o k s a n d records, a n d entries therein as evidence.

The records of a private corporation, even those required to be kept by statute, are not in any sense public records. They are merely private records, and, as such, subject to the general rules of evidence applicable to documentary evidence. (1) Admissibility as evidence. — As a general rule, the books and records of a corporation are admissible in evidence in favor of or against the corporation and its members to prove the corporate acts, its financial status, and other matters, including one's status as a stockholder. They are ordinarily the best evidence of corporate acts and proceedings or of the matters recorded therein. Thus, the stock and transfer book is the best evidence of

638


Sec. 74

the stock ownership and voting rights for purposes of corporate elections or for the purposes of dividend payment. (18 Am. Jur. 2d 707.) Where original corporate records are lost, mislaid, or destroyed, secondary evidence may be admitted in accordance with Section 4, Rule 130 of the Rules of Court. (2) Probative value. — It is generally held, however, that the records and minutes of a corporation are not conclusive even against the corporation, but are prima facie evidence only of the matters recorded therein. Thus, parol or extrinsic evidence may be admitted to supply omissions in the records or explain ambiguities, or to show what transpired where no records were kept, and according to some cases, to contradict such records. Corporations are not bound by false and simulated entries on their records unless, knowing them to be such, they have neglected to correct them and some innocent third person has relied thereon to his prejudice. (Ibid.) (3) Resort to other documents. — The quorum is based on the

totality of the shares which have been subscribed and issued, whether it be founders shares or common shares, (see Sees. 52, 137.) 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 larger amount of shares issued and outstanding as compared to that listed in the stock and transfer book. This is one instance where resort to documents other than the stock and transfer book is necessary. One who is actively a stockholder cannot be denied his right to vote by the corporation merely because the corporate officers failed to keep its records accurately. A contrary rule would work injustice to the owners and/or successors in interest of said shares. (Lanuza vs. Court of Appeals, 454 SCRA 54 [2005].) Persons given the right to inspect corporate b o o k s .

While the right of inspection of corporate books is granted as a matter of precedent or practice in other jurisdictions, it is one that is recognized by express provision of our corporation law.

Sec. 74

TITLE Vm. CORPORATE BOOKS AND RECORDS

639

(1) Any director, trustee, or stockholder or member. — Section

74 states that "the record of all business transactions of the corporation and the minutes of any meeting shall be open to the inspection of any director, trustee, or stockholder or member of the corporation at reasonable hours on business days." (par. 2.) (2) Voting trust certificate holder. — The word "stockholder,"

as used in Section 74, means not only a stockholder of record; it includes a voting trust certificate holder who has become merely the equitable owner of the shares transferred, (see Sec. 59, par. 3.) (3) Stockholder of a sequestered company. — Pursuant to said

provision, a stockholder of a sequestered corporation retains the right to inspect and/or examine the records of the corporation. The act of sequestration of property does not import or bring about a divestment of title over said property. In relation to the property sequestered, frozen or provisionally taken over, the sequestrating authority is a conservator, not an owner. (Republic vs. Sandiganbayan, 199 SCRA 39 [1991]; Africa vs. Presidential Commission on Good Government, 205 SCRA 39 [1992].) (4) Beneficial owner of shares. — A beneficial owner of shares

(e.g., buyer from record owner), pledgee, or judgment debtor may also be given the right of inspection, provided his interest is clearly established by evidence. R e m e d i e s a nd sanctions for e n f o r c e m e n t of right. (1) Action for mandamus or damages. — In case the officers of

the corporation wrongfully denies a stockholder or member of the right to inspect corporate books or papers, the usual remedy to enforce his right is by filing with the Commission an action for mandamus against the corporation. The secretary should be included as party defendant since such official is customarily charged with the custody of all documents and records of the corporation against whom personal orders of the court would be made, (see Ibid.; SEC Opinion, April 27, 1970.) In a proper case, the stockholder may maintain an action for damages which he may have sustained by the wrongful denial. (2) Civil and criminal liability. — Under Section 74 (par. 3.),

any officer or agent of the corporation who shall refuse to allow

640


Sec. 74

any director, trustee, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of the Code, shall be liable to such director, etc. for damages, and, in addition, shall be guilty of an offense which shall be punishable under Section 144 of the Code. However, if such refusal is pursuant to a resolution or order of the board of directors or trustees, the liability for such action shall be imposed upon the directors or trustees who voted for such refusal. Note that Section 74 (par. 3.) refers only to the "minutes or records" of the corporation, and does not include refusal to allow inspection of the stock and transfer book. Nevertheless, the officer or agent denying such inspection may be held civilly liable for damages, (see Arts. 19,21, Civil Code.) Basis and purpose of right to inspect corporate books. (1) Beneficial ownership of corporate assets. — Those in charge

of the corporation are merely the stockholders' or members' agents concerning whose good faith in discharging their duties the stockholders or members have an interest and right to be informed. (5 Fletcher, p. 571.) (a) The law is based on the principle that the stockholders or members have a right to be fully informed as to the condition of the corporation, in the manner its affairs are conducted, and how its capital stock to which they have contributed is employed and managed. (SEC Opinion, April 29, 1970, citing Stone vs. Kellog, 46 N.E. 22.) (b) The right of stockholders to inspect the books of the corporation rests on the fact of beneficial ownership of the corporate property and assets through ownership of shares. With reference to his right of inspection, the relation of a stockholder to the corporation is analogous to that of a partner to the firm. (18 Am. Jur. 2d 710; Art. 1803, Civil Code.) (c) The right is predicated not only upon the stockholders' in the corporation and ownership of shares of the corporation's assets but also ownerships of the corporation's assets but also upon the necessity of self-protection. (Gokongwei, Jr. vs. Securities and Exchange Commission, 89 SCRA 336 [1979].)

Sec. 74


641

(2) Protection of stockholders and general public from mismanagement, fraud, and other wrongful acts. — There is no question that

stockholders are entitled to inspect the books and records of a corporation in order to investigate the conduct of the management, determine the financial condition of the corporation, and generally take an account of the stewardship of the officers and directors. (18 Am. Jur. 2d 718.) (a) The evident purpose of the law in granting stockholders the right is to protect small and minority stockholders from the power of the majority and from mismanagement by its officers as well as to ascertain, establish, and maintain their rights and intelligently perform their corporate duties. (SEC Opinion, April 29,1970, citing Stone vs. Kellog, 46 N.E. 22.) (b) It has also been stated that the purpose of the law which requires corporations to keep books of account and gives stockholders the right to examine the records of their corporation is not only to protect the interests of stockholders but also to protect the public from monopolies, unlawful combinations, and unreasonable exactions from corporations. (Ibid., p. 710.)

In the exercise of its power of supervision and control over all corporations, the Securities and Exchange Commission, motu proprio or upon complaint by any aggrieved party, undertake an inspection and examination of books and records of any corporation, (see Sec. 142.) Right to inspection not absolute.

In spite of the fact that the right of inspection by a stockholder or member would appear to be absolute according to the provision of Section 74, there are limitations on the right. (1) Purpose of inspection. — The stockholder's (or member's)

right of inspection is given to him as such and must be exercised by him with respect to his interest as a stockholder and for some purpose germane thereto (such as where the purpose is to find out the actual financial condition of the corporation and how his investment is being used) or in the interest of the corporation, (see Gokongwei, Jr. vs. Securities and Exchange Commission, 89 SCRA 336 [1979].)


642

Sec. 74

(a) Ground for denial of right. — The right should be denied

on the ground that "the person demanding to examine or copy excerpts from the corporation's records and minutes has improperly used 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" (Sec. 74, par. 3.), or has an ulterior purpose or improper ends prejudicial to the corporation (Acuna vs. Parlatone, [C.A.] O.G. Suppl., Oct. 17, 1941, p. 28.), such as where the purpose is merely to gratify his curiosity or for a speculative use. (Gutherie vs. Harkness, 199 U.S. 148.) (b) Burden of proof that purpose is illegitimate or improper.

— On the application for mandamus to enforce the right, it is proper for the court, however, to inquire into and consider the stockholder's good faith and his purpose and motives in seeking inspection. (Gokongwei, Jr. vs. Securities and Exchange Commission, supra, citing 5 Fletcher, p. 716.) The presumption is that the purpose of the stockholder or member is legitimate or proper (i.e., related to his being a stockholder). Once the stockholder alleges a proper purpose, the burden of proving otherwise rests on the corporation, (see Republic vs. Sandiganbayan, 199 SCRA 39 [1991].) He may, therefore, demand an examination of the corporate books and records without disclosing his reasons. (7 R.C.L. 326.) In a criminal 5

6

To ascertain the value of petitioner's shares for sale is generally regarded as a proper motive. It is frequently combined with a purpose to inquire into and possibly initiate litigation with respect to mismanagement. (Gothrie vs. Harkness, 199 U.S. 148 [1905].) Mandamus has been denied, however, where the corporation alleged that the petitioner's purpose was to bring groundless suits in order to force the corporation or its principal shareholder to purchase his shares. (State ex rel. Linihan vs. United Brokerage Co., 101 A 433 [Del. Sup. Ct. 1917], cited in W.L. Cary, Cases and Materials on Corporations, 1969 ed., p. 1022.) In a case, however, the Supreme Court ruled: "Although the petitioner has claimed that he has justifiable motives in seeking the inspection of the books of the respondent bank, he has not set forth the reasons and the purposes for which he desires such inspection, except to satisfy himself as to the truth of the published reports regarding certain transactions entered into by the respondent bank and to inquire into their validity. The circumstances under which he acquired one share of stock in the respondent bank purposely to exercise the right of inspection do not argue in favor of his good faith and proper motivation. Admittedly, he sought to be a stockholder in order to pry into transactions entered into by respondent bank even before he became a stockholder. His obvious purpose was to arm himself with materials which he can use against the respondent bank 6

Sec. 74

TITLE Vni. CORPORATE BOOKS AND RECORDS

643

complaint for violation of Section 74, the defense of improper use or motive is in the nature of a justifying circumstance that could exonerate those who raise and are able to prove the same. (Ang-Abaya vs. Ang, 573 SCRA 129 [2008].) (2) Requisites for existence of probable cause to file a criminal case.

— In order that the penal provision under Section 144 may apply in a case of violation of a stockholder's or member's right to inspect corporate books, the following elements must be present. (a) A director, etc. has made a prior demand in writing for a copy or excerpts from the corporation's records or minutes; (b) Any officer or agent of the concerned corporation shall refuse to allow the said director, etc., to examine and copy said excerpts; (c) If such refusal is made pursuant to a resolution or order of the board of directors' or trustees the liability for such action shall be imposed upon the directors or trustees who voted such refusal; and (d) Where the officer or agent of the corporation sets up the defense that the person demanding to 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, the contrary must be shown or proved. (Ang-Abaya vs. Ang, supra; Sy Tiong Shiou vs. Sy Chim, 582 SCRA 517 [2009].) (3) Books of foreign corporation. — The right does not apply

where the corporation is not organized under the Philippine law as in such a case, the right of the stockholder is governed by the inspection requirements in the jurisdiction in which the foreign corporation was organized. (Philpotts vs. Phil. Manufacturing Co., 40 Phil. 471 [1919]; Grey vs. Insular Lumber Co., 67 Phil. 139 [1939]; see Sec. 129.) for acts done by the latter when the petitioner was a total stranger to the same. He could have been impelled by a laudable sense of civic consciousness, but it could not be said that his purpose is germane to his interest as a stockholder." (Gonzales vs. Philippine National Bank, 122 SCRA 490 [1983].)


644

Sec. 74

(4) Trade secrets. — There are some things which a corporation may undoubtedly keep secret notwithstanding the right of inspection given to stockholders, as where a corporation, engaged in the business of manufacture, has acquired a formula or process not generally known, which has proved of utility in the manufacture of its products. The corporation or its board of directors may properly adopt measures for the protection of such process from publicity. (Philpotts vs. Phil. Manufacturing Co., supra.) (5) Certified copies of minutes. — A stockholder does not have

any absolute right to secure certified copies of the minutes of the corporation until these minutes have been written up and approved by the directors. (Veraguth vs. Isabela Sugar Co., 52 Phil. 266 [1928].) (6) Place of inspection. — The Code requires every stock corporation to keep its stock and transfer books in the principal office of the corporation or in the office of its stock transfer agent. (Sec. 74, par. 4.) By implication, such books can only be inspected at such office. It has been held that a stockholder cannot be permitted to take the corporate books out of such office for the purpose of inspecting the same. (Veraguth vs. Isabela Sugar Co., supra.) (7) Reasonable regulations re inspection. — The right of inspec-

tion is subject to regulations as to time, place, and proper purpose which the corporation through the by-laws may prescribe, provided such regulations are reasonable and not contrary to law. (see Sec. 46, par. 1.) It cannot in substance be denied or made exercisable only at the whim or discretion of those in charge of the corporation. Of course, the right may only be exercised at reasonable hours on business days. (Sec. 74, par. 2.) Reasonable hours must be understood to mean reasonable hours on business days throughout the year and not merely during some arbitrary period of a few days chosen by the directors, e.g., for ten days prior to the annual meeting for the year. (Pardo vs. Hercules Lumber Co., 47 Phil. 964 [1925].) Extent of the right of inspection. (1) Copies, abstracts and memoranda. — The right to inspect

the books and records of the corporation includes, as an incident

Sec. 74

TITLE VITJ. CORPORATE BOOKS AND RECORDS

645

thereof, the right to make copies, abstracts and memoranda of their contents (Sec. 74, pars. 3, 4.) but a stockholder (or member) cannot, without order of the court, be allowed to take books from the office of the corporation. (Veraguth vs. Isabela Sugar Co., Inc., supra.) Under Section 75, any stockholder or member has the right to receive the corporation's most recent financial statement. (2) Agent or representative. — The right of inspection is

personal in the sense that it may be exercised by the director, trustee, stockholder, or member himself but the inspection and examination may be made by any proper representative or attorney-in-fact, and either with or without the attendance of the director, etc.; otherwise, the right would be futile or unavailing in many instances where through lack of knowledge necessary to exercise it, he is debarred from procuring in his behalf the services of one who could exercise it. (Philpotts vs. Phil. Manufacturing Co., 40 Phil. 471 [1919].) (3) All pertinent books, papers, etc. — Section 74 includes

"record of all business transactions and minutes of all meetings of stockholders or members or of the board of directors or trustees." (par. 1.) In general, the right of the stockholder (or member) extends to all books, papers, contracts, minutes, books or other instruments from which he can derive any information that will enable him to better protect his interest. (5 Fletcher, p. 638.) A stockholder cannot be denied access to the corporate books simply because they contain, along with information to which he is entitled, other information to which he has no right to demand, where the right is given by statute. (SEC Opinion, April 27,1970, citing 7 R.C.L. 225.) Right of stockholder to d e m a n d a list of stockholders. (1) Right only to inspect and make own list. — Under the Corpo-

ration Code, there is no express provision making it as duty of a corporation to supply any stockholder, upon his request, with a list of its stockholders showing their respective subscriptions. To do so would result to a great inconvenience on the part of the corporation, especially when there are thousands of stockholders. It seems, therefore, unnecessary for a stockholder

646


Sec. 74

to request that he be supplied with a list of stockholders with their shareholdings inasmuch as he can directly inspect the stock and transfer book of the corporation, subject, of course, to such limitation as to proper time, place, purpose, and conditions of inspection. (Ballantine, p. 385.) The Code impliedly recognizes the solicitation of proxies as a right (see Sec. 58.) and a proxy-seeking stockholder must have access to the corporation's list of stockholders before he can begin soliciting proxies. (2) Non-liability of corporation for allowing right. — As to

whether a stockholder can sue a corporation for revealing the names of stockholders and their stockholdings, it is the opinion of the Securities and Exchange Commission that a corporation in allowing a shareholder to get the list of stockholders in the exercise of his right to inspection, cannot be held liable by the other stockholders who did not so request, for that would be inconsistent with the express provision of the law granting stockholders the right to inspection of corporate books and records including the list of stockholders. (SEC Opinion, Aug. 11, 1972.) Right of stockholder to d e m a n d a detailed auditing of business o p e r a t i o n s .

The Code is silent as to whether a stockholder can demand a detailed auditing of the business operations of a corporation upon his discovery of probable anomalies and irregularities as appearing in the books of the corporation and other sources of information. (1) Power of courts. — The weight of authority in the United States, however, is to the effect that the courts do not have the power to order a full and complete audit where no good reason is shown that the same is necessary. (Merchants Brown Co. vs. Butler, 70 Fla. 397, 70 So. 383.) But while the court does not have authority to command in mandamus the corporation to allow an audit made, it does have the power to allow a reasonable time for the inspection of the books and records and if the auditor can accomplish the making of an audit during that time, there is no reason why he may not do so. (Florida Military Academy, Inc. vs. Sate Ex rel Moya, 127 Fla. 381,174 Sc. 3, 5.)

Sec. 74

TITLE VTII. CORPORATE BOOKS AND RECORDS

647

(2) Liability for expenses of audit. — A stockholder is entitled to an inspection and audit to ascertain the value of his stock and the correctness of an inventory or audit in order to exercise an option to purchase. (Dreyfuss and Sons vs. Benson, 239 S.W. 347.) It has also been said that all expenses of the investigation or audit are to be defrayed by the applicant unless the court orders them to be paid or shared by the corporation. (Ballantine, p. 390.) (3) Power of the Securities and Exchange Commission. — In

the light of all the foregoing authorities, a stockholder who would like to ascertain the value of his liquidation dividend may demand a detailed auditing of the corporate's business operations to achieve such end. (SEC Opinion, Feb. 28, 1972.) He can file a complaint or petition with the Securities and Exchange Commission pursuant to Presidential Decree No. 902A upon discovery of probable anomalies or irregularities in the management of the corporation, in which case, the Commission may order an audit and examination of the corporate books if there is a clear showing that the same is necessary. (SEC Opinion, Oct. 16,1990.) Right of stockholder to examine books of corporation's subsidiary. While the right of a stockholder to examine the books and records of a corporation for a lawful purpose is a matter of law, the right of such stockholder to examine the books and records of a wholly-owned subsidiary of the corporation in which he is a stockholder is a different thing. (1) Right recognized. — Some US State Courts recognize the right under certain conditions, while others do not. (a) Thus, it has been held that where a corporation owns approximately no property except the shares of stock of subsidiary corporations which are merely agents or instrumentalities of the holding company, the legal fiction of distinct corporate entities may be disregarded and the books, papers, and documents of all the corporations may be required to be produced for examination, and that a writ of mandamus may be granted, as the records of the subsidiary were, to all intents and purposes, the records of the parent even though the subsidiary was not named as a party.

648


Sec. 75

(b) Mandamus was likewise held proper to inspect both the subsidiary's and the parent's corporation's books upon proof of sufficient control or dominion by the parent showing the relation of principal or agent or something similar thereto. (c) Stockholders were also held entitled to inspect the records of a controlled subsidiary corporation which used the same offices and had identical officers and directors. (Gokongwei, Jr. vs. Securities and Exchange Commission, 89 SCRA 336 [1979], citing American cases.) Our Supreme Court has held that where the foreign subsidiary is wholly-owned by a holding company, and, therefore, under its control, it would be more in accord with equity, good faith and fair dealing to construe the statutory right of a stockholder of the parent corporation to inspect the books and records of the corporation as extending to books and records of such whollyowned subsidiary which are in the parent corporation's possession and control. (Ibid.) (2) Right refused. — On the other hand, mandamus at the suit

of a stockholder was refused where the subsidiary corporation is a separate and distinct corporation domiciled and with its books and records in another jurisdiction, and is not legally subject to the control of the parent company, although it owned a vast majority of stocks in the subsidiary. Likewise, inspection of the books of an allied corporation by a stockholder of the parent company which owns all the stock of the subsidiary has been refused on the ground that the stockholder was not within the class "persons having an interest." (Ibid.) Sec. 75. Rights 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

Sec. 75

TITLE Vin. CORPORATE BOOKS AND RECORDS

649

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 P50.000.00, the financial statements may be certified under oath by the treasurer or any responsible officer of the corporation, (n) Right of stockholder or member to financial statements. This additional right given to a stockholder or member reinforces his right of inspection and examination of corporate books and records. (1) The financial statements shall include (a) a balance sheet 7

9

TJnder generally accepted accounting principles, financial statements prepared to present the financial position and operating results of an enterprise also include a statement of changes in retained earnings, disclosure of changes in other categories of stockholders' equity, and related notes, (see PICPA Bulletin No. 19[3], Sept. 1977.) It is of common knowledge that audited financial statements are generally completed three or four months after the close of the accounting period. (Comm. of Internal Revenue vs. Court of Tax Appeals, 127 SCRA 9 [1981].) SEC Memo. Cir. No. 14 (Dec. 11, 2003) allows the use of functional currency other than Philippine peso for financial statement purposes and contains the guidelines for the use of such currency defined as the currency of the economic environment in which an entity operates and primarily generates and expends cash. The Philippine peso will be considered as a foreign currency if it is the functional currency of the qualified entity. Under existing SEC rules and regulations, the following corporations are required to submit to the SEC annual audited financial statements: (1) Stock corporations with paid-up capital stock each of P50,000.00 or more; (2) Non-stock corporations with total assets each of P500,000.00 or more, or with gross annual receipts of P100,000.00 or more; (3) Branch offices of stock foreign corporations with assigned capital each of P50,000.00 or more; (4) Branch offices of non-stock corporations with total assets each of P500,000.00 or more; and (5) Representative offices of foreign corporations with total assets each of P500,000.00 or more. The duty of a company's external auditor is to conduct an independent examination of the company's financial statement and supporting documents pursuant to prescribed auditing standard and practices: A company should neither allow nor require its external auditor to prepare its financial statements and lot any of its supporting documents, (see SEC Memo. Cir. No. 16, series of 2009.) "It presents data related to the financial condition of a business as of a specific period of time (e.g., December 31,1999). This statement of financial position shows the assets of the business, its liabilities, and the owners' equity. The totals of the amounts listed in each of these three major categories of the statement conform to the basic accounting equation: Assets = Liabilities and Owners' Equity. If the total assets of a corporation exceed the liabilities (claims of creditors), the excess of the assets (net worth or net assets) belongs to the stockholders. Such excess

650


Sec. 75

as of the end of the last taxable year and (b) a profit and loss statement* for said year, showing in reasonable detail its assets and liabilities and the result of its operations. 10

(2) If included in the financial report of the operations of the corporation for the preceding year, the financial statements must be duly signed and certified by an independent certified public accountant, except that if the paid-up capital of a stock corporation is less than P50,000.00, the certification under oath by the treasurer or any responsible officer of the corporation is sufficient. (3) The Securities and Exchange Commission requires the corporation to file with the Commission a copy of the balance sheet and related profit and loss statements. They are open for public inspection during reasonable hours on any business day. Duty of board to present a n n u a l financial report.

A financial report of the operations of the corporation for the preceding year is required to be presented to stockholders or members at every annual regular meeting of such stockholders

represents the stockholders' equity and is in the form of capital invested in stock and surplus (retained earnings). Thus, the term "net asset value" indicates the amount of assets exceeding the liabilities as differentiated from "total assets" which include the liabilities. (Adamson vs. Court of Appeals, 232 SCRA 602 [1994].) 'It shows the results of operations of a business over a period of time, usually one year (e.g., January 1,1999 to December 31,1999). Other alternative terms used are "statement of earnings," "statement of operations," and "income statement." The net results of operations can be represented by the equation: Receipts - Expenses = Net income (net loss). With respect to alleged losses, it has been held that where a profit and loss statement shows a loss, the statement must show income and items of expenses to explain the method of determining such loss. A profit and loss statement is devoid of any evidentiary weight where "the amounts are conclusions without premises, its bases left to speculation, conjectures, assertions and guesswork." (Nicolas vs. Court of Appeals, 288 SCRA 307 [1998].) '"Liabilities of an enterprise are obligations to pay sums of money, to convey assets other than money, or to render service. They generally arise from the receipt of an asset or service, as a consequence of a loss or expense incurred, or through the acquisition of borrowed funds. They include amounts withheld from employees or other parties for taxes and for contributions to the SSS or to pension funds and dividends declared but not yet paid, (see PICPA Bulletin No. 9[1], May 1973.)

Sec. 75


651

or members when directors or trustees are voted for. (1) This annual report includes the financial statements together with the accompanying supplementary notes explaining the financial data which cannot be conveniently shown on the body of the statements (see Sec. 141.), the corporation's performance and other activities of the year in review, and the prospects and other plans that the corporation may wish to undertake. (2) It contains the auditor's report which is a two-paragraph declaration of an independent certified public accountant following the completion of his examination of the corporation's financial statements." It may be prepared in detailed or condensed manner, depending on the specific needs of the corporation. With respect to other documents concerning corporate affairs, the corporation may require the stockholder to advance the expenses for copying and mailing the same. — oOo —

"The report simply renders an opinion on the fairness of the presentation of the financial statements — chiefly the balance and the income statement — of the corporation within the context of generally accepted accounting principles. Thus, it does not certify that a corporation is in good financial condition or is a good credit risk.

Title IX MERGER AND CONSOLIDATION Sec. 76. Plan of merger or consolidation. — Two or more corporations may merge into a single corporation which shall be one of the constituent corporations or may consolidate into a new single corporation which shall be the consolidated corporation. The board of directors or trustees of each corporation party to the merger or consolidation setting forth the following: 1. The names of the corporations proposing to merge or consolidate, hereinafter referred to as the constituent corporations; 2. The terms of the merger or consolidation and the mode of carrying the same into effect; 3. A statement of the changes, if any, in the articles of incorporation of the surviving corporation in case of merger; and, with respect to the consolidated corporation in case of consolidation, all the statements required to be set forth in the articles of incorporation for corporations organized under this Code; and 4. Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable, (n) Sec. 77. Stockholders' or members' approval. — Upon approval by majority vote of each of the board of directors or trustees of the constituent corporation of the plan of merger or consolidation, the same shall be submitted for approval by the stockholders or members of each of such corporations at separate corporate meetings duly called for the purpose. Notice of such meetings shall be given to all 652

Sec. 78

TITLE IX. MERGER AND CONSOLIDATION

stockholders or members of the respective corporations, at least two (2) weeks prior to the date of the meeting, either personally or by registered mail. Said notice shall state the purpose of the meeting and shall include a copy or a summary of the plan of merger or consolidation, as the case may be. The affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock of each corporation in the case of stock corporations or at least two-thirds (2/3) of the members in the case of non-stock corporations, shall be necessary for the approval of such plan. Any dissenting stockholder in stock corporations may exercise his appraisal right in accordance with this Code: Provided, That if after the approval by the stockholders of such plan, the board of directors should decide to abandon the plan, the appraisal right shall be extinguished. Any amendment to the plan of merger or consolidation may be made, provided such amendment is approved by majority vote of the respective boards of directors or trustees of all the constituent corporations and ratified by the affirmative vote of stockholders representing at least twothirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the members of each of the constituent corporations. Such plan, together with any amendment, shall be considered as the agreement of merger or consolidation, (n) Sec. 78. Articles of merger or consolidation. — After the approval by the stockholders or members as required by the preceding section, articles of merger or articles of consolidation shall be executed by each of the constituent corporations, to be signed by the president or vicepresident and certified by the secretary or assistant secretary of each corporation setting forth: 1. The plan of the merger or the plan of consolidation; 2. As to stock corporations, the number of shares outstanding, or in the case of non-stock corporations, the number of members; and 3. As to each corporation, the number of shares or members voting for and against such plan, respectively, (n)

653

654


Sees. 76-79

Sec. 79. Securities and Exchange Commission's approval and effectivity of merger or consolidation. — The articles of merger or of consolidation, signed and certified as hereinabove required, shall be submitted to the Securities and Exchange Commission in quadruplicate for its approval: Provided, That in the case of merger or consolidation of banks or banking institutions, building and loan associations, trust companies, insurance companies, public utilities, educational institutions and other special corporations governed by special laws, the favorable recommendation of the appropriate government agency shall first be obtained. Where the Commission is satisfied that the merger or consolidation of the corporation concerned is not inconsistent with the provisions of this Code and existing laws, it shall issue a certificate of merger or of consolidation, as the case may be, at which time the merger or consolidation shall be effective. If, upon investigation, the Securities and Exchange Commission has reason to believe that the proposed merger or consolidation is contrary to or inconsistent with the provisions of this Code or existing laws, it shall set a hearing to give the corporations concerned the opportunity to be heard. Written notice of the date, time and place of said hearing shall be given to each constituent corporation at least two (2) weeks before said hearing. The Commission shall thereafter proceed as provided in this Code, (n) Corporate combinations in g e n e r a l.

Changes may be made in the corporate organization by various ways. The most common are by combination and merger. (1) Under previous laws. — In the Philippines, before the enactment of the Corporation Code, there were no laws which expressly permitted the merger or consolidation of business corporations except of railroads (Act No. 2772, as amended by Act No. 2789.) and of banks. (Pres. Decrees No. 71 and 117, infra.) Nevertheless, our Supreme Court has held that authority to merge or consolidate can be derived from Section 281 / 2 (now Sec. 40.) of the former Corporation Law (Act No. 1459, as amended.) which provides, among others, that a corporation may "sell, exchange, lease or otherwise dispose of all or substantially all of its property and assets" if the board of directors is so authorized

Sees. 76-79


655

by the affirmative vote of the stockholders holding at least 2 / 3 of the voting power. The words "or otherwise dispose of," according to the Supreme Court, is very broad and in a sense, covers a merger or consolidation. (Reyes vs. Blouse, 91 Phil 305 [1952].) 1

To encourage bank mergers or consolidations, Presidential Decree No. 71, in amending certain provisions of the General Banking Act (R.A. No. 337, as amended.), exempts merged or consolidated banks from the application of Section 28 (now Sec. 23; see Sec. 14[6].) of the former Corporation Law which limits the number of directors in a corporation. For the sole purpose of facilitating bank mergers and consolidations duly approved by the Monetary Board of the Central Bank, any bank is allowed under Presidential Decree No. 117, to merge or consolidate with another bank by the affirmative vote of the stockholders representing at least a majority of the subscribed capital stock of the respective merging or consolidating banks, in a meeting called for that purpose, and the capital stock of the bank may be increased to the extent necessary to effect such merger or

'Such authority can also be implied from the following provisions of the National Internal Revenue Code (formerly, C A . No. 466, now Pres. Decree No. 1158, as amended.): "Sec. 35. x x x . (c) Exchange of Property. — (1) General rule. — Except as herein provided, upon the sale or exchange of property, the entire amount of the gain or loss, as the case may be, shall be recognized. (2) Exceptions. — No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation: (a) a corporation which is a party to a merger or consolidation, exchanges property solely for stock in a corporation which is a party to the merger or consolidation, (b) a shareholder exchanges stock in a corporation which is a party to the merger or consolidation solely for the stock of another corporation, also a party to the merger or consolidation, or (c) a security holder of a corporation which is a party to the merger or consolidation exchanges his securities in such corporation solely for stock or securities in another corporation, a party to the merger or consolidation. No gain or loss shall be recognized if a person exchanges his property for stock in a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four persons, gains control of said corporation: Provided, That stocks issued for services shall not be considered as issued in return for property." Note: The sentence before the proviso was amended by Presidential Decree No. 1705. It reads as follows: "No gain or loss shall be recognized if property is transferred to a corporation by a person in exchange for stock in such a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four persons, gains control of said corporation." Section 35 became Section 34 and is now Section 40 with the amendments effected by R.A. No. 8424 which inserted "or unit of participation" between "for stock" and "in such a corporation."


656

Sees. 76-79

consolidation notwithstanding the provisions of Sections 17 and 18 112 (now Sees. 38 and 40.) of Act No. 1459. (2) Under the Corporation Code. — The Code now expressly al-

lows merger or consolidation of corporations. Only corporations stock or non-stock, can merge or consolidate into a single corporation. Hence, a partnership may not be allowed to merge with a corporation but the partnership may transfer all its assets and liabilities to the corporation which will issue its shares of stock to be distributed to the partners in proportion to their respective interest in the partnership, provided the partnership shall be dissolved in accordance with the Civil Code. (SEC Opinion, Jan. 3, 1984.) C o m m o n forms of corporate c o m b i n a t i o n s .

Below are the common forms of corporate combinations. (1) Sale of assets. — A union of corporations may be effected by one corporation selling all or substantially all of its assets to another, (see Sec. 40.) Such sale is usually, though not necessarily, made in the course of the dissolution of the vendor corporation. (a) In a strict legal sense, the mere sale of all its property by a corporation and the distribution of its assets do not work a dissolution of the corporation inasmuch as possession of property is not essential to corporate existence. (Re Fulton, 178 N.E. 766.) Generally, therefore, where one corporation sells or otherwise transfers all its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor. (Edward J. Neil Co. vs. Pacific Farms, Inc., 15 SCRA 415 [1965].) 2

"Generally, a sale of assets does not constitute a dissolution requiring liquidation unless it is so labelled. Winding up is a separate transaction, though it may be submitted to the stockholders at the same time. A merger-like result may be achieved by the sale-of-assets method if the buying corporation is permitted to finance the purchase by issuing its own stock to the selling corporation. The latter may then distribute the stock as its liquidating dividend. Normally, in such instances, the buying company may assume the bulk of the seller's debt, but it still may not take on the risks of the contingent and unknown liabilities and may insist that there will be funds to pay them if the seller plans to liquidate. The issuance of additional stock by the acquiring company may entail a charter amendment to increase the amount of its authorized shares." (W.L. Cary, supra, op. ext., p. 1703.) 2

Sees. 76-79

TITLE DC. MERGER A N D C O N S O L I D A T I O N

657

(b) But, if in the agreement, a new corporation expressly acquired the assets and properties, and assumed the obligations and liabilities of an old corporation which is succeeded, the former cannot excuse itself from said obligations and liabilities on the theory that said two corporations are distinct and separate, (see Rivera vs. Litam & Co., Inc., 4 SCRA 1072 [1962].) In a sale of assets, the acquiring corporation — barring fraud of creditors — need assume only those obligations set forth explicitly in the agreement. (W.L. Cary, Cases and Materials on Corporations, 1969 ed., p. 1702.) (c) The sale of the assets for stock, if followed by dissolution, has the effect of a merger. ILLUSTRATION: X Inc., a shoe manufacturing company, sells all its assets to Y Inc., another shoe manufacturing company. In consideration for the transfer of all its assets, X Inc. receives shares of stocks from Y Inc. Thus, X Inc. becomes a stockholder of Y Inc. By the terms of the sale, the shares of stock of Y Inc., may be issued directly to the stockholders of X Inc. on the basis of their shareholdings. In such case, X Inc. will have no more stockholders as well. It may subsequently be dissolved. The above transaction is a sale of assets for stock in name but may be found by the courts to be really a de facto merger. Y Inc. is not liable for the liabilities of X Inc. except where Y Inc. expressly or impliedly assumed said liabilities, or Y Inc. is merely a continuation of X Inc., especially where the sale to Y Inc. was effected in furtherance of a fraudulent purpose, to evade payment by X Inc. of its outstanding obligations, the two corporations being treated as one, or where the transaction amounts to a de facto merger or consolidation, (infra.) (2) Lease of assets. — In this case, a corporation, without being dissolved, leases its property to another corporation for which the lessor merely receives rental paid by the lessee. This is usually practiced by railroad and transportation companies. The lease of assets is similar to the sale of assets except that under a lease, nothing passes except the right to use the property leased.


658

Sees. 76-79

(3) Sale of stock. — The purpose of a holding company is to acquire a sufficient amount of the stock of another corporation for the purpose of acquiring control. The acquiring corporation 3

is called the parent or holding company. The corporation whose

stocks are acquired is known as the subsidiary corporation. (a) A holding company has been defined as "a super corporation which owns or at least controls such a dominant interest in one or more other corporations that it is enabled to dictate their policies through voting power, or which is in position to control or materially to influence the management of one or more companies by virtue, in part at least, of its ownership of securities in the other company or companies." (18 Am. Jur. 2d 557.) (b) A subsidiary corporation may be created by organizing a new corporation out of the operating division or divisions of an existing corporation which shall continue its existence after the spin off and act as a holding company of the new corporation to which shall be transferred the net assets of the operating divisions in exchange for the shares of stock of the new corporation. This method of corporate combination is effected when the corporation to be acquired refuses to approve a sale of assets, a merger, or a consolidation. "The sale of stock normally does not require formal stockholder or director authorization, since the acquired company is not directly involved. Either cash or stock of the buying company may be used to finance the purchase. While the acquiring corporation does not become directly responsible for debts of the selling company, the spectre of unknown and contingent liabilities still remains. In a purchase and sale of stock, there are no actual 'dissenters' and hence, no appraisal rights. Several special problems may arise which are peculiar to the stock acquisition method of fusion. First of all, since the offer is to the shareholders directly rather than to the corporation, registration may be required under the Securities Act wherever a public offering is made. At the same time, there is no likelihood of inequitable treatment of selling shareholders so long as adequate disclosure is made to them, and so long as the controlling stockholders do not receive a premium or other special consideration for their shares. Finally, this may pose for the acquiring company a problem of operating a subsidiary with a possibly hostile minority interest. Whether or not dissident, the outsiders may have legitimate expectations quite different from those of the buyer; and the buyer may not ignore its fiduciary responsibility in dealing with its newly-acquired subsidiary. A merger-like result may be achieved by the sale-of-stock approach, by liquidating or merging the acquired company when a controlling interest in its stock has been obtained. Stock purchase may in fact be the first step in acquiring assets. Dissident minority interests may then be eliminated, although care must be exercised to ensure proper treatment of them under the plan. (W.L. Cary, supra, op. cit., p. 1704.) 3

Sees. 76-79


659

In all the foregoing three cases of corporate combinations, the legal identity of each corporation is retained. (4) Merger. — Here, two (or more) corporations unite, one corporation which retains its corporate existence absorbing or merging in itself the other which disappears as a separate corporation. It is the absorption of one corporation by another which survives. (a) Merger, as actually observed and practised in the Philippines, necessitates a transfer of all assets and the assumption of debts and liabilities of the absorbed corporation by the acquiring corporation followed by a separate action on the part of the absorbed corporation of dissolving itself, generally by amendment of its articles of incorporation shortening its term of existence, (see Sec. 40.) In return for the transfer of all the assets and assumption of the liabilities of the absorbed corporation (the latter with the consent of the creditors), the acquiring entity issues a block of shares equal to the net asset value transferred, which stocks are in turn distributed to the stockholders of the absorbed corporation. (SEC Opinion, Nov. 9,1961.) 4

(b) Where the merger is effected under Section 40 and not under the "statutory merger" authorized under Title IX, although the merger would result in dissolving the absorbed corporation, the dissolution is not legally effected by operation of such merger as the Code (see also Sec. 16.) provides for the means of achieving this end. A corporation, being a legal creation, can only be dissolved in the manner prescribed by the law which gave it life, (see SEC Opinion, Jan. 10,1975.) ILLUSTRATION: A Inc. and B Inc. are existing corporations. A Inc. transfers all of its assets to B Inc. B Inc. absorbs and acquires all the property, rights, and liabilities of A Inc., which is dissolved. B Inc. continues its corporate existence. Before the enactment of the Corporation Code which now expressly authorizes merger and consolidation, the most distinguishing features of which are that they accomplish several steps simultaneously and that a prescribed statutory procedure must be observed for their consummation. 4

660


Sees. 76-79

A Inc. and B Inc. are the constituent corporations. A Inc. is the merged or absorbed corporation while B Inc. is the merging, absorbing, or surviving corporation that continues the combined business. The stockholders of A Inc. become stockholders of B Inc. The merger shall be effective upon issuance by the Securities and Exchange Commission of a certificate of merger. (Sec. 79, par. 1.) There is no provision in the Code which prohibits the merger of a corporation whose term is about to expire with another corporation where the purpose is merely to continue the operations of the old entity, even if such other corporation is organized by a group of stockholders as the merged corporation. (SEC Opinion, April 19,1960.) (5) Consolidation. — Here, two (or more) corporations unite, giving rise to a new corporate body and dissolving the constituent corporations which cease to exist as separate corporations. ILLUSTRATION: A Inc. and B Inc. are existing corporations. They unite together to form C Inc. to which they transfer all their assets. A Inc. and B Inc. are dissolved by the consolidation. The title to their property passes to C Inc. and all their rights and liabilities are assumed by C Inc. The dissolved corporations, A Inc. and B Inc., are the constituent corporations. They are also the original corporations. C Inc., the new corporation, is called the consolidated corporation. The stockholders of A Inc. and B Inc. become stockholders of C Inc. The consolidation shall be effective upon issuance by the Securities and Exchange Commission of a certificate of consolidation. (Sec. 79, par. 1.) The legal effects of the merger or consolidation accomplished under Title IX are provided in Section 80. Both methods involve a transfer of the assets of the constituent corporations in exchange for securities in the new or surviving corporation but neither involves the winding-up of the affairs of the constituent corporations in the sense that the assets are distributed

Sees. 76-79


661

to the stockholders. Note that there is automatic assumption of liabilities of the absorbed corporation or constituent corporations (Sec. 80[5].) which are dissolved. (Sec. 80[1, 2].) Advantages of stock acquisition over asset acquisition. A number of further reasons has been given why a sale of stock, or merger or consolidation, may be preferable to a sale of assets, as follows: (1) Where assets of corporation to be acquired, not assignable with-

out consent. — Sometimes the corporation that is to be acquired possesses valuable franchises, leases, or contracts which are not assignable without consent. (a) In such case, a statutory merger or consolidation or, if consent to assignment would even then be required, a stock acquisition has an advantage over an asset acquisition in that the need to obtain consent to assignment is eliminated. (b) Moreover, if assets are to be acquired, the task of attending to all of the details involved in the transfer, such as the preparation and execution of deeds, would be simplified if the acquisition were by a statutory merger or consolidation. (c) Again, state bulk sales law either would be of no concern or would not apply to an acquisition by statutory merger or consolidation. (2) Where restrictions upon a merger or consolidation or transfer

of assets exist. — On the other hand, existing loan indentures or other agreements contain restrictions upon a merger or consolidation or transfer of assets. (a) If one or more mortgages are involved, afteracquired-property clauses therein might cause difficulty if a statutory merger or consolidation, or an asset acquisition, were attempted. (b) Undesirable leases or contracts including burdensome patent-license agreements may constitute an obstacle to a statutory merger or consolidation or a stock acquisition.

662


Sees. 76-79

(c) Labor union problems — the consequence, for example, of bringing a union or a different union into the picture — may present an obstacle to statutory merger or consolidation or an asset acquisition but not to a stock acquisition. (d) Problems of reconciling and meshing deferredcompensation plans of the corporations (including pension, profit-sharing, and stock option as well as individual employment contracts and bonus policies) may present similar obstacles. (e) Finally, the corporate charter of the corporation to be acquired may itself be important to preserve, as in the case of a banking corporation; or the preservation of the organization and its customers or even of an existing stock-exchange listing may make it desirable that the corporation to be acquired be technically the acquiring or surviving corporation or that its stock be acquired. (3) Where asset acquisition will give rise to greater tax liability. —

Not infrequently, an asset acquisition, unlike a stock acquisition, will give rise not only to State or local excise taxes in connection with the transition but will also involve some duplication of State or local franchise, business, and property taxes, including sales, use, transfer, or license taxes, and fees applicable to real estate, personal property, motor vehicles and the like. Sometimes some of these extra taxes can be avoided entirely when the transfer is effected by operation of law through statutory merger or consolidation. (W.L. Cary, supra, op. cit., pp. 1704-1705.) Procedure for effecting a plan of m e r g e r or consolidation.

Section 36(8) expressly grants authority to a corporation "to enter into with other corporations merger or consolidation" in accordance with the procedure prescribed by Sections 76 to 80. 5

According to the Report of the Federal Trade Commission (Report on Corporate Mergers and Acquisitions, 40 [1955].), the terms "merger" and "consolidation" are often employed to describe fusions involving concerns of relatively equal size and importance. In accounting terminology, such a combination might be referred to as a pooling of interests. If, on the other hand, a relatively small firm is being absorbed into a larger one, an "acquisition," or in the terminology of the Accounting Bulletin (No. 48) (1957), a "purchase," is said to have been made, (cited in W.L. Cary, supra, op. cit., p. 1622.)

Sees. 76-79


663

(1) Approval of plan. — The board of directors or trustees of each corporation, party to the merger or consolidation, shall approve a plan of merger or consolidation setting forth the matters mentioned in Section 76; (2) Submission to stockholders or members for approval. — The

plan shall be submitted for approval by the stockholders or members of each of such corporations at separate corporate meetings duly called for the purpose with proper notice. (Sec. 77.) Even holders of non-voting shares or non-voting members, as the case may be, are entitled to vote on the plan (Sec. 6, par. 6[6].); (3) Execution of formal contract. — After approval by the pre-

scribed vote of the stockholders or members (Ibid.), a formal contract known as articles of merger or of consolidation shall be executed by each of the constituent corporations, to be signed by the president or vice-president and certified by the secretary or assistant secretary of each corporation setting forth the matters stated in Section 78; 6

(4) Submission to SEC for approval. — The articles shall then be submitted for approval to the Securities and Exchange Commission in quadruplicate for its approval, provided that in the case of merger or consolidation of corporations governed by special laws, the favorable recommendation of the appropriate government agency shall first be obtained. (Sec. 79, par. 1.) The SEC 7

""Usually in merger agreements today, authority is given to the directors of either board to abandon it at any time before the effective date and after submission to the shareholders upon the happening of certain events, if in their judgment — for example — (1) any material litigation or government proceedings have been instituted against one of them, or (2) one company has suffered substantial loss as a result of catastrophe or any material adverse change in its condition, or (3) the merger would be impracticable because of the number of stockholders who assert the right to have their stock appraised and to receive payment." (W.L. Cary, supra, op. cit., p. 1699.) The SEC requires the submission of the following documents for approval of a plan of merger or consolidation: (1) Articles of merger or consolidation signed by the President or Vice-President and certified under oath by the Secretary or Assistant Secretary of the constituent corporations setting forth the following: the plan of merger or consolidation; the number of shares outstanding of each constituent corporation, or in the case of non-stock corporation, the number of members; as to each corporation, the number of outstanding shares voting for and against such plan, respectively; (2) Copies of the minutes of the board of directors' meeting and minutes of the stockholders' or members' meeting of the constituent corporations, approving and ratify7

664


Sees. 76-79

Rules require that the resolutions of the respective boards of the constituent corporations or that of the stockholders approving the merger or consolidation, duly signed and attested by their respective presidents and secretaries, must state the reasons or causes for such action; (5) Conduct of hearing by SEC. — The Securities and Exchange

Commission shall conduct a hearing with proper notice if, upon investigation, it has reason to believe that the proposed merger or consolidation is contrary to or inconsistent with the provisions of the Code or existing laws (see Sec. 140.), to give the corporations concerned the opportunity to be heard. (Sec. 79, par. 2.) The Commission may or may not conduct a hearing; and (6) Issuance of certificate by SEC. — The Commission shall

issue a certificate of merger or of consolidation, as the case may be, "at which time the merger or consolidation shall be effective," if satisfied that the same is not inconsistent with the provisions of the Code and existing laws. (Ibid., par. 1.) The merger or consolidation does not become effective upon the mere agreement of the parties. Since it involves fundamental changes in the corporation, as well as in the rights of stockholders and creditors, there must be an express provision of law authorizing them. The effectivity date is crucial for determining when the merged or constituent corporations cease

ing the plan of merger or consolidation, certified under oath by their respective secretaries or assistant secretaries; (3) List of creditors of the absorbed corporations, as of the date of approval of the plan of merger, or the list of creditors of the consolidating corporations, as of the date of approval of the plan of consolidation, with their addresses and the amounts owing to each; (4) Audited financial statements (balance sheet and related statement of income and expenses) of the constituent corporations, the date not earlier than 120 days prior to the date of riling of the application with the Commission. The financial statements shall be accompanied by a long form audit report of a certified public accountant; and (5) Amended articles of incorporation and by-laws of the surviving corporation, whenever necessary in accordance with the terms of the plan of merger, such as change of name of the surviving corporation, increase of capital stock, etc. In the case of consolidation, the articles of incorporation and by-laws of the new corporation and all documents or papers required for incorporation of the new corporation must be submitted to the Securities and Exchange Commission for the registration of the new corporation, (see SEC Opinion, July 26,1989.)

Sec. 80


665

to exist and when their rights, privileges, properties as well as liabilities pass on to the surviving corporation. (Associated Bank vs. Court of Appeals, 291 SCRA 511 [1998]; Philippine National Bank vs. Andrada Electric & Engineering Company, 381 SCRA 244 [2002]; Poliand Industrial Limited vs. National Development Co., 467 SCRA 500 [2005].) The Commission has opined that notwithstanding Section 79, the parties may stipulate a specific "effective date of merger (or consolidation)" where no third party will be prejudiced by such stipulation. (SEC Opinion No. 09-13, July 1, 2009.) The consent of the creditors of a corporation is not necessary in merger or consolidation, it being authorized by law. (see Sec. 80[5].) Where the merger or consolidation involves a foreign corporation licensed to transact business in the Philippines, Section 132 applies. Sec. 80. Effects of merger or consolidation. — The merger or consolidation, as provided in the preceding sections, shall have the following effects: 1. The constituent corporations shall become a single corporation which, in case of merger shall be the surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the consolidated corporation designated in the plan of consolidation; 2. The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated corporation; 3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation organized under this Code; 4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; and all property, real or personal, and all receivables due on whatever account including subscriptions to shares and other choses in action, and all and every other interest of, or belonging to, or due to each

666


Sec. 80

constituent corporation, shall be taken and deemed to be transferred to and vested in such surviving or consolidated corporation without further act or deed; and 5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations; and any claim, action or proceeding pending by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation, as the case may be. Neither the rights of creditors nor any lien upon the property of any of each constituent corporations shall be impaired by such merger or consolidation, (n) Legal effects of merger and consolidation.

(1) The effects of the merger or consolidation accomplished under Title IX are provided in Section 80. Note that unlike in sale of assets under Section 40, there is automatic assumption of the liabilities of the absorbed corporation or constituent corporations (Sec. 80[5].) which are dissolved. (Sec. 80[1,2].) (2) In view of Section 82(2), the absorbed or constituent corporations are ipso facto dissolved by operation of law, without necessity of any further act or deed (SEC Opinion, July 16,1981.) but there is no winding up of their affairs or liquidation of their assets, for the surviving corporation automatically acquires all the rights and liabilities of the constituent corporations. (3) An advantage of merger or consolidation, from the point of view of the selling corporation, is that it permits the transfer of the assets to the purchaser and the distribution of the consideration received in a single operation pursuant to the plan of merger or consolidation, whereas a sale requires as a separate subsequent step the dissolution and liquidation of the vendor. (C. Rohrlich, op. cit., p. 285.) (4) Both merger and consolidation involve exchanges of properties, a transfer of the assets of the constituent corporations in exchange for securities in the new or surviving corporation but neither involves the winding up of the affairs of the constituent

Sec. 80


667

corporations in the sense that their assets are distributed to the stockholders. Their tax consequences are governed by existing law, rules and regulations, particularly Section 34 of the National Internal Revenue Code. Where the exchange of property of a corporation is solely for stock of another corporation, neither gain nor loss is recognized as an exception to the general rule in taxation that gain shall be taxable and loss shall be deductible. If in addition to stock, money and/or other property is received, the gain, if any, but not the loss, shall be recognized. 8

Thus, where the value of the assets exchanged by A Inc. is P2 million and the value of B Inc. is P2.2 million, the difference of P.2 million is not taxable as gain to A Inc. and deductible as loss to B Inc. But if, in addition to stock of B Inc., A Inc. received money and/or other property, the gain of A Inc. is taxable in an amount not in excess of the sum of money and the fair market value of such property. (5) Dissolution of the constituent corporations which have been consolidated into a new corporation cannot be made to retroact to a date prior to the ratification or approval by their respective stockholders of a Consolidation Agreement previously approved by the respective boards of directors of the constituent corporations and the new corporation, but the transfer of the assets and liabilities of the constituent corporations could be made effective retroactively as of the date the said board of directors so resolved. (SEC Opinion, March 4,1975.) 9

(6) The consent of the creditors of a corporation is not necessary in merger or consolidation, it being authorized by law. At any rate, neither their rights nor any lien upon the property of any of each constituent corporation shall be impaired by such merger or consolidation. (Sec. 80[5].) 'See note 1. "Under Section 79 (par. 1.), the merger or consolidation shall be effective only upon issuance by the Securities and Exchange Commission of a certificate of merger or consolidation, as the case may be. The stipulated cut-off date (before or after date of issuance of certificate), however, with respect to transactions of the absorbed corporation and surviving corporation shall be binding on the parties to the merger agreement, (see SEC Memo. Opinion No. 04-36June 15, 2004.)

668


Sec. 80

(7) Where, in its articles of incorporation, a new corporation expressly acquired the assets and properties, and assumed the obligations and liabilities of an old corporation which it succeeded, the former cannot excuse itself from said obligations and liabilities on the argument that said two corporations are distinct and separate. (Rivera vs. Litam & Company, Inc., 4 SCRA 1072 [1962].) Dissenting stockholders may exercise their right of appraisal (Sec. 81 [3].) only after the plan of merger or consolidation is approved by the Securities and Exchange Commission. If before such approval the plan is abandoned by the board of directors, the appraisal shall be extinguished. (Sec. 77, par. 1.) (8) In a case, the main issue is whether the surviving bank (AB) may enforce the promissory note made by private respondent in favor of the absorbed bank (CBTC) after the merger agreement has been signed but prior to the issuance of a certificate of merger by the Securities and Exchange Commission. AB has a valid cause of action even assuming that the effectivity date of the merger was the date of execution. The agreement itself clearly provides that all contracts, irrespective of the date of execution, entered into in the name of CBTC shall be understood as pertaining to AB. The clause must have been deliberately included in the agreement in order to protect the interests of the combining banks, specifically, to avoid giving the merger agreement a farcical interpretation aimed at evading fulfillment of a due obligation. (Associated Bank vs. Court of Appeals, 291 SCRA 511 [1998].) Merger and consolidation distinguished from sale of assets. They are as follows: (1) In merger and consolidation, a sale of assets is always involved, while in the latter, the former is not always involved; (2) In the former, there is automatic assumption by the surviving or consolidated corporation of the liabilities of the con-

Sec. 80


669

stituent corporations, while in the latter, the purchasing corporation is not generally liable for the debts and liabilities of the selling corporation; 10

(3) In the former, there is a continuance of the enterprise and of the stockholders therein though in the altered form, while in the latter, the selling corporation ordinarily contemplates a liquidation of the enterprise; (4) In the former, the title to the assets of the constituent corporations is by operation of law transferred to the new corporation, while in the latter, the transfer of title is by virtue of contract; and (5) In the former, the constituent corporations are automatically dissolved, while in the latter, the selling corporation is not dissolved by the mere transfer of all its property. Reorganization of a corporation. Generally speaking, reorganization of a corporation is a means whereby those variously interested financially in a distressed business seek, through continuance of that business as a going concern, to work out of the difficulty for themselves and thus gain more than they could by a sale of the assets or of the business to others. (19 Am. Jur. 2d 895.) 11

12

(1) Distinguished from merger or consolidation. — A reorganiza-

tion is distinguishable from a merger or consolidation. It is not

"One of the principal concerns in a merger is over unknown or hidden liabilities which the acquired company fails to disclose or in fact is unaware of. A tax deficiency is one of the most frequent to arise. Other types of obligations which may be significant stem from collective bargaining agreement with unions, provisions under pension plans, and outstanding stock option or executive compensation arrangements." (W.L. Cary, supra, op. cit., p. 1702.) Under the principle of absorption, a bona fide buyer or transferee of all, or substantially all, the properties of the seller or transferor is not obliged to absorb the latter's employees. (Barayoga v. Asset Privatization Trust, 473 SCRA 690 [2005].) "This is not to be confused with that involving a mere change in structural organization or management, in business policy, or in production or trading methods in a corporation. The reorganization here is "internal." "E.g., the corporation's total assets are less than its total liabilities or it has a liquidity problem (i.e., it cannot pay its debts as they become due), or it has been judicially declared insolvent or in a state of suspension of payments. 10

670


Sec. 80

ordinarily the combination of several existing corporations, but is simply the carrying out by proper agreements and legal proceedings of a business plan or scheme for winding up the affairs of, or foreclosing a mortgage or mortgages upon, the property of insolvent corporations, and the organization of a new corporation

to take over the property and business of the distressed corporation." (Ibid., 895.) (2) Distinguished from sale. — It differs fundamentally from a

sale where the vendor corporation parts with its interest for cash and receives nothing more. The mere acquisition by one corporation of the capital stock of two others, without impairment of the corporate existence or function of any of the three corporations, is not a reorganization. The mere selling of authorized but unissued stock is not, in any sense, a reorganization. (Ibid.) A "sale" is the transfer of property from one person to another for a consideration of value. As a "mere purchase by one corporation of the properties of another corporation," it is not included in the term "reorganization," because the term "imports a continuity of interest on the part of the transferor or its stockholders in the properties transferred." (C. Rohrlich, op. cit., pp. 278-279.) (3) Distinguished from reincorporation. — Reorganization, as

the term is usually used, means the creation of a new company to take over the assets of a new corporation, while reincorporation, as this term is ordinarily used, more closely resembles the amendment of a charter, and is usually resorted either to correct errors in the original incorporation or to obtain the benefits of a statute enacted after the original incorporation or to extend the corporate life. (Sulpicio Guevara, The Philippine Corporation Law, 1967 ed., p. 210, citing Fletcher, Sec. 4839.) To reincorporate, the incorporators must comply with the provisions on incorporation under Sections 10 to 15 of the Code. Both involve the creation of a new corporation in place of another corporation which ceases to exist.

'The reorganization typically involves a recapitalization or revision of the capital structure of the corporation commonly effected by amendment of the articles of incorporation or merger with a subsidiary.

Sec. 80


671

(4) Distinguished from bankruptcy. — A "corporate reorganiza-

tion" is not a bankruptcy proceeding, but is a special proceeding which has for its object the rehabilitation of a debtor-corporation. It differs from a "bankruptcy" in that it contemplates conservation of the corporation and continuity of its business and not a liquidation of its assets. (9-A Words and Phrases 406.) Quasi-reorganization of a c o r p o r a t i o n .

The term quasi-reorganization has been defined as a "procedure recognized in accounting by which the accounts of the corporation may be restated to the same extent they would be if a new corporation were created and acquired the business of the existing corporation; a new basis for accountability of assets, liabilities, and capital is established." (SEC Opinion, Aug. 18, 1967, citing Montgomery's Auditing, 8th ed., p. 396.) 14

A quasi-reorganization as a type of capital readjustments has been described as follows:

15

"C. Readjustments of balance sheet valuations resulting in the revision of the stated value of the capital stock and of the

surplus. — This type of capital readjustment arises when the management realizes that radical changes have occurred in the value of a corporation's property — changes in value which are not reflected in periodic adjustments to the book surplus accounts. These changes are prompted by the realization on the part of management that the property of the corporation has radically increased or radically decreased beyond anything that is apparent from the book entries in the surplus accounts. These book entries representing either surplus or deficit must, therefore, be restated to reflect the fundamental changes that have affected the substantive values of the

"It has also been defined as follows: "A recapitalization, a principal feature of which has been absorption of a deficit; specifically, the procedure whereby a corporation, without the creation of a new corporate entity or the intervention of a court, eliminates an operating deficit or a deficit resulting from the recognition of other losses or both, and establishes a new retained earnings (earned surplus) account for the accumulation of new income subsequent to the effective date of such action." (E.L. Kohler, A Dictionary For Accountants, p. 388.) See Guidelines for Quasi-Reorganizarions. (Appendix "E.") 15

672


Sec. 80

corporation. In the process of revaluation, it may be necessary to read just-stated values standing against the capital stocks, and these changes may or may not involve restatement of the surplus accounts. Quite frequently too, other alterations in the capital structure are introduced to bring the outstanding security issues in line with acknowledged changes in the corporation's property values. As a group, they may be called revaluation readjustments, and these valuations are indicated by changes in the capital accounts." (Ibid., citing II Dewing, Financial Policy of Corporations, 5th ed., p. 1177.) ILLUSTRATION: The proposed quasi-reorganization of X Corporation as submitted to the Securities and Exchange Commission involved the following steps: "(a) Reduction of par value of common stock from P10.00

to P7.50 per share. — The present authorized capital stock of P20,000,000 divided into 2,000,000 shares of the par value of P10.00 each will correspondingly be reduced to 15,000,000 divided shares of the par value of P7.50 each. The amount of issued and outstanding capital stock will be reduced from about P10,300,000 to P7,725,000 but the number of issued and outstanding shares (i.e., 1,030,000) will remain unchanged. The reduction in par value of issued and outstanding shares will create a reduction surplus of P2,575,000. (see comments under Sec. 38.) (b) Restatement of assets consisting of. —

(i) Write-off of fixed assets (property plant and equipment) from original cost of P20,155,000 to the appraised value of P27,551,000, approximately, thereby reflecting an appraisal surplus of P7,396,000. (see comments under Sec. 43.) The great bulk of this surplus (almost P7 million) is attributable to the appreciation in the value of X's factory site consisting of six (6) parcels of land with an aggregate area of 177,242 square meters. The appraisal was made by an independent firm of high standing. (ii) Write-off of development and start-up costs of about P754,000. (c) Write-offs against surplus. — The accumulated deficit

estimated at P8,978,000 (as of September 30, 1967) and the

Sec. 80


development and start-up costs at about P754,000 to be written off, or a total of P9,732,000 will be charged to the capital surplus created totalling P9,971,000, consisting of reduction surplus of P2,575,000 and an appraisal surplus of P7,396,000. The balance of about P239,000 will be set up as a capital surplus account. (d) Conditions for effecting plan. — Disclosure of the quasi-

reorganization will be made by appropriate notations in the audited financial statements of X. It appears from the project study made on the matter, that if the plan is carried out, the company would be able not only to rehabilitate itself but also realize profits. Conversely, if the company cannot pursue its plan, it may not be able to solve its financial difficulties and thus, may result in its total collapse. Considering all the foregoing, the Commission interposed no objection subject to the following conditions: (1) Only the appreciation in the value of the company's six (6) parcels of land with an aggregate area of 177,242 square meters shall be considered, the increase in appraisal value of the rest of the company's property being excluded. This is for the reason that the increase in value of the parcels of land is, in the opinion of the Commission, realizable. As to those of the other kinds of property, the Commission does not feel it necessary to pass upon this matter at this time; (2) It is not deemed proper to write-off the development and start-up costs amounting to approximately P754,000; (3) The appraisal surplus created shall be used to write off deficit, and shall not be utilized for the declaration of dividends; (4) The plan shall be submitted to the stockholders in a special meeting duly called for the purpose and approved by the vote representing at least two-thirds of the subscribed capital stock; (5) Appropriate notice of the plan shall be given to the creditors of the corporation within a reasonable time prior to the submission of the papers reducing the company's authorized capital stock to the Commission; (6) Proper publication of the plan shall be made in at least one newspaper of general circulation throughout the Philippines, twice a week for two consecutive weeks; and

673

674


Sec. 80

(7) Appropriate notations in the company's audited financial statements of the utilization of the appraisal surplus to write off deficits shall be made for at least five (5) years after the effectivity of the quasi-reorganization. (SEC Opinion, Aug. 8,1967.)

Quasi-reorganization as a corporate practice has been employed with some frequency in the United States, so much so that the U.S. Federal Securities and Exchange Commission has prescribed the conditions under which the same may be effected. (Ibid.)

— oOo —

Title X APPRAISAL RIGHT Sec. 81. Instances of appraisal right. — 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 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 this Code; and 3.

In case of merger or consolidation, (n)

Appraisal right of a stockholder. The so-called appraisal right of a stockholder refers to his right

to demand payment of the fair value of his shares, after dissenting from a proposed corporate action involving a fundamental change in the corporation in the cases provided by law. Any fundamental change in the corporate charter would require the consent of all the stockholders, inasmuch as it would impair the obligation of the contract between the corporation and its stockholders, (see Sec. 16.) However, to meet the situation whereby an arbitrary minority group of stockholders could prevent advantageous corporate action, the Code authorizes the making of changes in the corporate structure in specified 675

676


Sec. 81

instances, by less than the unanimous vote, and to prevent any injustice to the minority, gives them the right to an appraisal and payment of their stock. (19 Am. Jur. 2d 49.) The appraisal right of a stockholder is more important where the corporation is a small one and there is no ready market for its stock. In big corporations whose stocks are actively traded in exchanges, the dissatisfied stockholder can easily sell his stocks. Instances when appraisal right available. The appraisal right does not normally belong to a stockholder as a matter of absolute right; otherwise, a stockholder can withdraw from a corporation anytime by returning his share and getting back his capital, which is truly violative of the trust fund doctrine. (SEC Opinion, Jan. 11,1982; see Sec. 41.) (1) Section 81 lists the three (3) instances when the right may be exercised as provided in Sections 16,37,40, and 77. (2) It is also available to a dissenting stockholder in case the corporation decides to invest its funds in another corporation or business for any purpose other than its primary purpose as provided in Section 42. (3) Under Section 105, any stockholder of a close corporation may, for any reason, compel 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. Amendment of articles of incorporation changing stockholders' rights. Statutes authorizing amendments of articles of incorporation upon a vote of a prescribed majority of its stock are as effectively a part of the certificates of stock as though printed thereon. Such statutes become a part of the stockholders' contract with the corporation. A stockholder will be deemed to consent in advance to the making of such changes as the statutes permit and as are designed to enable the corporation to conduct its business in a more profitable manner. Upon acceptance of his stock, he is bound by prior amendments as well as subsequent amendments,

provided, of course, there is no abuse of amendatory power. (18 Am. Jur. 2d 643-644.) Stockholders dissenting from a particular corporate change in their rights, though bound by such change, are given by the Code some form of remedy. They may withdraw from the corporation by an appraisal and payment of their stock. (Ibid., 646.) One of the limitations on the power of corporations to amend is that the amendment must be "for legitimate purposes." If the amendment was made in bad faith, the same may be questioned by dissenting minority stockholders by resort to the Securities and Exchange Commission (see Pres. Decree No. 902-A, Sec. 5[a, b].) and ultimately, to the courts. Limitations on the exercise of appraisal right. They are as follows: (1) Any of the instances provided by law for the exercise of the right by a dissenting stockholder must be present (Sees. 81, 42.); (2) The dissenting stockholder must have voted against the proposed corporate action. (Sec. 82, par. 1.) So, the right is not available to a stockholder who was either absent at the meeting where the corporate action was approved, or was present at such meeting but abstained from casting his vote; (3) A written demand on the corporation for payment of his shares must be made by him within 30 days after the date the vote was taken (Ibid.); (4) The price must be based on the fair value of the shares as of the day prior to the date on which the vote was taken (Ibid.); (5) Such fair value must be determined as provided in Section 82 (Ibid., par. 2.);

(6) Payment of the shares must be made only out of the unrestricted earnings of the corporation (Ibid.); and (7) Upon such payment, the stockholder must transfer his shares to the corporation. (Ibid.)

678


Sec. 82

Sec. 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 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 effected, the corporation shall pay to such stockholder, upon surrender of the certificate(s) of 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 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 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)

Procedure for exercise of right.

Section 82 prescribes a uniform procedure for the exercise by a dissenting stockholder of his appraisal right as follows: (1) The dissenting stockholder shall make a written demand on the corporation within thirty (30) days after the date on which the vote was taken for payment of the fair value of his shares. The failure of the stockholder to make the demand within the thirty (30)-day period shall be deemed a waiver of his appraisal right;

(2) If the proposed corporate action is implemented or effected, the corporation shall pay to such stockholder, upon surrender of the corresponding certificate(s) of stock within ten (10) days after demanding payment for his shares (Sec. 86.), the fair value thereof; and (3) Upon payment of the agreed or awarded price, the stockholder shall transfer his shares to the corporation. Determination of fair value of shares. (1) Appraisal of stockholder's shares. — If the withdrawing

stockholder and the corporation cannot agree on the fair value of the shares, it shall be determined and appraised as provided in the second paragraph of Section 82. In such case, either the dissenting stockholder or the corporation is entitled to demand an appraisal of the former's shares, and to compel such appraisal, if the other refuses to have it effected. (2) Valuation date. — Note that the fair value of the shares of the dissenting stockholder is determined as of the day prior to the date on which the vote was taken notwithstanding any appreciation or depreciation in value of the shares in anticipation of such corporate action. This rule avoids controversy on the valuation date, and prevents speculation on the shares. Payment shall be made only if the corporation has unrestricted retained earnings in its books to cover the same, (see Sec. 43.) This is in consonance with the trust fund doctrine. (3) Underlying theory of valuation. — The term "fair value," as used in the Corporation Code, is said to mean the intrinsic worth of the stock, which is to be arrived at after an appraisal of all the elements of value. The underlying theory is one of compensating the owner of the stock for his property right, and, therefore, no method of valuation should be relied upon exclusively; and since the theory of appraisal is to compensate the dissenting stockholder for the value of his stock as it was originally constituted, the valuation of his shares should be determined without regard to the effect of the corporate action. (19 Am. Jur. 2d 55-56.)

680


Sees. 83-84

Sec. 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, all rights accruing to such shares, including voting and dividend rights, shall be suspended in accordance with the provisions of this Code, 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) Effect of exercise of right.

Once the dissenting stockholder demands payment of the fair value of his shares — (1) All rights accruing to such shares including voting and dividend rights shall be suspended; and (2) He shall be entitled to receive payment of the fair value of his shares as agreed upon between him and the corporation or as determined by the appraisers chosen by them. Payment of shares .

(1) If he is not paid the value of his shares within thirty (30) days after the award, his voting and dividend rights shall be immediately restored until payment of his shares. (Sec. 83.) Accordingly, even if his rights as stockholder are suspended after his demand in writing is made, he cannot be considered as an ordinary creditor of the corporation. (SEC Opinion, Jan. 11,1982.) (2) Upon such payment, all his rights as stockholder are terminated, not merely suspended, (see Sec. 82, last sentence.) But if before he is paid the proposed corporate action is abandoned, his rights and status as a stockholder shall thereupon be permanently restored. (Sec. 84.) Sec. 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 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)

Extinguishment of right to payment. A dissenting stockholder who demands payment of his shares is no longer allowed to withdraw from his decision unless the corporation consents thereto. Any of the following cases will have the effect of extinguishing the withdrawing stockholder's right to payment of his shares: (1) Such stockholder withdraws his demand for payment and the corporation consents thereto; (2) The proposed corporate action is abandoned or rescinded by the corporation; (3) The proposed corporate action is disapproved by the Securities and Exchange Commission where its approval is necessary; or (4) The Commission determines that such stockholder is not entitled to appraisal right. If any of the above cases arise, the stockholder shall not be paid the fair value of his shares, 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. Sec. 85. Who bears costs of appraisal. — 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)

682


Sec. 86

Liability for costs and expenses of appraisal.

The costs and expenses of appraisal shall be borne as follows: (1) By the corporation. —

(a) Where the price which the corporation offered to pay the dissenting stockholder is lower than the fair value as determined by the appraisers named by them; (b) Where an action is filed by the dissenting stockholder to recover such fair value and the refusal of the stockholder to receive payment is found by the court to be justified. (2) By the dissenting stockholder. —

(a) Where the price offered by the corporation is approximately the same as the fair value ascertained by the appraisers; (b) Where the same action is filed by the dissenting stockholder and his refusal to accept payment is found by the court to be unjustified. Sec. 86. Notation on certificate(s); right of transferee. — Within ten (10) days after demanding payment for his shares, a dissenting stockholder shall submit the certificate(s) 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 certificate(s) bearing such notation are transferred, and the certificate(s) consequently cancelled, the rights of the transferor as a dissenting stockholder under the Title shall cease and the transferee shall have all the rights of a regular stockholder; and all dividend distributions which would have accrued such shares shall be paid to the transferee, (n) Notation on certificate(s) of shares of dissenting stockholder.

Section 86 requires the dissenting stockholder to submit to the corporation within ten (10) days after demanding payment

Sec. 86

TITLE X. APPRAISAL RIGHT

683

for his shares, the corresponding certificate(s) of stock for notation thereon that such shares are dissenting shares. With the notation, the secretary of the corporation will be guided accordingly, for under Section 83 all rights accruing to such shares including voting and dividend rights shall be suspended except as provided in said section and Section 84. Transfer of dissenting shares. The shares represented by the certificate(s) bearing such notation may be transferred or sold by the dissenting stockholder. In such case: (1) The transferee shall become a regular stockholder with the right to receive all dividend distributions which would have accrued to such shares; and (2) The right of the transferor as a dissenting stockholder to be paid the fair value of the shares shall cease. By transferring his shares, he ceases to be a stockholder. — oOo —

Title XI NON-STOCK CORPORATIONS Sec. 87. Definition. — For the purposes of this Code, a non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution: Provided, That any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title. The provisions governing stock corporations, when pertinent, shall be applicable to non-stock corporations, except as may be covered by specific provisions of this Title, (n) Sec. 88. Purposes. — Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agriculture and like chambers, or any combination thereof, subject to the special provisions of this Title governing particular classes of non-stock corporations, (n) Definition of non-stock c o r p o r a t i o n .

The definition of a non-stock corporation in Section 87 refers to an ordinary non-stock corporation formed for any of the

purposes mentioned in Section 88. Thus, a non-stock corporation organized to promote educational objectives may not be an educational corporation as contemplated in Sections 106 to 108 of the Corporation Code. 684

Sees. 87-88

TITLE XI. NON-STOCK CORPORATIONS

685

In the enumeration of the purposes for which non-stock corporations may be organized, "political" purpose is not specifically included. In view thereof, the Securities and Exchange Commission may reject the articles of incorporation if the purpose of the corporation is to engage in election campaign or partisan political activity. (SEC Opinion, April 10,1985.) 1

Power to make profits and engage in business. (1) Incidental profits obtained from operations. — A non-stock

corporation, as a general rule, is not empowered to engage in business with the object of making income or profits directly or indirectly. However, it is not prohibited to make income or profits as an incident to its operation. (Sec. 87, par. 1.) But, unlike stock corporations, any profit derived by it from any authorized activity cannot be distributed as dividends to its members. Incidental profits obtained from its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, (see Sec. 36[11].) It is in this sense that a non-stock corporation is considered a non-profit corporation. (2) Profits obtained from investment of accumulated funds. — A

non-stock corporation may not lawfully engage in any business activity for profit as it would run counter to its very nature as a non-profit entity (see Sec. 14[2].) unless it is necessary to carry out the purpose or purposes for which it was organized. However, it may invest its accumulated funds for profit purposes. Thus, it may subscribe to the capital stock of a corporation or invest in commercial papers such as money instruments, but such power must be included in its articles of incorporation in order that the investment may not be considered ultra vires, (see Sec. 45.) Non-stock corporations are not empowered to venture primarily in business activities. However, when incidental to the objects and purposes of the corporation and without the end of making profits to be distributed to the members, it may engage in certain economic activities stated in its articles of incorporation. •See SEC Requirements for Non-stock Corporations. (Appendix "F.")

686


Sees. 87-88

(3) Powers necessary furtherance of purposes. — Powers merely

convenient or useful are not implied (Sec. 36[11].) if they are not essential, having in view the nature and object of incorporation. Thus, an association of exporters cannot engage in fund-raising projects where such activity is neither necessary nor incidental to the furtherance of its objectives. Should the corporation desire to engage in fund-raising activities, it should amend its articles of incorporation (see Sec. 16.) to include the same in its purposes. (4) Determination of actual purpose or object. — What is deter-

minative of whether a corporation is engaged in business is its object or purpose as stated in its articles of incorporation and bylaws. It is a familiar rule that the actual purpose of a corporation is not controlled by the corporate form or by the commercial aspect of the business prosecuted but may be shown by extrinsic evidence, including its by-laws and the method of its operation. Hence, the fact that its capital stock is divided into shares (see Sec. 2.), does not detract from the fact that it is not engaged in business for profit if such is the case. (Collector of Internal Revenue vs. Club Filipino, Inc. de Cebu, 5 SCRA 321 [1962].) A non-stock corporation is a non-profit corporation, while a stock corporation is a for-profit corporation. Applicable provisions.

Non-stock corporations are now governed by Title XI of the Corporation Code. They shall be governed by the pertinent general provisions on stock corporations only in the absence of applicable specific provisions in Title XI. (Sec. 87, par. 2.) Thus, a non-stock corporation cannot be converted into a stock corporation by mere amendment of the articles of incorporation. It can only be dissolved under the methods specified in Title XIV, Sections 117-122. (SEC Opinion, Sept. 19, 1988.) Also, inasmuch as there 2

T h e Anti-Dummy Law (CA. No. 108.) applies only to entities engaged in wholly or partly nationalized economic business activities, that is, where there is a constitutional or statutory provision requiring Philippine citizenship as a requisite for the exercise or enjoyment of a right, franchise, or privilege. Only when there is an existing law (presently none) limiting foreign membership in a particular kind or type of non-stock corporation will its provisions apply thereto. (SEC Opinion, Oct. 22,1992.)

Sees. 89-92


687

is no special provision relating to hold-over term of the trustees of non-stock corporations in Title XI, the provision of Section 23 allowing hold-over in stock corporations is also applicable to non-stock corporations by virtue of Section 87. Chapter I — MEMBERS Sec. 89. Right to vote. — The right of the members of any class or classes to vote may be 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 by the articles of incorporation or the by-laws, a member may vote by proxy in accordance with the provisions of this Code, (n) 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. Sec. 90. Non-transferability of membership. — Membership in a non-stock corporation, and all rights arising therefrom, are personal and non-transferable, unless the articles of incorporation or the by-laws otherwise provide, (n) Sec. 9 1 . Termination of membership. — Membership shall be terminated in the manner and for the causes provided in the articles of incorporation or the by-laws. Termination of membership shall have the effect of extinguishing all rights of a member in the corporation or in its property, unless otherwise provided in the articles of incorporation or the by-laws, (n) Chapter II — TRUSTEES AND OFFICERS Sec. 92. Election and term of trustees. — Unless otherwise provided in the articles of incorporation or the by-laws, the board of trustees of non-stock corporations, which may be more than fifteen (15) in number as may be fixed in

688


Sees. 93-94

their articles of incorporation or by-laws, shall, as soon as organized, so classify themselves that the term of office of one-third (1/3) of their number shall expire every year; and subsequent elections of trustees comprising one-third (1/3) of the board of trustees shall be held annually and trustees so elected shall have a term of three (3) years. Trustees thereafter elected to fill vacancies occurring before the expiration of a particular term shall hold once only for the unexpired period. No person shall be elected as trustee unless he is a member of the corporation. Unless otherwise provided for in the articles of incorporation or the by-laws, officers of a non-stock corporation may be directly elected by the members, (n) Sec. 93. Place of meetings. — 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) Chapter III — DISTRIBUTION OF ASSETS IN NON-STOCK CORPORATIONS Sec. 94. Rules for distribution. — In case of dissolution of a non-stock corporation in accordance with the provisions of this Code, its assets shall be applied and distributed as follows: 1. All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequate provision shall be made therefor; 2. Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in accordance with such requirements; 3. Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, benevolent, educational or similar purposes,

Sees. 89-95


689

but not held upon a condition requiring return, transfer or conveyance by reason of the dissolution, shall be transferred or conveyed to one or more corporations, societies or organizations engaged in activities in the Philippines substantially similar to those of the dissolving corporation pursuant to a plan of distribution adopted as provided in this Chapter; 4. Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in accordance with the provisions of the articles of incorporation or the by-laws, to the extent that the articles of incorporation or the by-laws determine the distributive rights of members, or any class or classes of members, or provide for distribution; and 5. In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not organized for profit, as may be specified in a plan of distribution as provided in this Chapter, (n) Sec. 95. Plan of distribution of assets. — A plan providing for the distribution of assets, not inconsistent with the provisions of this Title, may be adopted by a non-stock corporation in the process of dissolution in the following manner: The board of trustees shall, by majority vote, adopt a resolution recommending a plan of distribution and directing the submission thereof to a vote at a regular or special meeting of members having voting rights. Written notice setting forth the proposed plan of distribution or summary thereof; and the date, time and place of such meeting shall be given to each member entitled to vote, within the time and in the manner provided in this Code for the giving of notice of meetings to members. Such plan of distribution shall be adopted upon approval of at least two-thirds (2/3) of the members having voting rights present or represented by proxy at such meeting, (n) Rules applicable only to non-stock corporations.

The specific rules that follow, governing a non-stock corporation, must be borne in mind. Most of the rules distinguish a nonstock corporation from a stock corporation.


690

Sees. 89-95

(1) Prohibition against distribution of dividends. — No part of

its income is distributable as dividends to its members (Ibid., par. 1.), meaning, no pecuniary benefits shall inure in favor of the members although they may avail of, or derive other forms of, assistance from the corporation. (SEC Opinion, April 10, 1985.) Thus, a board cannot legally pass a resolution giving some benefits to the active members of the corporation, among others, in the form of grocery items and the like. (SEC Opinion, Dec. 17, 1987.) (2) Non-profit character. — It cannot engage in business with the object of making profits. Section 88 enumerates the allowable purposes for which a non-stock corporation may be organized. The fact that there is no distribution by an organization of earnings or profits by way of dividends or otherwise to its members is not conclusive as to its non-profit character. Thus, where the members of an association (the purpose of which according to its constitution is to "provide for its members and their dependents recreational activities and a source of food and other items at minimum prices that are consistent with good service and efficient management") do not receive dividends in the form of cash, but they receive benefits in the form of commissary privileges, such as the importation of goods dutyfree, purchase of food and other items at minimum or reduced prices, and return or refund of capital at the end of membership or upon dissolution of the corporation, its constitution likewise providing that profits of the association will be kept at a minimum and at the end of each fiscal period 10% of the net earnings will be put into a Reserve Fund if this fund is below $50,000 in value, to be used at the discretion of the Board of Directors for capital improvements and to absorb operating deficits or any kind of loss," such an entity is one created and operated for profit. (U.S. Employees Association Employees Association [USEAEA] vs. U.S. Employees Association [USEA], 107 SCRA 87 [1981].) 3

(3) Right to vote. — The right to vote of members may be limited, broadened, or even denied in the articles of incorporation or the by-laws. (Sec. 89, par. 1.) As to meaning of profit, see "Dividends distinguished from profits or under Section 43. 3

Sees. 89-95


691

(a) The by-laws may declare who shall be entitled to vote and how they shall be entitled to vote, or impose other restrictions such as limiting the right to vote of each member to a maximum number of votes irrespective of the amount of his capital contribution, or authorizing the chairman to vote the remaining balance after deducting the total votes of the members/proxies (SEC Opinion, April 23, 1987.), or restraining proxies from participating directly in the election of trustees at the annual meeting of members (SEC Opinion, Aug. 25,1987.), or limiting the right to vote only to members of good standing, in which case delinquent members shall not be included in determining the existence of the required quorum. (SEC Opinion, Feb. 23,1993; see Sec. 24.) (b) Unless otherwise provided by the articles of incorporation or the by-laws, a member may vote by proxy in accordance with the provisions of the Corporation Code. (Sec. 89, par. 2.) If proxy voting may be denied outrightly in the articles of incorporation or by-laws, it necessarily follows that the qualifications on who should be appointed proxies or limitations on proxy may also be made therein. (SEC Opinions, July 23,1981 and Sept. 20,1994.) (c) Each member shall be entitled only to one vote in the election of trustees unless cumulative voting is authorized in the articles of incorporation or the by-laws. (Sec. 89, par. 1.) He may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. (Sec. 24.) (d) Voting by mail or other similar means may be authorized. (Sec. 89, last par.) This is necessary where a non-stock corporation has numerous members who are located in various parts of the country, but it must be specifically provided for in the by-laws before the same can be availed of. (4) Governing boards. — Non-stock corporations may, through their articles of incorporation or their by-laws, designate their governing boards by any name other than as board of trustees. (Sec. 138.) Trustees of non-stock corporations have duties similar to those of stock corporations.

692


Sees. 89-95

(a) The number of trustees who must be members of the corporation (Sec. 92, par. 2.), may be more than fifteen (15). (Sec. 92, par. 1.) But the number of incorporating trustees shall not be more than fifteen (15). (see Sec. 14[6].) Although non-stock corporations are allowed to have more than 15 trustees, under the principle of delegation of corporate management, the board is supposed to be small in number so that it may easily muster a quorum to act on urgent matters. (SEC Opinion, Sept. 26, 1997.) (b) Unless otherwise provided in the articles of incorporation or the by-laws, the terms of office of the trustees first elected are staggered with a one (l)-year interval. (Sec. 92, par. 1.) Although the law provides for a staggered term, the number of trustees comprising the board and their term of office may vary as the articles or the by-laws may provide. (SEC Opinion, March 20, 1985.) While staggered terms are allowed, the members of the board should always be elected in accordance with Section 24 and any vacancy thereof filled as provided by Section 29. (c) Trustees subsequently elected shall have a term of three (3) consecutive years. (Sec. 92, par. 1.) It may be limited to one (1) year only as per Article 23. The term or the percentage of trustees comprising a group may vary under the articles of incorporation or by-laws. (SEC Opinion, May 7, 1981.) While non-stock corporations are allowed, in view of the phrase "unless otherwise provided in the Articles of Incorporation or the by-laws" found in Section 93, to provide in their articles of incorporation or by-laws the desired term of office (not necessarily one [1] year or three [3] years) of the board, lifetime or unlimited term is not allowed as it absolutely deprives other members to the opportunity to participate in the management of the corporation or to become officers of the corporation. While the restriction under Section 7 (founders' shares) of the Corporation Code applies to stock corporations, in view of the rationale behind it, the same is likewise applicable to non-stock corporations in view of Section 87 (par. 2.) which

Sees. 89-95


693

states that the provisions governing stock corporations, when pertinent, shall be applicable to non-stock corporations. (SEC Opinions, Sept. 23,1991 and No. 04-46, Dec. 7, 2004.) (d) Only members of the corporation can be elected to sit in the board. (Sec. 92, par. 2; see Sec. 27.) Hence, to be eligible as trustee, a candidate should meet the qualifications for membership of the corporation as prescribed by its by-laws. (e) A corporation, being a juridical person, is not qualified to occupy the position of a director or trustee. (Sec. 25.) Accordingly, in the absence of an express provision in the by-laws stating that authorized representatives of juridical persons or corporate members are also to be considered as "members" of the corporation for purposes of qualifying them to be elected as members of the board, they cannot be elected as trustees. (SEC Opinion, Sept. 2,1991.) (f) Officers other than trustees may be directly elected by the members (not by the board) unless otherwise provided in the articles of incorporation and the by-laws. (Sec. 92, last par.) (5) Meetings. — Meetings of the board of trustees of a stock corporation may be held anywhere in or outside the Philippines, unless the by-laws provide otherwise. (Sec. 53, last par.) (a) The by-laws may provide that the members may hold their meetings at any place even outside the place where the principal office of the corporation is located, provided that such place is within the Philippines. (Sec. 93.) Thus, meetings may coincide with conventions of the non-stock corporation in any place of the country. (b) Where the by-laws expressly provide for the holding of members' meeting at the principal office of a non-stock corporation conformably with the general rule in Section 51, meetings may not take place anywhere else without first amending said by-laws in accordance with Section 48. In case the by-laws do not indicate the place of meeting, the members cannot hold their meetings outside the place where the principal office of the corporation is located. The authority

694


Sees. 89-95

to transfer the place of members' meetings outside the place where the principal office of the corporation is located must be expressly granted by the by-laws. (SEC Opinions, Dec. 26, 1991 and Sept. 24,1997.) (6) Dissolution. — In case of dissolution, its assets shall be applied and distributed in accordance with certain specific rules laid down by law (Sec. 94.) or as may be specified in a plan of distribution adopted by the corporation, provided it is not inconsistent with such rules. (Sec. 95.) It is not allowed to distribute any of the assets of the corporation or any incidental income or profit made by the corporation during its existence. (7) Conversion into stock corporation. — A non-stock corpo-

ration cannot be converted into a stock corporation by mere amendment of the articles of incorporation. It must be dissolved first under the methods specified in Title XIV, and thereafter, the members may organize as a stock corporation. (SEC Opinion, Feb. 24, 1989.) The conversion of an existing non-stock, non-profit corporation into a "stock corporation" by mere amendment of the articles of incorporation would be tantamount to distribution of the corporate assets or income of the corporation to its members inasmuch as thereafter they automatically become stockholders thereof. This scheme might defraud the public who might have contributed donations or grants to the non-stock, non-profit corporation since after its conversion the donated corporate assets would in effect be treated as paid-in capital or subscription payments of the stockholders. (SEC Opinion, March 20,1995.) Membership in a non-stock corporation. (1) Manner or mode of acquisition. — Membership in a nonstock corporation cannot be acquired except in the particular manner or mode of acquiring the same, as provided for in its valid by-laws. (12-A Fletcher, pp. 579, 583-585.) Transfer of membership rights by virtue of inheritance is not provided for and is not, therefore, considered as a valid mode of acquiring membership in the corporation. Furthermore, the rights of members of a non-stock corporation which usually are

Sees. 89-95


695

evidenced by a certificate or policy of some kind showing that the person named therein or the holder is entitled to the rights of membership, are not necessarily transferable although they may be made so. (Ibid., p. 579.) (2) Approval of admission of new members. — Admission of

members is one corporate power expressly granted under Section 36(6) of the Code. In the absence of any express provision in the by-laws as to what body the admission of corporate members is lodged, it must logically be in the board of trustees because it is the board which exercises the corporate powers of all corporations formed under the Corporation Code, and the approval of the members of the corporation shall not be necessary, (see Sec. 23.) (3) Mode adopted in the by-laws. — The manner of admitting

new members to a non-stock corporation is governed by the by-laws and may not, therefore, be uniform in all corporations. The by-laws may either provide that new members may be admitted by a majority of the members of the board of trustees or a committee on membership. Once adopted, such mode of admitting new members must be observed until a new procedure is adopted by the corporation through an amendment of the bylaws. (SEC Opinion, Sept. 26,1969.) (4) Qualifications for membership. — Under Section 6 of R.A.

No. 7192, otherwise known as the "Women in Development and Nation-Building Act," "women shall enjoy equal access to membership in all social, civic and recreational clubs, committees associations, and similar other organizations devoted to public purpose, x x x (italics supplied) The right refers to "equal access to membership," not to "equal membership." It would be absurd to construe it in terms of equality membership, as there are types or kinds of organizations wherein not all sexes or persons, by the nature of their objectives, are acceptable or qualified to become members. It is also a matter of general knowledge that corporations may validly prescribe certain qualifications necessary for membership and the mode of procedure in which membership can be acquired. It is also clear from the above provision that women are given equal access to membership only

696


Sees. 89-95

to associations or organizations "devoted to public purpose." (SEC Opinion, June 14,1993.) Neither is the equal protection guarantee of the Constitution violated. (Art. Ill, Sec. 1 thereof.) The guarantee does not require that persons different in fact be treated in law as though they were the same. Where there are reasonable grounds for so doing, persons or their properties may be grouped into classes to each of which special legal rights and liabilities may be attached. No violation is committed as long as the classification is reasonable, not arbitrary or capricious. (SEC Opinion, Oct. 4, 1993, citing Textbook on the Philippine Constitution by Hector S. De Leon.) (5) Admission before adoption of corporate by-laws. — A private

corporation commences to have corporate existence and juridical personality and is deemed incorporated from the date of issuance of its certificate of incorporation. (Sec. 19.) If it is a non-stock corporation, it has the power and capacity to admit members. (Sec. 36[6].) The above provisions do not require the adoption of corporate by-laws before a corporation can commence its operation by accepting membership. Hence, it may accept members in addition to the incorporating members even before the adoption of its by-laws, notwithstanding a provision in its articles of incorporation stating that additional members may be accepted pursuant to the by-laws of the corporation. (SEC Opinion, March 8,1993.) (6) Amendment of by-laws. — The board of trustees of the

corporation may not increase the membership fee by mere resolution, without first properly amending the by-laws of the corporation. The trustees do not have the power to make such step in their capacity alone as members of the board of trustees, as it needs an amendment of the by-laws of the corporation, if the matter is expressly treated therein. Under Section 48 (par. 1 ) of the Code, by-laws may be amended by vote of a majority of the members of a non-stock corporation. In the absence of a due delegation by the members of such power to the board of trustees, the latter cannot amend the by-laws nor circumvent the law by adopting a resolution to that effect. (SEC Opinion, March 3,1969.)

Sees. 89-95


697

(7) Nature of membership rights. — Membership and all rights

arising therefrom are personal and non-transferable unless otherwise provided in the articles of incorporation or the by-laws. (Sec. 90.) The general rule is that membership in a non-stock corporation has personal elements accompanied by social and other ties; hence, except where the articles of incorporation or bylaws so provide, it cannot be transferred to any other person who wishes to be a member. (SEC Opinion, July 27, 1990.) Indeed, in the absence of restrictions, it may act arbitrarily, and exclude any person it may see fit and the courts have no power to interfere. (SEC Opinion, Dec. 3,1991, citing 12-A Fletcher, Sec. 5687.) (8) Power of courts. — Courts are without power to strip a member of a non-stock, non-profit corporation of his membership therein without cause; otherwise, that would be an unwarranted and undue interference with the well-established right of a corporation to determine its membership. (Chinese YMCA of the Phil. Islands vs. Ching, 71 SCRA 460 [1976].) (9) Termination of membership. — Membership shall be terminated only in the manner and for the causes provided in the articles of incorporation or by the by-laws. (Sec. 91.) Nevertheless, it is essential that the expulsion or suspension of a member must be based on just and reasonable ground (e.g., acts of disloyalty, non-payment of dues, dishonesty) after notice and hearing of the charge against him. In the absence of waiver, the member is entitled to due process. Its denial will entitle the member to award of damages. (10) Payment of dues and other assessments. — Membership

corporations, such as sports clubs, may provide in its articles of incorporation for the payment by its members of monthly dues called "club dues" as may be prescribed in the by-laws or by the board of directors to meet the expenses for the general operations of the club and for the maintenance and improvement of its premises and facilities. The term "dues" are obligations payable at recurring intervals for maintenance of an organization. It is different from "assessment" which always implies a burden imposed in invictum and a single act as distinguished from a recurring act. (SEC Opinion, Nov. 12, 1986.)

698


Sees. 89-95

A non-stock corporation is authorized by law to accept members and may collect reasonable membership dues and other assessments for purposes of accomplishing the purposes or objectives for which the corporation was organized. (SEC Opinion, March 27,1995.) The articles of incorporation or by-laws may provide that only members of good standing or those who are up-to-date in the payment of their dues or other obligations may vote. (SEC Opinion, Feb. 4,1988.) — oOo —

Title XII CLOSE CORPORATIONS Sec. 96. Definition and applicability of Title. — A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All of the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) All of the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall be deemed not a close corporation when at least twothirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest in accordance with the provisions of this Code. The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides, (n) Definition of close corporation.

A close corporation has been defined as a corporation in which the stock is held in a few hands, or in few families, and which 699

700


Sec. 96

stock is not at all or only rarely dealt in buying and selling. (Words and Phrases, p. 498.) It has also been defined as one in which the directors and officers have the power to fill vacancies in their own number, without allowing to the general body of stockholders any choice or vote in their elections. (Black's Law Diet., 4th ed., p. 410.) Peculiarity of a close corporation.

The outstanding peculiarity of a close corporation is the identity between stock ownership and active management. In a close corporation, all the outstanding stock (there being no publicly held securities of any other class) is owned by the persons (or members of their immediate families) who are active in the management and conduct of the business. (C. Rohrlich, Law and Practice in Corporate Control, p. 96.) It is essentially an incorporated partnership in which the stockholders consider each other as partners but which the law treats as a corporation. Thus, stockholders in a close corporation are very much like members in a partnership. They owe to one another the same duty of utmost good faith and diligence that partners owe one another. This strict duty applies particularly to controlling stockholders. Meaning of t e r m under t h e C o d e .

Within the meaning of the Corporation Code, it is one whose articles of incorporation provide the following: (1) All its issued stock, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding 20; (2) All its issued stock shall be subject to one or more restrictions on transfer permitted by the Code (see Sec. 98.); and (3) Any of its stock shall not be listed in any stock exchange or offered to the public. All the three (3) features must be present for a corporation to be classified as a close corporation within the meaning of

Sec. %

TITLE Xn. CLOSE CORPORATIONS

701

the Code. Where 2 / 3 of the voting stock or voting rights of a corporation as defined above is owned or controlled by another corporation which does not fall within the definition of a close corporation, the former shall be deemed not a close corporation. (Sec. 96, par. 1.) So too, a narrow distribution of ownership does not, by itself, make a close corporation. (San Juan Structural & Steel Fabricators, Inc. vs. Court of Appeals, 296 SCRA 631 [1998].) 1

Corporations which are vested with public interest such as those mentioned are not allowed to be incorporated as a close corporation. (Ibid., par. 2; see Sec. 140, pars. 2, 3.) Applicable provisions. The rules set forth in Title XII primarily govern close corporations. The provisions of other Titles of the Code apply in a suppletory character, when not otherwise inconsistent with any provision of Title XII. (Ibid., last par.) Need for special rules for close corporations. In a close corporation, we are dealing essentially with an incorporated partnership. Indeed, a close corporation has also been described as a "corporation de jure "and a "partnership de 2

•It has been opined that while a corporation with more than 20 stockholders due to subsequent transfers may no longer be classified as a close corporation, the same will not be treated as a publicly-held corporation if the corporation has no intention of going public and provided that the subsequent transfers of shares have the prior approval of the SEC and the offering is of a limited character. (SEC Opinion, Oct. 21,1992.) T h e close corporation is organized primarily for the purpose of assuring limited liability to all the participants, at least to the very large extent that such limitation is available to stockholders but not to partners. In view of the legal nature of the corporation, this limitation of liability comes, however, inseparably tied to other characteristics which the owners not only do not desire but also find affirmatively objectionable. (Rohrlich, op. cit., p. 97.) Among the lesser "evils" are the formalities incident to the corporate status, such as the requirements for the filing of incorporation documents, need for a board of directors, for stockholders' meetings, and all the other paraphernalia of corporateness. These burdens are generally accepted as a price which must be paid for the privileges of being a corporation, even if some of them are all too frequently neglected in practice. (Ibid.) The very objective then of a close corporation form is to enjoy the advantages of the corporate organization, like the limitation of personal liability, and at the same time to retain internally the partnership form of doing business. Close corporations are usually small business corporations with few stockholders who participate actively in the management of the business.


702

Sec. 96

facto." It may in fact be that the business began as a proprietorship, or a partnership and the parties then decided to incorporate for tax reasons, to insulate themselves from liability, to obtain outside capital, or to meet the problems of continuity and transferability which arise at the death or retirement of one of the members. A close corporation then has special needs and problems different from those of a widely-held corporation. 3

In many situations, it may not be fair nor practicable to apply indiscriminately to the two types of corporate enterprise the same rules or principles of law applicable to corporations. Hence, the need for special provisions to govern close corporations. On this point, the following discussion is illuminating: (1) Incorporated business enjoying the characteristics of a part-

nership. — "Forty years ago, the literature in the corporate field focused upon the subject of 'corporate advantages without incorporation.' This was in fact the title of a book published in 1929 by Professor Edward H. Warren. Only recently has any noticeable interest developed in the other direction, namely, how a business, once incorporated, can nonetheless enjoy the characteristics of a partnership. Let us assume that a group of three persons, having promoted a business, or perhaps already operating a partnership, decide to incorporate and to divide the stock equally among them. Their reason for incorporation may be to achieve limited liability, to assure continuity of the business upon their death, to obtain funds more readily, or to escape from taxation at individual rates if they are in high brackets. In reality, though not in law, theirs may be an incorporated partnership. Despite certain advantages of incorporation they may nonetheless chafe at the rigid pattern of internal control and management which is commonly associated with it. They are still partners in spirit. For example, rule by majority may be distasteful to them. They may all prefer

ln the field of finance, for instance, a widely-held corporation may sell its securities to the public or to large institutional investors such as insurance companies. The question of shareholders' pre-emptive rights in newly issued shares is considerably less significant than in the case of a closely-held corporation (see Sees. 39,102.), which is unable to go to the market for the issuance of securities but must pledge or mortgage its assets and even borrow on the personal notes of its principal stockholders. (W.L. Cary, Cases and Materials on Corporations, 1969 ed., pp. 19, 21.) 3

to retain a veto power over major business decisions. They may be reluctant to have new 'partners' substituted without their consent." (2) Flexible standard operating procedure with respect to matters

of internal organization. — "The standard operating procedure for corporations has been described as pyramidal in form, with the shareholders at the base, the directors constituting the policymaking body and managing the company's affairs, and the officers executing policies already formulated, (see Sec. 23.) Typically, both shareholders and directors are expected to act by majority vote, shares are freely transferable and dissolution is regarded as an extraordinary remedy. If there is any major deviation from this established norm, by contract or otherwise, doubt immediately arises whether it could be valid under the law. Initially, in this area of the law, no effort was made consciously to distinguish between the publicly held concern and the small so-called close corporation. One natural inquiry is why such an inflexible standard operating procedure — for all corporations alike — should be treated as sacrosanct. Is it realistic in the case of the closely held corporation? Does it accord with business practice when the corporation is fundamentally the will and effort of a few individuals? Is there any injury to outsiders — shareholders or creditors — to the public generally, if the deviations are limited to the internal organization of the corporation? These are some of the questions which are being raised today and which may be responsible for a noticeable tendency toward increasing corporate flexibility in this country. In America today, there is developing some recognition that a closely held concern may in fact function upon an entirely different basis than a public corporation. Its success may depend upon the cooperative effort and mutual confidence of its shareholder owners. Business practice here may play a major role in the development of corporation law. Realistically, should public corporations on the one hand, and chartered partnerships on the other, be governed by a single inflexible standard operating procedure. Nevertheless, enthusiasm for flexibility and the development of new legal concepts must be tempered with competing practical considerations. If, for example, unanimity is

704


Sec. 97

required for action by the shareholders or directors, have we not thus encouraged the likelihood of a stalemate or deadlock? At what point is a statutory solution available or even feasible, if the 'partners' cannot agree?" (3) Restriction of the freedom of the vote at the shareholder and

at the director level. — "More specifically, let us return to the three partners. Each of them will seek to implement his aims at the different levels of corporate action. Each may want to insure concerted action among the three of them, or perhaps that his own voice will carry force, even to the point of veto. This is accomplished by restricting the freedom of the vote at the shareholder and at the director level, directly by contract or indirectly by provisions in the charter or by-laws requiring more than a majority for quorums and for policy decisions. Each may want to obtain for himself a guaranteed position as an officer of the company with a minimum salary. Each should consider the possibilities for dissolving the corporation in the event of a deadlock or of a serious clash of personalities. Finally, each will want some control over the power of newcomers to buy stock in the corporation." (W.L. Cary, Cases and Materials on Corporations, 1969 ed., pp. 362-363.) Sec. 97. Articles of incorporation. — The articles of incorporation of a close corporation may provide: 1. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their transfers as may be stated therein, subject to the provisions of the following section; 2. For a classification of directors into one or more classes, each of which may be voted for and elected solely by a particular class of stock; and 3. For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code. The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors so long as this provision continues in effect:

1. No meeting of stockholders need be called to elect directors; 2. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for purposes of applying provisions of this Code; and 3. The stockholders and the corporation shall be subject to all liabilities of directors. The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders, instead of by the board of directors, (n)

Permissible provisions in articles of incorporation. The matters mentioned in Section 97 are allowed to be provided in the articles of incorporation of a close corporation. (1) Classification of directors into one or more classes. — An illus-

tration of No. (2), in paragraph 1, is where the articles of incorporation provides for two classes of stock, "A" and " B , " allocating a number of directors for each class, and the holders of each class would be elected to the board of directors solely by the holders of the same class regardless of the number of shares in each class. But the members of the board of directors cannot be divided into groups, with each group having different terms of office, (see Sec. 23; for exceptions, see Sees. 92,108.) It is not clear whether under No. (3) a unanimity requirement for stockholders' and directors' resolution would be valid. The classification of directors into one or more classes or groups is not allowed in an ordinary or widely-held corporation. (2) Quorum and voting requirements. — The articles of incorporation of a close corporation may provide for quorum and voting requirements in meetings of stockholders or directors greater than those provided in the Corporation Code. The classification of shares into common and founders' shares and grant of founders' shares a 1:10 voting rights ratio are valid. The 1:10 voting rights ratio for founders' shares is not subject to the limited period under Section 7 of the Code. The 5-year limitation provided

706


Sec. 98

in Section 7 applies only to the grant of an exclusive right to vote and be voted for in the election of directors. (SEC Opinion No. 10-02, Jan. 15, 2010.) (3) Management of the corporation by the stockholders. — Where

the articles of incorporation provide that the business of the corporation shall be managed by the stockholders themselves rather than by a board of directors, then the stockholders shall be deemed to be the directors with all the liabilities imposed by the Code on directors, (par. 2.) In the ordinary stock corporation, the management or conduct of the business and affairs thereof is entrusted to the board of directors and cannot be turned over to the stockholders except for a few specified matters concerning its internal affairs, (see Sec. 23.) (4) Election or appointment of officers directly by the stockhold-

ers. — The articles may likewise provide that all or certain specified officers or employees shall be elected or appointed directly by the stockholders, instead of the board of directors. (Sec. 97, last par.) In the ordinary stock corporation, corporate officers are elected by a majority of all the members of the board of directors. (Sec. 25.) Stockholders in a close corporation are very much like members in a partnership. They owe to one another the same duty of utmost good faith and diligence that partners owe one another. This strict duty applies particularly to controlling stockholders. Sec. 98. Validity of restrictions on transfer of shares. — Restrictions on the right to transfer shares must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock, otherwise, the same shall not be binding on any purchaser thereof in good faith. Said restrictions shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated therein. If upon the expiration of said period, the existing stockholders or the corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares to any third person, (n)

Sec. 98

TITLE XII. CLOSE CORPORATIONS

707

Restrictions on transfer of shares. One of the three distinguishing characteristics of a close corporation is that all of its stock shall be subject to one or more specified restrictions permitted by Title XII. (Sec. 96, par. 1.) Section 98 imposes two (2) conditions for the validity of restrictions on the right to transfer shares, namely: (1) Such restrictions must appear in the articles of incorporation and in the by-laws, as well as in the certificate of stock; otherwise, they shall not be binding on any purchaser thereof in good faith; and (2) They shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholders with such reasonable terms, conditions or period stated therein. Thus, a restriction fixing the purchase price very much below the fair market value of the shares may be invalid. Also invalid is a prohibition against transfer of stock without the prior consent of the board of directors or of the other stockholders. 4

Right of first refusal. The corporation or the stockholders have the right of first refusal, that is, the stockholder who wants to sell his shares to any third person must first offer it either to the corporation or to the other existing stockholders usually under the same terms In an American case, there was a question as to the "unreasonableness," that is, "unfairness" of the price specified in the by-laws, namely, a price at which the shares had originally been purchased from the corporation. Reversing the Appellate Division upon this point, the court said (p. 543.): "Generally speaking, these restrictions are employed by the so-called 'close corporations' as part of the attempt to equate the corporate structure to a partnership by giving the original stockholders a sort of pre-emptive right through which they may, if they choose, veto the admission of a new participant. Obviously, the case where there is an easily ascertainable market value for the shares of a closely-held corporate enterprise is the exception, not the rule, and consequently, various methods or formulae for fixing the option price are employed in a practice, e.g., book or appraisal value, often exclusive of good will, or a fixed price, or the par value of the stock. In sum, then, the validity of the restriction on transfer does not rest on any abstract notion of intrinsic fairness of price. To be invalid, more than mere disparity between option price and current value of the stock must be shown. Since the parties have in effect agreed on a price formula which suited them, and provision is made freeing the stock for outside sale should the corporation not make, or provide for, the purchase, the restriction is reasonable and valid." (W.L. Cary, pp. 502-503, citing Allen vs. Biltmore Tissue Corp., 2 N.Y. 2d., 534,148 N.E. 2d 812 [1957].) 4

708


Sec. 98

and conditions. The right pertains to shares already issued to stockholders. If the existing stockholders or the corporation fails to exercise the option to purchase within the period stated, the transferring stockholder may sell his shares to any third person. The present policy of the Securities and Exchange Commission is to limit the period to one (1) month which is deemed "sufficient for the stockholders or for the corporation (not necessarily a closely-held one) to signify their desire to buy the shares of stock being offered for sale by any stockholder." (SEC Opinion, Oct. 13, 1964.) Under Section 98, an absolute restraint on transfer of stock unlimited in time is invalid. Need for stock transfer restrictions in close corporations. (1) Prevent changes in control of corporation. — As noted earlier,

one of the major objectives of the shareholders of a close corporation may be to remain close, i.e., to choose new "partners" on the death or retirement of the present shareholder participants. Although restrictions on the transfer of shares are occasionally adopted for other reasons, the usual purpose of such restrictions is to prevent changes in control of the corporation which might otherwise result from the transfer of voting shares. (W.L. Cary, op. cit., p. 494.) In this connection too, the shareholders of a close corporation, like partners, may wish to insure their own continuance as directors and officers if it is permissible. (Ibid., p. 21.) (2) Maintain delectus personae of partnership. — In contrast,

a widely-held corporation needs centralized management distinguished from the owners which in a close corporation may not be needed or desired since, often, the same persons are both managers and shareholders, with no clear differentiation separating one capacity from the other. The idea that they must act as fiduciary directors for the benefit of themselves as passive beneficial owners will strike them as a legalistic nonsense. Again, in the widely-held company, the shares of stock must be freely transferable, for the so-called "owners" demand a liquid investment. In the close corporation, this is not likely to be wanted any more than it is in a partnership. The incorporators want to continue as partners albeit with the advantages of corporate

Sec. 98

TITLE Xn. CLOSE CORPORATIONS

709

personality; they do not want other people to be able to step into the shoes of their co-partners. (Ibid., pp. 16-17, citing L.C.B. Grower, in an article entitled "Some Contrast between British and American Corporation Law," 69 Harv. L. Rev. 1369 [1956].) They must prefer, for obvious reasons, the delectus personae of the partnership. (C. Rohrlich, op. cit., p. 100.) Scope of restrictions. In construing the full scope of the intended restrictions as expressly set forth in the articles of incorporation and in the bylaws as well as in the certificate of stock, the courts take the view that said stated restrictions are "not to be enlarged by implication." (1) Transfers covered. — The articles of incorporation, etc. should make clear whether the restrictions imposed upon transfers of stock are applicable only to voluntary inter vivos sales or also to gifts or to testamentary dispositions and devolution upon death or other transfers by operation of law. Ordinarily, option restrictions apply only to voluntary transfers. Thus, it has been held that in the absence of provisions to the contrary, such restraints do not prevent a shareholder from disposing of his shares by testamentary provision (Stern vs. Stern, 146 F [2d] 870.) nor apply to transfers by operation of law. (McDonald vs. Farley & Loetscher Mfg. Co., 283 N.W. 261.) Neither do they apply to a sheriff's sale on execution against a stockholder, nor to a sale of stock by a receiver pursuant to an order of a court. (SEC Opinion, May 5,1986.) The SEC has held that the reasonable option period may range from 30 to 60 days or even more, depending on the circumstances. Where the articles of incorporation do not provide an option period, a clause that restricts the transfer of makers of stock by way of pledge or mortgage is not valid and enforceable because the effect of the absence of such option period is to absolutely prohibit the mortgage, pledge, or encumbrance of such stock without the written consent of the other stockholders. (SEC Opinion No. 06-19, March 16, 2006.) (2) Transferees covered. — Consideration should also be given as to whether transfers to existing shareholders or to members of

710


Sec. 99

the transferor's immediate family should be included or excluded, totally or partially, from the scope of the restriction. In this connection, two considerations are involved. One, the limitation upon the admission in the corporation of new shareholders; and two, the preservation of the initial proportionate ownership as among the original shareholders. (3) Optionees covered. — The articles of incorporation, etc.

should likewise set forth with precision whether the option runs in favor of all the stockholders or only to some of them, whether there is any priority as among the optionees (e.g., the corporation and the other shareholders), the order of any such priority and the extent thereof, and the principle of participation as among the optionees, i.e., whether they participate in the purchase equally, pro rata to the existing holdings, or otherwise. (C. Rohrlich, op. cit, pp. 114-116.) Sec. 99. Issuance or transfer of stock of a close corporation in breach of qualifying conditions. — 1. If stock of a close corporation is issued or transferred to any person who is not entitled under any provision of the articles of incorporation to be a holder of record of stock, and if the certificate for such stock conspicuously shows the qualifications of the persons entitled to be holders of record thereof, such person is conclusively presumed to have notice of the fact of his ineligibility to be a stockholder. 2. If the articles of incorporation of a close corporation states the number of persons, not in excess of twenty (20), who are entitled to be holders of record of its stock, and if the certificate for such stock conspicuously states such number, and if the issuance or transfer of stock to any person would cause the stock to be held by more than such number of persons, the person to whom such stock is issued or transferred is conclusively presumed to have notice of this fact. 3. If a stock certificate of any close corporation conspicuously shows a restriction on transfer of stock of the corporation, the transferee of the stock is conclusively presumed to have notice of the fact that he has acquired stock in violation of the restriction, if such acquisition violates the restriction.

Sec. 99


711

4. Whenever any person to whom stock of a close corporation has been issued or transferred has, or is conclusively presumed under this section to have, notice either (i) that he is a person not eligible to be a holder of stock of the corporation, or (ii) that transfer of stock to him would cause the stock of persons permitted by its articles of incorporation to hold stock of the corporation, or (iii) that the transfer of stock is in violation of a restriction on transfer of stock, the corporation may, at its option, refuse to register the transfer of the stock in the name of the transferee. 5. The provisions of subsection (4) shall not be applicable if the transfer of stock, even though otherwise contrary to subsections (1), (2) or (3), has been consented to by all the stockholders of the close corporation, or if the close corporation has amended its articles of incorporation in accordance with this Title. 6. The term "transfer," as used in this section, is not limited to a transfer for value. 7. The provisions of this section do not in any way impair any right of a transferee regarding any right to rescind the transaction or to recover under any applicable warranty, express or implied, (n) Issuance or transfer of stock in breach of qualifying conditions.

In the cases contemplated in Nos. 1, 2, and 3 of Section 99, the transferee is conclusively presumed to have notice of the restriction or condition and, therefore, he is not allowed to prove lack of notice even if such is the fact. The corporation cannot be compelled to register, although it may, at its option, register the transfer of the stock in the name of the transferee. (No. 4.) The transfer, however, shall be binding upon the corporation notwithstanding such conclusive presumption, where it has been consented to by all the stockholders of the close corporation or if the close corporation has amended its articles of incorporation as provided in Section 103. (No. 5.) The term "transfer," as used above, includes donation as it is not limited to a transfer for value. (No. 6.) Hence, the conclusive presumption of notice applies to a donee.

712


Sec. 100

The breach of any restriction in the issuance or transfer of stock is without prejudice to the right of the transferee under existing laws (i.e., Civil Code) to rescind the transaction or recover under applicable warranty, express or implied. (No. 7.) Sec. 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 whether 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, (n)

Sec. 101


713

Valid agreements by stockholders. Section 100 considers as valid between the parties the agreements mentioned when executed by the stockholders of a close corporation. Under No. (1), the pre-incorporation agreements among stockholders shall continue to be valid and binding even after incorporation if such be their intent, subject to the limitation that they should not be inconsistent with the articles of incorporation. No. (1) refers to stockholders' agreement in general, while No. (2), to voting or pooling agreements in particular. No. (3) makes clear that even if the effect of a provision in any written agreement relating to any phase of the corporate affairs is to make the parties partners among themselves, the same shall not be invalidated on that ground. This follows the modern practice of allowing stockholders of a close corporation to operate as a partnership among themselves but remaining as a corporation with respect to third persons. Accordingly, a stockholders' agreement shall not be invalidated on the ground that it restricts or interferes with the discretion or powers of the board of directors. But the stockholders actively engaged in the management of a close corporation shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance. (No. 5.) It has been held that the President of a close corporation who actually manages the business falls within the meaning of an "employer" as contemplated by the Labor Code and may be held jointly and severally liable for the obligations of the corporation to its illegally dismissed employees. Our jurisprudence is wanting as to the definite scope of "corporate tort." Essentially, tort consists in the violation of a right given or the omission of a duty imposed by law. Simply stated, tort is the breach of a legal duty. (Naguiat vs. National Labor Relations Commission, 269 SCRA 553 [1997].) Sec. 101. When board meeting is unnecessary or improperly held. — Unless the by-laws provide otherwise, any action by the directors of a close corporation without a meeting shall nevertheless be deemed valid if: 1. Before or after such action is taken, written consent thereto is signed by all the directors; or

714


Sec. 102

2. All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or 3. The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or 4. All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing. If a directors' meeting is held without proper call or notice, an action taken therein within the corporate power is deemed ratified by a director who failed to attend, unless he promptly files his written objection with the secretary of the corporation after having knowledge thereof, (n) Action taken by directors without meeting or at improperly called m e e t i n g .

In any of the four (4) cases specified, the action by the directors of a close corporation without a meeting is deemed valid. The exception is when the by-laws provide otherwise. Under No. (2), ratification cannot take place where the action taken at a meeting held without proper call or notice is beyond the corporate powers of the corporation, (see Sec. 45.) Note that under the second paragraph, a written objection is required, (see M.R. Dulay Enterprises, Inc. vs. Court of Appeals, 225 SCRA 678 [1993].) Under Section 53, an oral objection is sufficient to preserve the right of a director to question the validity of any action taken in a meeting held without proper notice. Sec. 102. Pre-emptive right in close corporations. — The pre-emptive right of stockholders in close corporations shall extend to all stock to be issued, including reissuance of treasury shares, whether for money or for property or personal services, or in payment of corporate debts, unless the articles of incorporation provide otherwise, (n) Pre-emptive right of stockholders.

In close corporations, the pre-emptive right of stockholders (see Sec. 39.) extends to all stock to be issued, whether common or preferred, voting or non-voting, etc., newly authorized shares

or newly issued balance of originally authorized shares including treasury shares; whether the consideration for the issuance of the stock is cash or otherwise; and whether or not its denial will affect their relative interests or positions in the corporation. 5

In other words, the right of pre-emption is a matter of absolute right on the part of the stockholders, except only when limited or curtailed by the articles of incorporation. This is of vital importance in closely held corporations to keep the association intact and prevent the shifting of control from one faction to another or to unwelcome outsiders and thus, avoid deadlocks in the management of the corporation, (see Sec. 104.) The other exceptions provided in Section 39 are not applicable. In a widely-held corporation, the pre-emptive right extends only to new issues of shares out of an increase of the capital stock, (see Sec. 39.) Sec. 103. Amendment of articles of incorporation. — Any amendment to the articles of incorporation which seeks to delete or remove any provision required by this Title to be contained in the articles of incorporation or to reduce a quorum or voting requirement stated in said articles of incorporation shall not be valid or effective unless approved by the affirmative vote of at least two-thirds (2/3) of the outstanding capital stock, whether with or without voting rights, or of such greater proportion of shares as may be specifically provided in the articles of incorporation for amending, deleting or removing any of the aforesaid provisions, at a meeting duly called for the purpose, (n) A m e n d m e n t of the articles of incorporation.

Any amendment of the articles of incorporation must comply with the requirements prescribed by the above provision. The amendment must be approved at the stockholders' meeting duly called for the purpose. Mere written assent of the stockholders As long as they remain in the treasury (see Sec. 57.), they have really the status of unissued authorized shares subject to "issue" (although "re-issue" is the more appropriate word) at some future time. 5

716


Sec. 104

which is allowed under Section 16 is insufficient. The other provisions of Section 16 apply, (see Sec. 96, last par.) Note that even those without rights are entitled to vote. The effect of the amendment is to terminate the status of the corporation as a close corporation. Sec. 104. Deadlocks. — Notwithstanding any contrary provision in the articles of incorporation or by-laws or agreement of stockholders of a close corporation, if the directors or stockholders are so divided respecting the management of the corporation's business and affairs that the votes required for any corporate action cannot be obtained with the consequence that the business and affairs of the corporation can no longer be conducted to the advantage of the stockholders generally, the Securities and Exchange Commission, upon written petition by any stockholder shall have the power to arbitrate the dispute. In the exercise of such power, the Commission shall have authority to make such order as it deems appropriate including an order: (1) cancelling or altering any provision contained in the articles of incorporation, by-laws, or any stockholders' agreement; (2) cancelling, altering or enjoining any resolution or other act of the corporation or its board of directors, stockholders, or officers; (3) directing or prohibiting any act of the corporation or its board of directors, stockholders, officers, or other persons party to the action; (4) requiring the purchase at their fair value of shares of any stockholder, either by the corporation regardless of the availability of unrestricted retained earnings in its books or by the other stockholders; (5) appointing a provisional director; (6) dissolving the corporation; or (7) granting such other relief as the circumstances may warrant. A provisional director shall be an impartial person who is neither a stockholder nor a creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose further qualifications, if any, may be determined by the Commission. A provisional director is not a receiver of the corporation and does not have the title and powers of a custodian or receiver. A provisional director shall have all the rights and powers of a duly elected director of the corporation, including the right to notice of and to

Sec. 104

TITLE XH. CLOSE CORPORATIONS

717

vote at meetings of directors, until such time as he shall be removed by order of the Commission or by all the stockholders. His compensation shall be determined by agreement between him and the corporation subject to approval of the Commission, which may fix his compensation in the absence of agreement or in the event of disagreement between the provisional director and the corporation, (n) Arbitration of intra-corporate d e a d l o c k s by the Securities a n d E x c h a n g e C o m m i s s i o n .

If the directors or stockholders of a close corporation are evenly divided respecting the management of the corporation's business and affairs, and there is no way to settle the dispute, they may become deadlocked. The situation may lead to the paralyzation of corporate operations which may have grave consequences to the members of the corporation. To avoid these consequences, the Securities and Exchange Commission, upon written petition by any stockholder, shall have power to arbitrate the dispute. The power given to the Commission by Section 104 may be exercised, notwithstanding any provision in the articles of incorporation or by-laws or agreement of stockholders of a close corporation to the contrary. In the exercise of its power, the Commission may make such order as it deems appropriate under the circumstances including the dissolution of the corporation. The SEC may order the dissolution of the corporation if it will be beneficial to the stockholders and to creditors but where the business is successful, it may appoint instead a provisional director as additional member of the board. The second paragraph specifies the qualifications, rights, and powers of a provisional director who may be appointed by the Securities and Exchange Commission in the exercise of the authority conferred upon it by Section 104. Dissolution in the event of deadlock.

Some statutes (like Sec. 104.) expressly provide for dissolution in the event of a deadlock in the board of directors and / or among the stockholders respecting the management of the corporation's business and affairs (e.g., in the election of directors). They

718


Sec. 104

commonly refer to an "evenly divided" board and are, therefore, not available when the board is composed of an uneven number of directors unless the "odd man" is a "dummy." The "sword of dissolution" cuts both ways, and whether ease or difficulty of bringing about dissolution is "good" or "bad" depends upon whose ox is being gored. All depends, of course, upon which party is most seriously prejudiced by maintenance of the status quo. It is, therefore, important in many situations to consider means whereby the statutory power vested in a given percentage to bring about dissolution is curtailed for the greater protection of the minority who may be opposed to dissolution. Section 104 provides a formula for obviating dissolution upon disagreement among the stockholders of a close corporation by authorizing the arbitration of their differences by the Securities and Exchange Commission. Even where the law is in terms applicable, the dissolution of a prosperously going corporation, especially if the disagreement does not render it impossible for the corporation to continue operating, should be the exception rather than the rule. But while resort to statutory dissolution proceedings (Title XIV.) are not precluded unless limited or waived by express provision to such effect in an agreement of all the stockholders (see Sec. 100.), the Commission has the power, in a proper case, such as where there exists a fundamental deadlock which is causing injury to the corporation, to order its dissolution when there is no other way left to save the stockholders' investment from disintegration. (see C. Rohrlich, op. cit., pp. 137-139.) 6

'"Such small corporations, being really partnerships, between two or three people who contribute their capital, skills, experience, and labor, should be treated by a court of equity as partnerships in many respects. A large corporation or one that has some prospect of becoming large is really an institution separate and distinct from its owners serving a separate purpose in our society by providing employment, accumulating capital for proper purposes and adding to community wealth and community service. Even if a large or growing corporation is temporarily operating at a loss, there may be quite reasonable expectations that its position will improve. Not so with the two-man corporation which owns no valuable trade secrets, market advantages or growth probabilities but simply continues to exist as the form in which individuals pool their efforts. When one of those two dies and everything indicates that the corporation can never do more than pay salary to the survivor, the reason for corporate existence is gone and the court of equity should make a dissolution decree fashioned to fit the facts and providing for an appropriate form of dissolution and sale of assets whether to the survivors or by public auction or otherwise as may appear just." (Desmond, Chief Judge [dissenting], in Kreiger vs. Gerth, 16 N.Y. 2d 802, 210 N.E. 2d 355.)

Sec. 105


719

Sec. 105. Withdrawal of stockholder or dissolution of corporation. — In addition and without prejudice to the 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 petition to the Securities and Exchange Commission, compel the dissolution of such corporation whenever any of the 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, (n)

Right of stockholder to withdraw or to have the corporation dissolved. The right of the stockholder to withdraw may be exercised "for any reason" provided that the corporation has sufficient assets to cover its debts and liabilities exclusive of capital stock. On the other hand, his right to have the corporation dissolved by written petition to the Securities and Exchange Commission must be founded on some legal grounds mentioned, justifying dissolution by the Commission which shall order the dissolution only after proper notice and hearing, (see Sec. 121.)

— oOo —

Title XIII SPECIAL CORPORATIONS Chapter I — E D U C A T I O N AL C O R P O R A T I O N S

Sec. 106. Incorporation. — Educational corporations shall be governed by special laws and by the general provisions of this Code, (n) Educational corporation defined. An educational corporation is a stock or non-stock corporation organized to provide facilities for teaching or instruction. Such corporations normally maintain a regular faculty and curriculum and normally have a regular organized body of pupils or students, or attendance at the place where the educational activities are regularly carried on. (see Oleck, Modern Corporation Law, p. 540.) Laws applicable. Educational corporations are classified by the Code as "special corporations" and are different from an ordinary nonstock corporation formed or organized for educational purpose, (see Sec. 88.) 1

'For purposes of Act No. 2076, "An Act making the inspection and recognition of private schools and colleges obligatory for the Secretary of Public Instruction (now Secretary of Education, Culture and Sports), and for other purposes," the term private school or college shall be deemed to include any private institution for teaching, managed by private individuals or corporations, x x x which offers courses of kindergarten, primary, intermediate or secondary instruction or superior courses in vocational, technical, professional or special schools by which diplomas or certificates are to be granted or titles and degrees conferred." (Sec. 2 thereof, as amended by C A . No. 180.) 720

Sec. 107

TITLE XIH. SPECIAL CORPORATIONS

721

Educational corporations are governed primarily by special laws, and suppletorily, by the general provisions of the Corporation Code, (see Sec. 106.) Those organized as stock corporations are governed by the provisions on stock corporations as to number and term of directors. (Sec. 108, last par.) 2

3

Sec. 107. Prerequisites to incorporation. — Except upon favorable recommendation of the Ministry of Education and Culture, the Securities and Exchange Commission shall not accept or approve the articles of incorporation and by-laws of any educational institution. (168a) 4

Incorporation. Except insofar as may be provided by special laws, the incorporation of educational corporations shall be governed by the provisions of the Code. (see Sees. 10-19.) The Securities and Exchange Commission shall not accept or approve the articles of incorporation and by-laws of any educational institution unless 5

"Sec. 4(2). Educational institutions, other than those established by religious groups and mission boards, shall be owned solely by citizens of the Philippines or corporations or associations sixty per centum of the capital of which is owned by such citizens. The Congress may, however, require increased Filipino equity participation in all educational institutions. The control and administration of educational institutions shall be vested in citizens of the Philippines. No educational institution shall be established exclusively for aliens, and no group of aliens shall comprise more than one-third of the enrollment in any school. The provisions of this subsection shall not apply to schools established for foreign diplomatic personnel and their dependents, and, unless otherwise provided by law, for other foreign temporary residents." (Constitution, Art. XTV.) 2

A non-stock educational institution is not allowed to convert to a non-profit educational foundation under R.A. No. 6055 which authorizes the conversion only of stock corporations to non-profit educational foundations. (SEC Opinion, Feb. 22, 1961.) If the educational institution is incorporated as a non-stock corporation under the Code, it can be converted into a foundation by amending its articles of incorporation and by-laws to reflect said change, and specifying the sources and application of funds in the amended articles. In the amendment of the articles, the provisions of Section 16 of the Code must be complied with. (SEC Opinion, Feb. 19,1974.) 'Now, Department of Education, Commission on Higher Education, and Technical Education and Skills Development Authority, the first, concentrating on basic education, the second, on college and university learning, and the third, on technical and vocational skills training. TJnless exempted for special reasons by the Secretary of Public Instruction, any private school or college recognized by the Government shall be incorporated under the provisions of Act No. 1459 known as the Corporation Law (now B.P. Big. 68, the Corporation Code) within 90 days after the date of recognition, and shall file with the Secretary of Public Instruction a copy of its incorporation papers and by-laws. (Act No. 2076, Sec. 5, par. 2, as amended by C A . No. 180.) 3

722


Sec. 108

accompanied by a favorable recommendation of the Department of Education, Culture and Sports. (Sees. 107,17.) Sec. 108. Board of trustees. — Trustees of educational institutions organized as non-stock corporations shall not be less than five (5) nor more than fifteen (15): Provided, however, That the number of trustees shall be in multiples of five (5). Unless otherwise provided in the articles of incorporation or the by-laws, the board of trustees of incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so classify themselves that the term of office of one-fifth (1/5) of their number shall expire every year. Trustees thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall hold office only for the unexpired period. Trustees elected thereafter to fill vacancies caused by expiration of term shall hold office for five (5) years. A majority of the trustees shall constitute a quorum for the transaction of business. The powers and authority of trustees shall be defined in the by-laws. For institutions organized as stock corporations, the number and term of directors shall be governed by the provisions on stock corporation. (169a) Board of trustees or directors.

Section 108 lays down the following rules: (1) For non-stock educational corporations. —

(a) The number of trustees shall not be less than five (5) nor more than fifteen (15); (b) It shall be in multiples of five (5), i.e., their number shall be five (5), ten (10), or fifteen (15); (c) Unless otherwise provided in the articles of incorporation or the by-laws, the terms of office of the trustees shall be staggered with one (l)-year interval; (d) Trustees subsequently elected shall have a term of five (5) years; same. (SEC Opinion, Nov. 17,1994.) (e) Trustees elected to fill vacancies occurring before the

Sees. 109-111

TITLE XIII. SPECIAL CORPORATIONS

723

expiration of a particular term, shall hold office only for the unexpired period; (f) A majority of the trustees shall constitute a quorum for the transaction of business; and (g) The powers and authority of trustees shall be defined in the by-laws, subject to the provisions of Section 23. (2) For stock educational corporations. — The number and term of directors shall be governed by the provisions on stock corporations. The requirement that the number of trustees in educational institutions shall be in multiples of five (5) in the first paragraph and the staggering system in the second paragraph are mandatory; otherwise, the legislature would have provided for an exception to the same. Educational corporations may, through their articles of incorporation or their by-laws, designate their governing boards by any name than as board of trustees. (Sec. 138.) Chapter II — RELIGIOUS CORPORATIONS Sec. 109. Classes of religious corporation. — Religious corporations may be incorporated by one or more persons. Such corporations may be classified into corporations sole and religious societies. Religious corporations shall be governed by this Chapter and by the general provisions on non-stock corporations insofar as they may be applicable, (n) Sec. 110. Corporation sole. — For the purpose of administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect or church, a corporation sole may be formed by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of such religious denomination, sect or church. (154a) Sec. 111. Articles of incorporation. — In order to become a corporation sole, the chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect or church must file with the Securities and Exchange Commission articles of incorporation setting forth the following:

724


Sec. 112

1. That he is the chief archbishop, bishop, priest, minister, rabbi or presiding elder of his religious denomination, sect or church and that he desires to become a corporation sole; 2. That the rules, regulations and discipline of his religious denomination, sect or church are not inconsistent with his becoming a corporation sole and do not forbid it; 3. That as such chief archbishop, bishop, priest, minister, rabbi or presiding elder, he is charged with the administration of the temporalities and the management of the affairs, estate and properties of his religious denomination, sect or church within his territorial jurisdiction, describing such territorial jurisdiction; 4. The manner in which any vacancy occurring in the office of chief archbishop, bishop, priest, minister, rabbi or presiding elder is required to be filled, according to the rules, regulations or discipline of the religious denomination, sect or church to which he belongs; and 5. The place where the principal office of the corporation sole is to be established and located, which place must be within the Philippines. The articles of incorporation may include any other provision not contrary to law for the regulation of the affairs of the corporation. (155a) Sec. 112. Submission of the articles of incorporation. — The articles of incorporation must be verified, before filing, by affidavit or affirmation of the chief archbishop, bishop, priest, minister, rabbi or presiding elder, as the case may be, and accompanied by a copy of the commission, certificate of election or letter of appointment of such chief archbishop, bishop, priest, minister, rabbi or presiding elder, duly certified to be correct by any notary public. (156a) From and after the filing with the Securities and Exchange Commission of the said articles of incorporation, verified by affidavit or affirmation, and accompanied by the documents mentioned in the preceding paragraph, such chief archbishop, bishop, priest, minister, rabbi or presiding elder, as the case may be, shall become a corporation sole, and all temporalities, estate and properties of the religious denomination, sect or church theretofore administered or managed by him as such chief archbishop, bishop, priest,

Sees. 113-114


minister, rabbi or presiding elder shall be held in trust by him as a corporation sole, for the use, purpose, behalf and sole benefit of his religious denomination, sect or church, including hospitals, schools, colleges, orphan asylums, parsonages and cemeteries thereof. (157a) Sec. 113. Acquisition and alienation of property. — Any corporation sole may purchase and hold real estate and personal property for its church, charitable, benevolent or educational purposes, and may receive bequests or gifts for such purposes. Such corporation may mortgage or sell real property held by it upon obtaining an order for the purpose from the Court of First Instance of the province where the property is situated; but before the order is issued, proof must be made to the satisfaction of the court that notice of the application for leave to mortgage or sell has been given by publication or otherwise in such manner and for such time as said court may have directed, and that it is to the interest of the corporation that leave to mortgage or sell should be granted. The application for leave to mortgage or sell must be made by petition, duly verified, by the chief archbishop, bishop, priest, minister, rabbi or presiding elder acting as corporation sole, and may be opposed by any member of the religious denomination, sect or church represented by the corporation sole: Provided, That in cases where the rules, regulations and discipline of the religious denomination, sect or church, religious society or order concerned represented by such corporation sole regulate the method of acquiring, holding, selling and mortgaging real estate and personal property, such rules, regulations and discipline shall control, and the intervention of the courts shall not be necessary. (159a) Sec. 114. Filling of vacancies. — The successors in office of any chief archbishop, bishop, priest, minister, rabbi or presiding elder in a corporation sole shall become the corporation sole on their accession to office; and shall be permitted to transact business as such on the filing with the Securities and Exchange Commission of a copy of their commission, certificate of election, or letters of appointment, duly certified by any notary public.

'Now, Regional Trial Court.

725


726

Sees. 115-116

During any vacancy in the office of chief archbishop, bishop, priest, minister, rabbi or presiding elder of any religious denomination, sect or church incorporated as a corporation sole, the person or persons authorized and empowered by the rules, regulations or discipline of the religious denomination, sect or church represented by the corporation sole to administer the temporalities and manage the affairs, estate and properties of the corporation sole during the vacancy shall exercise all the powers and authority of the corporation sole during such vacancy. (158a) Sec. 115. Dissolution. — A corporation sole may be dissolved and its affairs settled voluntarily by submitting to the Securities and Exchange Commission a verified declaration of dissolution. The declaration of dissolution shall set forth: 1.

The name of the corporation;

2.

The reason for dissolution and winding up;

3. The authorization for the dissolution of the corporation by the particular religious denomination, sect or church; 4. The names and addresses of the persons who are to supervise the winding up of the affairs of the corporation. Upon approval of such declaration of dissolution by the Securities and Exchange Commission, the corporation shall cease to carry on its operations except for the purpose of winding up its affairs, (n) Sec. 116. Religious societies. — Any religious society or religious order, or any diocese, synod, or district organization of any religious denomination, sect, or church, unless forbidden by the constitution, rules, regulations, or discipline of the religious denomination, sect or church of which it is a part, or by competent authority, may, upon written consent and/or by an affirmative vote at a meeting called for the purpose of two-thirds (2/3) of its membership, incorporate for the administration of its temporalities or for the management of its affairs, properties and estate by filing with the Securities and Exchange Commission, articles of incorporation verified by the affidavit of the

Sees. 109-116


727

presiding elder, secretary, or clerk or other member of such religious society or religious order, or diocese, synod, or district organization of the religious denomination, sect, or church, setting forth the following: 1. That the religious society or religious order or diocese, synod, or district organization is a religious organization of some religious denomination, sect, or church; 2. That two-thirds (2/3) of its membership have given their written consent or have voted to incorporate at a duly convened meeting of the body; 3. That the incorporation of the religious society or religious order, or diocese, synod, or district organization desiring to incorporate is not forbidden by competent authority or by the constitution, rules, regulations or discipline of the religious denomination, sect, or church of which it forms a part; 4. That the religious society or religious order, or diocese, synod, or district organization desires to incorporate for the administration of its affairs, properties and estate; 5. The place where the principal office of the corporation is to be established and located, which place must be within the Philippines; and 6. The names, nationalities, and residences of the trustees elected by the religious society or religious order, or the diocese, synod, or district organization to serve for the first year or such other period as may be prescribed by the laws of the religious society or religious order, or of the diocese, synod, or distinct organization, the board of trustees to be not less than five (5) nor more than fifteen (15). (160a) Definition of religious corporation. A religious corporation has been defined as a corporation com-

posed entirely of spiritual persons and which is organized for the furtherance of a religion or for perpetuating the rights of the church or for the administration of church or religious work or property. (Oleck, Modern Corporation Law, p. 14.) The spiritual persons that may compose ecclesiastical corporations are bishops, certain deans and prebendaries, all archdea-

728


Sees. 109-116

cons, persons and vicars which are sole corporations and those abbots and monks which may constitute corporations aggregate. (1 Fletcher, p. 188.) Applicable provisions.

Religious corporations are classified by the Code as "special corporations" and are not to be confused with an ordinary nonstock corporation organized for religious purpose, (see Sec. 88.) The Corporation Code does not require any religious group, sect, or denomination to be registered as a corporation but the status of an unregistered religious group is that of an ordinary organization or association without juridical or legal personality separate and distinct from that of its members. (1) Religious corporations are primarily governed by Sections 109 to 116 and suppletorily, by the general provisions of Title XI on non-stock corporations (Sees. 87 to 95.) insofar as they may be applicable. (Sec. 109, par. 2.) Thus, pursuant to Section 93, their by-laws may provide that the members may hold their regular or special meetings at any place even outside the place where the principal office of the corporation is located. However, although Section 92 allows more than 15 trustees for non-stock corporations, Section 116(b) prescribes a maximum limit of 15 only. The rule is that a special provision prevails over a general provision of a statute. (2) As a rule, by-laws of a religious corporation must conform with the general provisions affecting corporations. Any inconsistency shall be resolved in favor of the special provisions of Title XI on non-stock corporations and Title XIII, Chapter II on religious corporations. Thus, since the special provisions pertaining to religious corporations do not specify the mode of election of the board of trustees of a religious corporation, its by-laws may provide for the same in line with rules of the religious denomination of which it is a part. (SEC Opinion, Feb. 28,1974.) Classes of religious corporations.

Such corporations may be classified into corporation sole and corporation aggregate /religious society. They may also be formed or organized as ordinary religious non-stock corporations. (Sees. 87, 88.)

Sees. 109-116

TITLE Xm. SPECIAL CORPORATIONS

729

(1) Corporation sole. — It is incorporated by one person (Sec.

109, par. 2.) and consists of one member or corporator only and his successors, such as a bishop. Under Section 110, it may be formed by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of a religious denomination, sect or church for the purpose of administering and managing, as trustee, the affairs, property and temporalities of such religious denomination, sect or church. In a wider sense, the term temporalities means the money revenue of a church, derived from pew rents, subscriptions, donations, collections, cemetery charges, and other sources. (Black's Law Dictionary [Rev. 4th ed.], p. 1634.) (a) Filing articles of incorporation and other documents. — In

order to be a corporation sole, the chief archbishop, etc. must file with the Securities and Exchange Commission a verified articles of incorporation setting forth the matters mentioned in Section 111, although it may include any other provision not contrary to law for the regulation of the affairs of the corporation. (Sec. I l l , par. 2.) Thus, a corporation sole may include in its articles all matters which could be provided for in the by-laws. Such articles must be accompanied by a copy of the commission, certificate of election, or letter of appointment of such chief archbishop, etc., as the case may be. (Sec. 112, par. 1.) (b) Effect of filing. — From and after such filing, the chief archbishop, etc., as the case may be, shall become a corporation sole,' and all the temporalities, estate, and properties of the religious denomination, sect or church theretofore administered by him as such chief archbishop, etc. shall be held in trust by him as a corporation sole for the benefit of his religious denomination, sect or church, including hospitals, schools, colleges, orphan asylums, parsonages and cemeteries thereof. (Ibid., par. 2.) But properties acquired by the corporation shall be registered in the name of such chief archbishop, etc. or in the name of the corporation, and not in 'It is not required by law to file by-laws with the Securities and Exchange Commission; neither do the rules and regulations of the Commission require such class of corporations to file any reportorial requirements, such as the general information sheet and financial statements. (SEC Opinion, Oct. 17,1988.)

730


Sees. 109-116

the name of such archbishop, etc. "in trust for the use, purpose, and sole benefit" of his religious denomination. After the decree of registration is entered, the Corporation Code, Section 112 (par. 2.), operates and declares that the title to the property is in the corporation and the chief archbishop, etc. is administering it as representative of that corporation, (see Bishop of Nueva Segovia vs. Insular Gov't., 26 Phil. 300 [1913].) Note that Section 112 does not expressly require the approval by the Securities and Exchange Commission of the articles of incorporation unlike in the case of educational corporations, (see Sec. 107.) (c) Acquisition and alienation of property. — A corporation

sole may purchase and hold property, real and personal, and receive bequests or gifts for its church, charitable, benevolent or educational purposes. However, authority from the Regional Trial Court is required before it can mortgage or sell real property but such authority is not necessary where the religious denomination, sect or church, religious society or order concerned represented by the corporation sole has rules which regulate the acquisition, mortgage, and selling of real estate and personal property, in which case such rules shall control. (Sec. 113; see Republic vs. Intermediate Appellate Court, 168 SCRA 165 [1988].) (d) Filling of vacancies. — The successors in office of any

chief archbishop, etc., as the case may be, shall become the corporation sole on the filing with the Securities and Exchange Commission of a notarized copy of their commission, certificate of election, or letters of appointment. In case of any vacancy in the office of chief archbishop, etc., as the case may be, the person or persons authorized by the rules of the denomination to administer the affairs of the corporation sole during such vacancy shall exercise all the powers and authority of the corporation sole during such vacancy. (Sec. 114.) (e) Term of existence. — The articles of incorporation of a

corporation sole is not required to state the term for which it is to exist. Once incorporated, a corporation sole, unless oth-

Sees. 109-116


731

erwise provided in the articles of incorporation, shall exist indefinitely unless it is dissolved. (f) Dissolution. — Under the Code, a corporation sole may be dissolved voluntarily by filing with the Securities and Exchange Commission for approval a verified declaration of dissolution setting forth the matters specified in Section 115. Upon such approval, the corporation shall be deemed dissolved. (Sec. 115.) (2) Religious society. — It is incorporated by an aggregate of

persons. (Sec. 109, par. 1.) Under Section 116, any religious society or religious order, or any diocese, synod, or district organization of any religious denomination, sect or church, unless forbidden by the rules of the latter or by competent authority may, upon consent and/or by an affirmative vote at a meeting called for the purpose, of 2 / 3 of its membership, incorporate for the administration or management of its temporalities, affairs and property. (a) Filing of articles of incorporation. — To incorporate,

said religious society, etc. must file with the Securities and Exchange Commission, a verified articles of incorporation setting forth the matters mentioned in Section 116. Note again that the law does not expressly require the approval by the Securities and Exchange Commission of the articles of incorporation which is a condition for incorporation in the case of educational corporations, (see Sec. 107.) (b) Registration not mandatory. — The law does not require

religious societies or churches to register as a corporation but they may do so in order to acquire legal personality for the administration of their temporalities or properties. (SEC Opinion, April 6, 1968.) It is only upon incorporation that a religious society or church can have a juridical personality and may be allowed to acquire properties in its own name. 7

Tn a case, the crux of the controversy was who of the two factions of a voluntary religious group (of hermanas mayores) would be entitled to possession of the properties (religious images) in litigation, all of them being members of the same association. It was held that the rights of such an organization (which was strictly independent of the church) to the use of its property must accordingly be determined by the ordinary principles which govern voluntary association. "The use of properties of a religious congregation in case of

732


Sees. 109-116

(SEC Opinion, Feb. 28, 1974.) The Roman Catholic Church is not registered like other religious societies or churches in the Philippines, because it has been recognized as a juridical person since time immemorial. (Barlin vs. Ramirez, 7 Phil. 41 [1906].) (c) Term of existence. — Section 116 (as well as Sec. 160

of the former Corporation Law) does not provide for a term of existence of religious corporations whether classified as a corporation sole or a corporation aggregate. As such, the law intends that religious corporations may exist perpetually. Accordingly, where the articles of incorporation of a religious corporation does not provide for a term of existence, it shall be understood that the intention is for the corporation to exist for an mdefinite period, unless sooner dissolved or revoked in accordance with law. (SEC Opinion No. 04-45, Nov. 4, 2004.) Corporation sole. (1) Components; purpose; power to hold and transmit property.

— A corporation sole is a special form of corporation usually associated with the clergy. Conceived and introduced into the common law by sheer necessity, the legal creation which was referred to as "that unhappy freak of English law" was designed to facilitate the exercise of the functions of ownership carried on by the clerics for and on behalf of the church which was regarded as the property owner. (1 Bouvier's Law Dictionary, pp. 682-683.) It consists of one person only, and his successors (who will always be one at a time), in some particular station, who are incorporated by law in order to give them some legal capacities and advantages particularly that of perpetuity which in their natural persons they could not have. (Reid vs. Barry, 93 Fla. 849,112 So. 846.) Through this legal fiction, church properties acquired by the incumbent of a corporation sole pass by operation of law, upon schism, is controlled by the numerical majority of the members. The minority in choosing to separate themselves into a distinct body, and refusing to recognize the authority of the government body, can claim no rights in the property from the fact that they once had been members." (Caftete vs. Court of Appeals, 171 SCRA 13 [1989].)

Sees. 109-116

TITLE Xm. SPECIAL CORPORATIONS

733

his death, not to his personal heirs but to his successor in office. A corporation sole, therefore, is created not only to administer the temporalities of the church or religious society where he belongs, but also to hold and transmit the same to his successor in said office. (Roman Catholic Apostolic Adm. of Davao, Inc. vs. Land Registration Commission, 102 Phil. 596 [1957]; Republic vs. Intermediate Appellate Court, 168 SCRA 165 [1988].) (2) Merely the administrator of properties of church. — Both

the Corporation Code (see Sec. 110.) and the Canon Law are explicit in their provisions that a corporation sole or "ordinary" is not the owner of the properties he may acquire but merely the administrator thereof and holds the same in trust for the church to which the corporation is an organized and constituent part. Being mere administrator of the temporalities or properties titled in his name, constitutional provisions requiring 60 (or 100) per centum Filipino ownership are not applicable, unless the control over the property affected has been devised to circumvent the real purpose of the Constitution. (Ibid.) Also, considering that there is no express provision conferring ownership of properties of the Catholic Church on the Pope, although he appears to be the administrator, nor on the head of the corporation sole, as he is a mere administrator of its properties, the ownership thereof devolves upon the church or congregation acquiring the same. A corporation sole can, therefore, purchase private lands in the Philippines without violating the Constitution although its head is an alien, as long as it can be shown that the religious denomination which he represents is owned at least 60% by Philippine citizens. (SEC Opinions, Nov. 6,1990 and Sept. 21,1993.) (3) Without nationality. — Although a branch of the Universal Roman Catholic Apostolic Church, every Roman Catholic Church in different countries, if it exercises its mission and is lawfully incorporated in accordance with the laws of the country where it is located, is considered an entity or person with all the rights and privileges granted to such artificial being under the laws of that country, separate and distinct from the personality of the Roman Pontiff or the Holy See without prejudice to its religious relations with the latter which are governed by the Canon

734


Sees. 109-116

Law or their rules and regulations. The Roman Catholic Church in the Philippines has no nationality. Corporations sole cannot be considered as aliens because they have no nationality at all. 9

In determining, therefore, whether constitutional provisions requiring 60 (or 100) per centum Filipino capital are applicable to a corporation sole, the nationality of the constituents of the diocese, and not the nationality of the actual incumbent of the parish, must be taken into consideration.' (Ibid.) — 0 O 0 —

"It has been held that the Iglesia ni Crista, as a corporation sole or a juridical person, is disqualified to acquire or hold alienable lands of the public domain, except by lease, because of the prohibition in Article XTV, Section 11 of the Constitution (now Art. XII, Sec. 2.) and because the said church is not entitled to avail of the benefits of Section 48(b) of the Public Land Law which applies only to Filipino citizens or natural persons. A corporation has no nationality. (Republic vs. Villanueva, 11 SCRA 875 [1982]; Republic vs. Gonong, 118 SCRA 729 [1982]; Republic vs. Iglesia ni Crista, 127 SCRA 687 [1984] and 128 SCRA 44 [1984].) 'It is not for the SEC to determine as to what should be the basis of determining the 60% citizenship requirement — whether it should be based on the capital contribution or on the number of membership. The question should be addressed to the Land Registration Authority for a definite ruling. (SEC Opinion, Aug. 8,1994.)

Title XIV DISSOLUTION Sec. 117. Methods of dissolution. — A corporation formed or organized under the provisions of this Code may be dissolved voluntarily or involuntarily, (n) M e a n i n g of d i s s o l u t i o n .

(1) The term dissolution, as applied to a corporation, signifies the extinguishment of its franchise to be a corporation and the termination of its corporate existence. (2) It is that condition of law and fact which ends the capacity of the body corporate to act as such and necessitates a liquidation and extinguishment of all legal relations existing in respect of the corporate enterprise. (3) It denotes the complete destruction of the corporation and within contemplation of the law, is equivalent to its death, being sometimes likened to the death of a natural person. (16 Fletcher, p. 655.) 1

P o w e r to dissolve corporation.

It is an accepted theory that what the law itself has granted, the law may take away. And so a corporation may come to an end and its life extinguished only by the act or with the approval 'A distinction not to be ignored exists, however, between the life of a human being and that of a personi ficta, the creature of the State. When a human being dies, his death is equally a fact whether it is brought about legally or illegally. But the death of a corporation must be "conditioned by juristic quality of the cause." There is no dissolution, strictly speaking, unless the corporation has lost all power to continue or resume its business as a going concern. (Ibid.) As has been pointed out, the law which gives a corporation existence may terminate for some purposes and yet permit it to continue for purposes of settling its affairs. (Ballantine, p. 729.) The result of dissolution "is not death of the corporation, but its retirement from active business." (Ibid., p. 731.) 735


736

Sec. 117

of the sovereign power by which it was established. (Ibid., p. 659.) Being a creation of the State, a corporation can only be dissolved with the consent of the State. Accordingly, the courts of one State do not have the power to dissolve a corporation created by the laws of another State. In fact, the dissolution of corporations is primarily a matter for the legislature and is ordinarily not a matter of judicial cognizance. However, our law (infra.) authorizes the dissolution of a corporation through judicial proceedings or permits dissolution by the stockholders or members without judicial proceedings. (18 Am. Jur. 2d 953-954.) De jure and de facto dissolution. The dissolution of a corporation may either be de jure or de facto.

(1) A dejure dissolution is a dissolution in law adjudged and determined by judicial sentence, or brought about by an act of or with the consent of the sovereign power, or which results from the expiration of the charter period of corporate life. (2) A de facto dissolution, on the other hand, is one which takes place in substance and in fact when the corporation by reason of insolvency, cessation of business, or otherwise, suspends all its operations and, as it may be, goes into liquidation still retaining its primary franchise to be a corporation. The mere fact, however, that the corporation has quit doing business does not necessarily constitute even a de facto dissolution, if it is still solvent and has not gone into liquidation. (16 Fletcher, p. 656.) Two legal steps in corporate dissolution. Dissolution of a corporation involves two legal steps: (1) The termination of the corporate existence at least as far as the right to go on doing ordinary business is concerned; and (2) The winding up of its affairs, the payment of its debts, and the distribution of its assets among the shareholders (Ibid., p. 655.) or members and other persons interested. After windingup, the existence of the corporation is terminated for all purposes.

Sec. 117

TITLE XIV. DISSOLUTION

737

After the formal dissolution of the corporation, any of its stockholders may form another corporation which will engage in the same line of business even if it is done during the liquidation period, (see Sec. 122.) Methods or causes of corporate dissolution. A corporation can have perpetual existence. The law, however, permits the dissolution of corporations. Under Section 117, a private corporation organized under the law may be dissolved either voluntarily or involuntarily. These two methods of dissolving corporations may be outlined as follows: (1) Voluntary, which may be effected: (a) by the vote of the board of directors/trustees and the stockholders/members where no creditors are affected (Sec. 118.); (b) by judgment of the Securities and Exchange Commission after hearing of petition for voluntary dissolution where creditors are affected (Sec. 119.); (c) by amending the articles of incorporation to shorten the corporate term (Sec. 120.); or (d) In the case of a corporation sole, by submitting to the Securities and Exchange Commission a verified declaration of dissolution for approval. (Sec. 115.) (2) Involuntary, which may be effected: (a) by expiration of the term provided for in the original articles of incorporation (Sec. 11.); (b) by legislative enactment (infra.); (c) by failure to formally organize and commence the transaction of its business within two (2) years from date of incorporation (Sec. 22.); or (d) by order of the Securities and Exchange Commission. (Sec. 121.) Methods exclusive. According to some decisions, the methods of effecting dissolution as prescribed by statute are exclusive, and a

738


Sec. 118

corporation cannot be dissolved except in the manner prescribed by law. It is said that a failure to follow the prescribed statutory method renders ineffectual any attempt to dissolve a corporation. (19 Am. Jur. 2d 955.) The requirements for dissolution mandated by the Corporation Code should be strictly complied with, (see Vesagas vs. Court of Appeals, 371 SCRA 508 [2001].) Piercing the veil of corporate fiction (see Sec. 2.) is not one of the causes by which a corporation may be dissolved. The total destruction of a condominium project does not automatically dissolve the condominium corporation. Under R.A. No. 4726 (Condominium Law), two general options are available for unit owners to pursue: First, restore or reconstruct the project and continue with the condominium; and second, terminate the condominium project and voluntarily dissolve the corporation under any of the conditions provided under said law. (see Sees. 13,14 thereof.) Sec. 118. Voluntary dissolution where no creditors are affected. — In case dissolution of a corporation does not prejudice the rights of any creditor having a claim against such corporation, then such dissolution may be effected by majority vote of the board of directors or trustees, and by a resolution duly adopted by the affirmative vote of the stockholders owning at least two-thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of the members at a meeting to be held on the call of the directors or trustees after publishing the notice of the time, place and object of the meeting for three (3) consecutive weeks in a newspaper published in the place. Where the principal office of said corporation is located, and if no newspaper is published in such place, then in a newspaper of general circulation in the Philippines, and after sending such notice to each stockholder or member either by registered mail or by personal delivery at least thirty (30) days prior to said meeting. A copy of the resolution authorizing the dissolution shall be certified by a majority of the board of directors or trustees and countersigned by the secretary of the corporation. The Securities and Exchange Commission shall thereupon issue the certificate of dissolution. (62a)

Sec. 118


739

Voluntary dissolution of c o r p o r a t i o n s .

The legal existence of a corporation is terminated only when a corporation is dissolved by legal authority or expires by limitation of existence or by forfeiture. (Ballantine, p. 709.) Thus, the statutory provisions on voluntary dissolution must be followed in order to legally effect the dissolution of a corporation. (SEC Opinion, Feb. 6,1964.) (1) Compliance with legal requirements. — A mere resolution

by the board of directors or trustees and by the stockholders or members of a corporation to dissolve the same does not have the effect of dissolution but some other steps, administrative or judicial, are necessary. (Daguhoy Enterprises, Inc. vs. Ponce, 96 Phil. 15 [1954].) In case of voluntary dissolution, it can have no legal effect until all the requirements prescribed by law are complied with. A corporation being a legal creation, it can only be dissolved in the manner prescribed by the law which gave it life. (2) When corporation deemed dissolved. — The corporation

shall be deemed dissolved only upon issuance of the certificate of dissolution, if the dissolution is effected under Section 118; when a judgment is rendered dissolving the corporation, if under Section 119; upon approval of the amended articles of incorporation or the expiration of the shortened term, as the case may be, if under Section 120; and upon approval of the verified declaration of dissolution, if under Section 115. (3) Where no dissolution papers filed. — If no dissolution papers

are filed with the Securities and Exchange Commission by a corporation claiming dissolution voluntarily, such corporation is still deemed legally existing, notwithstanding the fact that it has ceased to operate. The only possible exception is where the corporation is dissolved by judicial decree (infra.) and the court order dissolving it has not been filed with the Commission. In such case, the corporation would be legally dead even if the Commission has no notice of such fact. (SEC Opinion, March 1, 1971.) (4) Where corporation sole. — A corporation sole may be

dissolved and its affairs settled voluntarily by submitting to the Securities and Exchange Commission a verified declaration of dissolution. Upon approval of such declaration by the Com-

740


Sec. 118

mission, the corporation shall cease to carry on its operations except for the purpose of winding up its affairs. (Sec. 115.) Voluntary dissolution where no creditors are affected. (1) How effected. — A private corporation may be dissolved voluntarily without the necessity of going to the Securities and Exchange Commission or the court in case the dissolution does not affect the rights of any creditor against such corporation. The dissolution is effected by the mere vote of the board of directors or trustees and the resolution duly adopted by the stockholders or members. The procedure for dissolution is specifically provided for in Section 118. Even holders of non-voting shares or non-voting members, as the case may be, are entitled to vote on the matter. (Sec. 6, par. 6[8].) The publication requirement is prescribed for the protection of unknown creditors. (2) Issuance of certificate of dissolution.

— The Securities

and Exchange Commission is required to issue a certificate of dissolution. Such requirement was not present in the former law, and the practice of the Commission was merely to record the fact of voluntary dissolution of a corporation. It was not required to issue an order expressly approving the dissolution. Consequently, the issuance of the certificate of filing of the resolution of voluntary dissolution was sufficient to dissolve the corporation. (SEC Opinion, Feb. 6,1964.) (3) Dissolution of a corporation sole. — Under Section 115, a corporation sole may be dissolved voluntarily by submitting to the Securities and Exchange Commission a verified declaration of dissolution which must be approved by the Commission before the dissolution can take effect. Sale of assets in anticipation of voluntary dissolution. Under the terms of Section 40 of the Code, the board of directors or trustees of a corporation may be authorized by the holders of at least 2 / 3 of the outstanding capital stock or by at least 2 / 3 of the members of the corporation "to sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all

its property and assets, including its goodwill upon such terms and conditions and for such consideration which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration as its board of directors or trustees may deem expedient." (par. 1.) (1) Liquidation of corporate debts permitted. — In anticipation of a voluntary dissolution proceeding, a corporation may, pursuant to the provisions of Section 40, convert its assets into cash and settle with its creditors. The proceeds of such sale may be used to pay debts, although no refund of capital to shareholders except as authorized by the provision of Section 40 may be made until the dissolution is accomplished. This is so, because corporations are under no obligation to continue in business. The exercise of the right to do business is one which is purely voluntary, and if at anytime it is deemed advisable to suspend the transaction of business, pay debts, and convert assets into cash or its equivalent, the execution of that purpose is a matter which concerns the corporation and its creditors alone. (Fisher, op. cit., p. 379.) (2) Distribution of corporate assets prohibited. — While a corporation may validly liquidate its debt prior to its dissolution under Section 40 of the Code, it cannot, under the express prohibition of Section 122 (last par.) thereof, "distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities." Since it is only upon the issuance of the certificate of dissolution that the dissolution of a corporation becomes legally effective, it cannot, prior to such issuance, lawfully distribute its assets to its stockholders though it may lawfully liquidate its debts in anticipation of such voluntary dissolution. (SEC Opinion, Feb. 6,1964.) Right of minority stockholders to o p p o s e dissolution.

Ordinarily, the motive of the stockholders voting for dissolution is immaterial. It is only in rare and exceptional cases that their action will be stayed or interfered with by the courts or the Securities and Exchange Commission. If a stockholder had the votes required for voluntary dissolution of a corporation and dissolution was necessary to protect his investment and would

742


Sec. 119

not give unfair advantage over other stockholders, the fact that the corporation would suffer if it were dissolved is immaterial. However, the right of stockholders to voluntarily dissolve the corporation by vote of a prescribed percentage thereof is not absolute. If it clearly appears that the action of the stockholders in voting for dissolution is in bad faith, or that the resolution for dissolution has been superinduced by fraud or undue influence, or if it is clearly established that the resolution was not taken for the benefit of the corporation or in furtherance of its interest, but for the mere purpose of unjustly oppressing the minority of the stockholders or any of them and causing a destruction or sacrifice of their pecuniary interests or holdings, giving a clear indication of a breach of trust, such action may be restrained. In forcing dissolution and disposition of the corporate assets, the majority stockholders cannot overreach the minority stockholders or freeze them out of their share of the proceeds. (19 Am. Jur. 2d 962-963.) Sec. 119. Voluntary dissolution where creditors are affected. — Where the dissolution of a corporation may prejudice the rights of any creditor, a petition for dissolution of a corporation shall be filed with the Securities and Exchange Commission. The petition shall be signed by a majority of its board of directors or trustees or other officers having the management of its affairs, verified by its president or secretary or one of its directors or trustees, and shall set forth all claims and demands against it, and that its dissolution was resolved upon by the affirmative vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members, at a meeting of its stockholders or members called for that purpose. If the petition is sufficient in form and substance, the Commission, by an order reciting the purpose of the petition, shall fix a date on or before which objections thereto may be filed by any person, which date shall not be less than thirty (30) days nor more than sixty (60) days after the entry of the order. Before such date, a copy of the order shall be published at least once a week for three (3) con-

Sec. 120


743

secutive weeks in a newspaper of general circulation published in the municipality or city where the principal office of the corporation is situated, or if there be no such newspaper, then in a newspaper of general circulation in the Philippines, and a similar copy shall be posted for three (3) consecutive weeks in three (3) public places in such municipality or city. Upon five (5) days' notice, given after the date on which the right to file objections as fixed in the order has expired, the Commission shall proceed to hear the petition and try any issue made by objections filed; and if no such objection is sufficient, and the material allegations of the petition are true, it shall render judgment dissolving the corporation and directing such disposition of its assets as justice requires, and may appoint a receiver to collect such assets and pay the debts of the corporation. (Rule 104, Rules of Court) Voluntary dissolution where creditors are affected. In case the dissolution of a corporation affects the right of any creditor having a claim against the corporation, a hearing before the Securities and Exchange Commission is required. In the judgment dissolving the corporation, the Commission may appoint a receiver (infra.) to take charge of the liquidation of the corporation. The procedure for dissolution is set forth in Section 119. Sec. 120. Dissolution by shortening corporate term. — A voluntary dissolution may be effected by amending the articles of incorporation to shorten the corporate term pursuant to the provisions of this Code. A copy of the amended articles of incorporation shall be submitted to the Securities and Exchange Commission in accordance with this Code. Upon approval of the amended articles of incorporation or the expiration of the shortened term, as the case may be, the corporation shall be deemed dissolved without any further proceedings, subject to the provisions of this Code on liquidation, (n)

744


Sec. 120

Dissolution by shortening of t e r m .

(1) How effected. — A corporation is dissolved upon the expiration of the period as fixed in the original articles of incorporation, unless said period is extended by an amendment of the articles of incorporation, (see Sees. 11, 36[2].) A voluntary dissolution is effected if the articles of incorporation is amended to shorten the corporate term. Upon approval by the Securities and Exchange Commission of the amended articles of incorporation or the expiration of the shortened term, as the case may be, the corporation shall be deemed dissolved without any further proceedings except its liquidation, (see Sees. 120,122.) Section 120 is very clear that it is only upon approval by the Commission that the corporation shall be deemed dissolved. The automatic approval under Section 16 which is a general provision does not apply. The corporation is a creature of the State and it can only be dissolved with the State's approval after complying with the formalities of the law for dissolution. (SEC Opinion, March 30, 1982.) (2) Publication of notice of dissolution. — An affidavit of

publication of notice of dissolution of the corporation must be executed by the publisher of the print medium. It cannot be dispensed with by alleging that the same is not required in Section 120 and that no creditors will be prejudiced by its dissolution. The publication of the notice of dissolution serves as a protection of the rights of existing creditors of the dissolving corporation who, under the law, enjoy preference in the distribution of assets before the stockholders are finally entitled to a return of their investments. (SEC Opinion, Aug. 30,1988.) Dissolution by expiration of t e r m .

(1) How effected. — A corporation is dissolved upon the expiration of the period as fixed in the original articles of incorporation, unless said period is extended by an amendment of the articles of incorporation, (see Sees. 11, 36[2].) (2) Extension of corporate existence/reincorporation. — Upon

dissolution of a corporation by expiration of corporate term provided for in the original or amended articles of incorporation, it ceases to exist de facto or de jure except only for purposes

Sec. 120

TITLE XTV. DISSOLUTION

745

connected with winding up or liquidation. (Sec. 122.) Its corporate existence or juridical personality may thus no longer be extended. (Alhambra Cigar vs. Securities and Exchange Commission, 24 SCRA 269 [1968].) But the stockholders may reincorporate the expired corporation by complying with the requirements for incorporation under Sections 10 to 15 of the Corporation Code. A corporation automatically terminates upon the expiration of the stated period. It is not necessary to seek the aid of the Securities and Exchange Commission or a court to terminate the corporation or to formally dissolve and liquidate it. The task of distributing the assets of the corporation resets upon the board of directors. Dissolution by legislative enactment. (1) Reserved power of Congress to dissolve corporations. — It is

provided by the former corporation law (Sec. 76 thereof.) that "any or all corporations created by virtue of this Act may be dissolved by legislative enactment." This provision has been deleted in the new Code, but the power is still reserved, albeit impliedly, by Section 145 subject to the limitations therein and the constitutional prohibition against laws impairing the obligations of contracts. (Constitution of the Philippines, Art. HI, Sec. 10.) With reference to franchises of public utilities, the exercise of the power by the legislature is reserved by the Constitution in the clause which provides: "Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires." (Art. XII, Sec. 11 thereof.) (2) Limitations on the power. — Thus, the limitations on the power to dissolve corporations by legislative enactment are as follows: (a) Under the Constitution, the amendment, alteration, or repeal of the corporate franchise of a public utility shall be made only "when the common good so requires"; (b) Under Section 145 of the Code, it is provided that: "No right or remedy in favor of or accrued against any corporation, its stockholders, members, directors, trustees, or

746


Sec. 120

officers nor any liability incurred by any such corporation, its stockholders, members, directors, trustees, or officers, shall be removed or impaired either by the subsequent amendment or repeal of the Code or any part or portion thereof"; and (c) While Congress may provide for the dissolution of a corporation, it cannot impair the obligation of existing contracts between the corporation and third persons, or take away the vested rights of its creditors. And, of course, a repeal of the charter of a corporation, except for some act or neglect constituting a cause for forfeiture of its charter is void as unconstitutionally impairing the obligation of the contract between the State and the corporation, unless the corporation consents. (16 Fletcher, p. 662.) In the case, however, of the corporate franchise of a public utility, there is no impairment if the amendment, etc. is effected because "the common good so requires." (3) Inherent power of Congress to amend or repeal laws. — The

inherent power of Congress to make laws carries with it the power to amend or repeal them. Involuntary corporate dissolution may be effected through the amendment or repeal of the Corporation Code. It has even been said that "dissolution of a corporation does not constitute an impairment of the obligation of contracts made with creditors and others, since resort may be had to the property of the corporation in the mode provided by statute, or, if there is no adequate statutory remedy, by the process of equity." (19 Am. Jur. 2d 954.) It would be a doctrine new in the law that the existence of a private contract of the corporation should force upon it a perpetuity of existence contrary to public policy and the nature and object of its charter. (16 Fletcher 662.) Dissolution by failure to formally o r g a n i z e and c o m m e n c e transaction of b u s i n e s s . (1) Cessation of corporate powers. — If a corporation does not

formally organize and commence the transaction of its business or the construction of its works within two years from the date of its incorporation, its corporate powers shall cease and the corporation shall be deemed dissolved, except when such failure is

due to causes beyond its control. (Sec. 22, par. 2.) The cessation of corporate powers operates as a dissolution. An attempted completion of organization after such time is wholly ineffective and will not give it even the status of a de facto corporation. A complete organization from the very beginning is necessary in order to give it a corporate existence, (see Sees. 10 to 15.) Under Section 22, the corporation is "deemed dissolved." Nevertheless, there is no automatic dissolution until the dissolution has been lawfully declared by the Securities and Exchange Commission after notice and hearing as required by due process but the effect of the declaration shall retroact to the time the corporation should be deemed dissolved. (2) Collateral attack of a dissolved corporation. — The legal exis-

tence of a corporation whose powers have ceased under Section 22 can be collaterally attacked in any private suit to which the said corporation may be a party. (3) Subsequent continuous incorporation. — But a corporation

which had duly organized itself but failed to exercise its corporate rights and franchise even beyond two (2) years from date of incorporation is not deemed dissolved. The continuous inoperation of a corporation for a period of at least five (5) years, however, is a ground for the suspension or revocation of its registration by the Commission. (Sec. 22, par. 1; Pres. Decree No. 902-A, Sec. 6[i, 4].) Effect of c h a n g e of n a m e on corporate existence.

A mere change in the name of a corporation does not result in its dissolution. The changing of the name of a corporation, either by the legislature (i.e., by special act) or by the corporators under legislative authority (i.e., under a general law), is no more the creation of a corporation than the changing of the name of a natural person is the begetting of a natural person. The act, in both cases, is what the language imports — a change of name, and not a change of being. Nor does it affect the rights of the corporation or lessen or add to its obligations previously acquired or incurred by it. After a corporation has effected a change in its

748


Sec. 120

name, it should sue and be sued in its own name. (Phil. First Insurance Co., Inc. vs. Hartigan, 34 SCRA 252 [1970].) It is the same corporation with a different name but the same identity, property, rights, and liabilities. (Republic Planters Bank vs. Court of Appeals, 216 SCRA 738 [1992].) Effect of insolvency or bankruptcy on corporate existence.

Insolvency is the inability or failure to pay debts as they become due. When used in the bankruptcy sense, it means that condition of an individual or organization where the total liabilities exceed the total assets available for their settlement. While the possession of assets is necessary to the creation of a stock corporation, the loss of all its property does not affect its existence. (7 R.C.L. Corps., par. 4.) For the same reason, the appointment of a receiver for a corporation does not ipso facto produce its dissolution nor bar the exercise of corporate rights, (see Teal Motor vs. Court of First Instance, 51 Phil. 549 [1928]; Leyte A & M Oil Co. vs. Block Johnston & Greebaum, 52 Phil. 429 [1928].) However, the inability to exercise its corporate powers by reason of insolvency might constitute such non-user as to warrant a decree of dissolution, (see Sec. 52, Act No. 1956 [The Insolvency Law], as amended.) Effect of alienation of all a s s e t s on corporate existence. (1) Practical or de facto dissolution. — Under certain circum-

stances, a legal dissolution of a corporation may result from the transfer or sale of all its property and assets, as where it virtually amounts to a surrender of the corporate charter with the consent of the State. Moreover, a transfer of all property of a corporation, whatever its legal effect on the life of a corporation may be, is generally, for all practical purposes, a dissolution, particularly when the corporation is insolvent or nearly so, and conveys its entire property with a view of going out of business. (2) State of suspended animation. — But a corporation may exist

without property, and may at any time, purchase the same or

Sec. 120


749

other property and resume business. And so, though a practical or de facto dissolution may take place when a corporation disposes of or is deprived of all its property, there is, in such case, as a rule, no dissolution as a matter of law. (16 Fletcher, p. 707.) It may continue in a state of suspended animation. (3) Ground for voluntary dissolution. — The sale or other disposition of all, or substantially all of the corporate assets (Sec. 40.) to convert them into cash and liquidate corporate debts may, however, be a ground for the voluntary dissolution of a corporation, (see Sees. 118-119.) Effect of death, etc. of stockholders or members on corporate existence. (1) In the case of stock corporations. — Dissolution by the death of all the members of the corporation cannot apply to business corporations. The shares being property, pass by assignment, bequest, or descent, and must ever remain the property of some persons who, of necessity, must be members of the corporation so long as it may exist. (19 Am. Jur. 2d 954-955.) Under normal conditions, the stockholders of a corporation are not the same as the corporation itself. The corporation has the right of succession. Hence, the transfer of shares neither dissolves the corporation nor renders the same inoperative even if the transfer results to only four or less stockholders, (see Sec. 10.) A corporation may be owned substantially by a single individual and the rest of the stockholders may only be qualifying shareholders for the purpose of complying with the statutory requirement of at least five incorporators /stockholders directors. (SEC Opinion, Jan. 18,1993.) (2) In the case of non-stock corporations. — The death or withdrawal of members may leave the association in such a state as to be incapable of acting or continuing itself. Where that happens and too few members remain to continue the succession and fill vacancies under the constitution of the association, a dissolution may result. As a rule, however, such a corporation is not dissolved by the death or withdrawal of its members, even though it is left without members. (16 Fletcher, p. 691.)

750


Sec. 120

Effect of want of officers on corporate existence.

The want of officers by reason of failure to elect or by reason of death or resignation does not of itself work a dissolution of the corporation or operate as a surrender of the corporate franchise. Although the proper officers may be necessary to enable the body to act, yet they are not essential to its validity. Even the want of officers and the want of power to elect them would not be fatal to its existence. The corporate body has a potentiality which might, by proper authority, be called into action without affecting its identity. Accordingly, the election of non-resident directors will not ipso facto dissolve a corporation of a State the statutes of which provide that every director of its corporations must be a resident of the State. However, the failure of a corporation to hold an election of officers may, in a proper case, be a cause for forfeiture of its charter. (19 Am. Jur. 2d 957.) Effect of concentration of stock on corporate existence.

Although the shares of a corporation after its creation are held by a less number of shareholders than that which the law would have required as a condition precedent to the organization of the same corporation, it is held that the corporation continues to exist. While there is a dictum to the effect that on the acquisition of ownership of all the stock of a corporation by a single individual, the corporation is thereby virtually dissolved, it is well recognized that the fact that all of the stock of a business corporation is owned by or concentrated in the hands of one person does not ipso facto dissolve the corporation; and if the articles of incorporation or by-laws require certain acts by more than the shareholder, the sole owner may transfer a portion of his shares to other persons and thereby conform to the letter of the requirement. The purchase, however, by one of all the shares of a corporation may operate as a dissolution of the corporation to the extent that in such event, it suspends the exercise of the rights under the franchise until the owner transfers stock in good faith so as to maintain an organization under the statute. It is held that the

fact that all the stock of a corporation is owned by one person is no ground for a forfeiture of its franchise. (Ibid., 959.) Sec. 121. Involuntary dissolution. be dissolved by the Securities and upon filing of a verified complaint and hearing on grounds provided and regulations, (n)

— A corporation may Exchange Commission and after proper notice by existing laws, rules

Dissolution by order of the Securities and Exchange Commission. The Securities and Exchange Commission may order the dissolution of a corporation on grounds provided by existing laws, rules and regulations upon filing of a verified (i.e., under oath) complaint and after proper notice and hearing. Section 121 does not state the person who, or the agent which, can file the verified complaint. However, the Rules of Procedure in the Securities and Exchange Commission requires that all actions filed with the Commission must be prosecuted and defended in the name of the real party-in-interest. (Rule III, Sec. 2 thereof.) (1) Violations by a corporation. — Under Section 144, which provides a general penalty for violations of the Code not specifically penalized therein, 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. (2) Deadlocks in a close corporation. — In case of deadlock in a close corporation respecting the management of its affairs, the Securities and Exchange Commission, upon written petition of any stockholder, shall have authority to make such orders as it may deem appropriate including an order dissolving the corporation. (Sec. 104, par. 1.) (3) Mismanagement of a close corporation. — Any stockhold-

er of a close corporation may, by written petition to the Securities and Exchange Commission, compel the dissolution of such corporation whenever any of the 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 corpora-


752

Sec. 121

rion or any stockholder, or whenever corporate assets are being misapplied or wasted. (Sec. 105.) (4) Suspension or revocation of certificate of registration of a cor-

poration. — Although the Securities Regulation Code transferred the Commission's jurisdiction over matters enumerated under Section 5 of Presidential Decree No. 902-A to the regional trial courts (infra.), it retains its power to suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of corporations, partnerships or associations, upon any of the grounds provided by law, including the following: (a) Fraud in procuring its certificate of registration; (b) Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of, or damage to, the general public; (c) Refusal to comply or defiance of any lawful order of the Commission restraining commission of acts which would amount to a grave violation of its franchise; (d) Continuous inoperation for a period of at least five (5) years; (e) Failure to file by-laws within the required period; and (f) Failure to file required reports in appropriate forms as determined by the Commission within the prescribed period. (Sec. 6[1] thereof; see Sec. 144.) 2

Under the SEC Rules, the Commission may suspend or revoke the certificate of registration of a corporation in the following cases: (a) Corporations which have failed to formally organize and commence the transaction of their business or the construction of their works within two (2) years from the date of incorporation; (b) Corporations which have been inoperative for a continuous period of at least five (5) years; (c) Corporations which have failed to file by-laws within the prescribed period; and (d) Corporations which have failed to file/register for a period of five (5) years their financial statements, general information sheet, or stock and transfer book or membership book. In any of the foregoing instances, the SEC shall mail to the corporation and the controlling stockholder a show-cause-order directing them to show cause within thirty (30) days from receipt thereof why the certificate of registration shall not be suspended or revoked. A second show-cause-order shall be published in a newspaper of general circulation, directing the corporation which failed to respond to the first order to appear before the SEC at a hearing on the date, time and at the place stated in the order. If the corporation, through its officers/directors, shall not comply with the directives for the submission of the required reports, or when the corporation fails to appear, the SEC may issue the lesser sanction which is suspension which shall immediately be executory. The 2

Sec. 121


753

A corporation sole may be dissolved and its affairs settled voluntarily by submitting to the Securities and Exchange Commission a verified declaration of dissolution. Upon approval of such declaration by the Commission, the corporation shall cease to carry on its operations except for the purpose of winding-up its affairs. (Sec. 115.) Subsection (d) speaks of "non-user" which means the corporation has failed to exercise the powers given to it, while subsections (a), (b) and (c) involve "misuser" which means that it has abused said powers. As a rule, a forefeiture of corporate charter will not be decreed if some other adequate remedy is available. In conducting hearings and investigation, the Commission is not strictly bound by the technical rules on procedure under the Rules of Court, except in those matters where it is expressly provided that the pertinent provisions of the Rules of Court shall apply. Such hearings may be conducted by the body, board, committee or officer designated by the Commission for the purpose. (SEC Opinion, June 6,1994.) Dissolution by quo warranto proceedings. (1) Jurisdiction. — This method is impliedly found in Section 20 of the Code which authorizes the Solicitor General to bring a quo warranto proceeding against a (de facto) corporation claiming in good faith to be a corporation to oust it from the exercise of corporate powers, and, ultimately, to have it dissolved. The 3

corporation shall then have ninety (90) days from receipt thereof within which to file a petition for reconsideration of the order. After the lapse of the ninety (90) day period and no petition for reconsideration has been filed, the order of revocation shall be issued which shall become final and executory. (XXVIII SEC Quarterly Bulletin, 90 [No. 3, June 1994].) The assets of a corporation whose SEC registration has been revoked are not automatically transferred to a new corporation that has been registered to remove the previous corporation's existence. The corporation must undergo corporate liquidation pursuant to Section 122, distributes its assets to its stockholders, and the stockholders, in turn, exchange the assets for shares in the new corporation. For all intents and purposes, the two corporations are separate and distinct. (SEC Opinion No. 08-17, Aug. 20, 2008.) A SEC order of revocation for non-operation and non-submission of reportorial requirements automatically dissolves a corporation. The last elected directors may pass a resolution to petition the SEC to lift the order of revocation. (SEC Opinion No. 06-01, Jan. 5, 2006.) A Latin phrase meaning "by what authority." It is a challenge to a person's legal authority to act. 3

754


Sec. 121

law does not specify where the proceeding should be instituted, whether with the Securities and Exchange Commission or the Regional Trial Court. Before its deletion by the 1997 Rules of Civil Procedure, quo warranto actions against a corporation could be brought in the Regional Trial Court under Section 2 of Rule 66 of the Rules of Court. The deletion of Section 2 was apparently on recognition of the fact that the matter of dissolution is within the original and exclusive jurisdiction of the SEC pursuant to Pres. Decree No. 902-A, particularly Section 5(b) (see note 3.) and Section 6(d) providing for the creation and appointment by the Commission and the powers of management committee or rehabilitation receiver. 4

5

In Unilongco vs. Court of Appeals (305 SCRA 561 [1997]), the

Supreme Court accordingly ruled: "While the regular courts are granted jurisdiction over involuntary dissolution of corporations through quo warranto proceedings, as previously discussed, P.D. No. 902-Ais explicit in its mandate that in all matters within its jurisdiction, the SEC has original and exclusive authority, x x x. Furthermore, the intent to remove from the regular courts jurisdiction over actions against persons who usurp corporate offices and quo warranto actions against corporations is crystallized in the 1997 Rules of Civil Procedure, as amended. Section 2, Rule 66 of the old Rules is deleted in its entirety, Section 1(a), Rule 66 of the amended Rules no longer Section 21(1) of B.P. Big. 129 vests the Regional Trial Courts with original jurisdiction to issue writs of quo warranto. Section 5(b) of Pres. Decree No. 902-A (March 11, 1976), however, vests in the Securities and Exchange Commission "original and exclusive jurisdiction to hear and decide cases involving x x x controversies x x x between [a] corporation, partnership or association and the State insofar as it concerns their individual franchise or right to exist as such entity." Hence, under said provisions they have concurrent jurisdiction over involuntary dissolution. ^ c . 2. Like actions against corporations. — A like action may be brought against a corporation: (a) When it has offended against a provision of an act for its creation or renewal; (b) When it has forfeited its privileges and franchise by non-user; (c) When it has committed or omitted an act which amounts to a surrender of its corporate rights, privileges, or franchises; (d) When it has misused a right, privilege, or franchise conferred upon it by law, or when it has exercised a right, privilege, or franchise in contravention of law.

Sec. 121


755

contains the phrase "or an office in a corporation created by authority of law" found in the old section. 6

xxx

xxx

xxx

Hence, whatever ambiguities may arise regarding jurisdiction over quo warranto actions against corporations or persons usurping corporate offices are now clarified and resolved by the 1997 Rules of Civil Procedure. Quo warranto actions against corporations or persons using corporate offices fall under the jurisdiction of the SEC, unless otherwise provided for by law, as in the instant case where the corporate entities involved are homeowners associations, in which case jurisdiction is lodged with the Home Insurance and Guarantee Corporation (HIGC)." Unilongo was decided in April 5, 1999 when original and exclusive jurisdiction to hear and decide cases involving intracorporate disputes including controversies "between [the] corporation, partnership or association and the State insofar as it concerns their individual franchise or right to exist as such entity," was exercised by the SEC as expressly granted by Pres. Decree No. 902-A. With the transfer of its quasi-judicial jurisdiction 7

'Section 1 of Rule 66 of the new Rules now reads: "Section 1. Action by Government against individuals. — An action for the usurpation of a public office, position or franchise may be commenced by a verified petition brought in the name of the Republic of the Philippines against: (a) A person who usurps, intrudes into, or unlawfully holds or exercises a public office, position or franchise; (b) A public officer who does or suffers an act which, by the provision of law, constitutes a ground for the forfeiture of his office; or (c) An association which acts as a corporation within the Philippines without being legally incorporated or without lawful authority so to act. (la) Subsection (a) deleted "or an office in a corporation created by authority of law." Hence, an action against a person who usurps, etc. a corporate office fails under the jurisdiction of the SEC. Under Subsection (c), the action of a quo warranto is really against the individuals who act as a corporation. Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving: (a) Devices or schemes employed by, or any acts of the board of directors, business associates, its officers or partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stockholder, partners, members of associations or organizations registered with the Commission. 7

756


Sec. 121

over the said cases enumerated in Section 5 of Pres. Decree No. 902-A to the Regional Trial Courts pursuant to Section 5.2 of the Securities Regulation Code (SRC), approved on July 19, 2000, it is not clear whether the RTCs can take cognizance over any such case where the matter of dissolution of the corporation is among the issues involved, and order dissolution when warranted. 8

(2) Where violations not serious. — Where the violations are

not willful or fraudulent or do not affect the public adversely or seriously, the court (or SEC) may in its discretion merely enjoin the further commission of the wrongful act or acts. In other words, not any violation if proved will warrant a dissolution of a corporation. A different rule "would be dangerous in the extreme, since it would actually place the life of all corporate investments in the country within the absolute power of a single government official. No corporate enterprise of any moment can be conducted perpetually without some trivial misdemeanor against corporate law being committed by someone or other of its numerous employees." Thus, "the extreme penalty of forfeiture of its franchise will not be visited upon a corporation for holding a piece of real estate for a period slightly in excess of the time

(b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members, or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the State insofar as it concerns their individual franchise or right to exist as such entity; (c) Controversies in the election or appointment of directors, trustees, officers or managers of such corporations, partnerships or associations; (d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in case where the corporation, partnership or association possesses sufficient property to cover all its debts but foresees the impossibility of meeting them when they respectively fall due or in cases where the corporation, partnership or association has no sufficient assets to cover its liabilities, but is under management of a Rehabilitation Receiver or Management Committee created pursuant to this Decree. (As added by P.D. No. 1758.) 'The Interim Rules of Procedure Governing Intra-Corporate Controversies under R.A. No. 8799 omitted controversies "between such corporation, partnership or association and the State insofar as it concerns their individual franchise or right to exist as such entity." Section 5.2 of R.A. No. 8799 (SRC), however, is it very clear that "the Commission's jurisdiction over all cases enumerated" under said section "is hereby transferred to the courts of general jurisdiction or the appropriate Regional Trial Court." Furthermore, Section 20 of the Corporation Code does not expressly require that a quo warranto proceeding against a de facto corporation must be brought by the Solicitor General only before the Securities and Exchange Commission.

Sec. 121


757

allowed by law, where the conduct of the corporation does not appear to have been characterized by obduracy or pertinacity in contempt of law." (Republic of the Philippines vs. Security Credit and Acceptance Corporation, 19 SCRA 58 [1967].) (3) Instance where dissolution warranted. — In the cited case, the Supreme Court which has consistently refused to impose the capital punishment of dissolution ordered the dissolution of a corporation found to have been operating as a banking institution and lending the amounts received from a total of 59,463 savings account deposits without the authorization of the Monetary Board of the Central Bank as required by the General Banking Act. (Sec. 2, R.A. No. 337.) Since the corporation could not operate lawfully as a bank and it had no function other than banking, it is clear that if a mere injunction against future violations had been granted, the corporation would have no reason to exist. The dissolution was also warranted because the misuser of the corporate funds and franchise was willful and repeated 59,463 times and its continuance inflicted injury upon the public, considering the number of persons affected thereby. (Ibid.) 9

Right of minority s t o c k h o l d e r s to s u e for dissolution.

The general rule is that the minority stockholders of a corporation cannot sue and demand its dissolution. (1) Where stockholders without redress or remedy within corporation itself. — There are cases, however, that hold that even minority stockholders may ask for dissolution, this, under the theory that such minority members, if unable to obtain redress and protection of their right within the corporation, must not and should not be left without redress and remedy. Even the existence of de jure corporation may be terminated in a private suit for its dissolution by the stockholders without the intervention of the State. (2) Where violations do not warrant quo warranto proceedings. — Again, although, as a rule, minority stockholders of a corporation may not ask for its dissolution in a private suit, and such action should be brought by the government through the Solicitor 'Now, General Banking Law of 2000, R.A. No. 8791.

758


Sec. 121

General in a quo warranto case, at their instance and request, there might be exceptional cases wherein the intervention of the State, for one reason or another, cannot be obtained, as when the State is not interested because the complaint is strictly a matter between the stockholders and does not involve, in the opinion of the Solicitor General, any of the acts or omissions warranting quo warranto proceedings, in which minority stockholders are entitled to have such dissolution. When such action or private suit is brought by them, the court has jurisdiction and may or may not grant the prayer, depending upon the facts and the circumstances attending it. (Financing Corp. of the Phils, vs. Teodoro, 93 Phil. 678 [1953]; Hall vs. Piccio, 86 Phil. 603 [1950].) Effects of dissolution.

A dissolved corporation continues to exist but only for a limited purpose and for a limited time. (1) Transfer of legal title to corporate property. — The dissolu-

tion of the corporation results in the vesting of legal title to the corporate property in the stockholders, who become co-owners thereof. The stockholders are, therefore, entitled to have the corporate assets sold or converted into cash which will, in turn, be distributed to those entitled thereto. (SEC Opinion, Aug. 3,1984.) (2) Continuation of corporate business. — The corporation

ceases as a body corporate to continue the business for which it was established. (Sec. 122, par. 1.) But while the dissolved entity is prohibited from continuing its operation as a "corporation," it may operate to continue to undertake the purposes for which it was organized but its status is only that of an ordinary "association" (see Sec. 10.) which has no juridical personality. (SEC Opinion, Sept. 25, 1995.) However, any of its stockholders or members, after its formal dissolution, may re-incorporate or form another corporation to engage in the same line of business or activity undertaken by the dissolved corporation by complying with the registration requirements under the Corporation Code. (3) Creation of a new corporation. — While the board of

directors of a dissolved corporation is not normally permitted to undertake any activity outside of the usual liquidation of its business, there is nothing to prevent its stockholders from

Sec. 122


759

conveying their respective shareholdings toward the creation of a new corporation to continue the business of the old. Winding up is the sole activity of a dissolved corporation that does not intend to incorporate anew. If it does, however, it is not unlawful for the old board of directors to negotiate and transfer the assets of the dissolved corporation, as expressly allowed by Section 40, to the new corporation intended to be created as long as the stockholders have given their consent. (Chung Ka Bio vs. Intermediate Appellate Court, 163 SCRA 534 [1988].) (4) Reincorporation of dissolved corporation. — A dissolved

corporation cannot be revived. However, those interested may reincorporate by refiling a new articles of incorporation and bylaws. (Rebollido vs. Court of Appeals, 170 SCRA 800 [1989].) (5) Continuation as a body corporate. — The dissolution does

not by itself imply the diminution or extinction of the rights and liabilities of such entity (Gonzales vs. Sugar Regulatory Board, 170 SCRA 377 [1989].), nor those of its owners and creditors. (Clemente vs. Court of Appeals, 242 SCRA 717 [1995].) A defendant corporation is subject to suit and service of process even though dissolved. (Rebollido vs. Court of Appeals, supra.) The corporation continues as a body corporate for three (3) years for purposes of winding up or liquidation. (Sec. 122, par. 1.) It may hold an election of officers but only for said purposes. (6) Cessation of corporate existence for all purposes. — Upon the

expiration of the winding up period of three (3) years, the corporation ceases to exist for all purposes and as a general rule, it can no longer sue and be sued as such. (Gelano vs. Court of Appeals and Insular Sawmill, Inc., 103 SCRA 90 [1981].) In the absence of a statutory provision to the contrary, pending actions by or against a corporation are abated upon the expiration of the period allowed by law for the liquidation of its affairs. (National Abaca & Other Fibers Corp. vs. Pore, 2 SCRA 989 [1961].) Sec. 122. Corporate liquidation. — 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)

760


Sec. 122

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. (77) At any time during said three (3) years, said 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. (78) Upon 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, 78, 16, last par.) Meaning of liquidation. (1) Liquidation, as applied to a corporation, means the winding up of the affairs of the corporation by reducing its assets in money, settling with creditors and debtors, and apportioning the amount of profit and loss, (see 16 Fletcher, p. 658.) (2) It consists of adjusting all debts and claims, that is, of collecting all that is due the dissolved corporation, the settlement and adjustment of claims against it, and the payment of its debts, (see China Banking Corp. vs. Michelin & Cie, 58 Phil. 261 [1933].) Nature of liquidation. A distribution of all assets is a "winding up" of the affairs of the corporation and is synonymous with liquidation. (19 Am. Jur. 2d 953.)

Sec. 122


761

Since the stockholders of a corporation are not co-owners or tenants in common of the corporate property, the liquidation of its assets by the stockholders is not and cannot be considered a partition of community property but rather, a transfer or conveyance of the title of its assets to the individual stockholders. (Stockholders of F. Guanzon & Sons, Inc. vs. Register of Deeds 6 SCRA 373 [1962].) M e t h o d s of corporat e liquidation.

There are three methods by which a dissolved corporation may wind up its affairs: (1) Liquidation by the corporation itself (Sec. 122, par. 1.); (2) Liquidation by a duly appointed receiver (Sec. 119, last par.); and (3) Liquidation by a trustee to whom the corporation had conveyed the corporate assets, (see Sec. 122, par. 2.) The liquidation process is an internal concern of the corporation and falls within the powers of the directors and stockholders to affect. (SEC Opinions, April 30,1986, July 23,1993, and Nov. 21,1997.) While the SEC may order the dissolution of a corporation, jurisdiction over the liquidation of the corporation pertains to the appropriate regional trial court. Thus, the SEC has no authority to liquidate the assets of a dissolved corporation except where it can work out a final settlement of corporate affairs in the absence of a duly designated receiver or trustee, (see Clemente vs. Court of Appeals, 242 SCRA 717 [1995], infra.) Liquidation requires the settlement of claims for and against the corporation and the trial court is in the best position to convene all creditors of the corporation, ascertain their claims, and determine their preferences. (Consuelo Metal Corp. vs. Planters Development Bank, 555 SCRA 465 [2008].) Liquidation by the corporation itself.

The normal method or procedure is for the corporation through the directors or trustees and executive officers to have charge of the winding up operation. (1) Period of three years. — As the law (Sec. 122.) grants the cor-

poration a period of three (3) years after the time when it would

762


Sec. 122

have been so dissolved within which to wind up its affairs, the claims by and against it not presented and settled within that period become unenforceable as there exists no longer a corporate entity against which they can be enforced, (see Buenaflor vs. Camarines Sur Industry Corp., 108 Phil. 472 [I960].) In other words, actions pending by or against the corporation when the three (3)-year period expires are abated, for after said period, the corporation becomes defunct and ceases to be an entity capable of suing or being sued. (National Abaca & Other Fibers Corp. vs. Pore, 2 SCRA 989 [1961].) (2) Extension of period. — The law does not allow any extension of the period. However, a creditor with a pending action against a corporation or a corporation with a pending suit filed by it may prevent the abatement by asking the proper court for the appointment of a receiver or trustee within the winding up period, (par. 2.) The trustee may sue and be sued as such in all matters connected with the liquidation, even beyond the period where there is no time limit within which the trustee must finish the liquidation. It may be found impossible to complete the work of liquidation within the three-year period. It has been held, however, that the counsel who prosecuted and defended the interest of a dissolved corporation may be considered a trustee of the corporation with respect to the matter in litigation (Gelano vs. Court of Appeals, 103 SCRA 90 [1981].) and the board of directors may be permitted to complete the corporate liquidation by continuing as "trustees" by legal implication. (Clemente vs. Court of Appeals, 242 SCRA 717 [1995].) Indeed, if "the trustee may commence a suit which can proceed to final judgment even beyond the three-year period, [n]o reason can be conceived why a suit already commenced by the corporation itself during its existence not by a mere trustee who, by fiction, merely continues the legal personality of the dissolved corporation should not be afforded similar treatment and allowed to proceed to final judgment and execution thereof. (Reburiano vs. Court of Appeals, 301 SCRA 342 [1991], citing Gelano vs. Court of Appeals, supra; Knetch vs. United Cigarette Corp., 384 SCRA 45 [2002].) (3) Action against liquidators/stockholders. — It is to be noted

that there is nothing in Section 122 (par. 1.) which bars an

Sec. 122


763

action for the recovery of the debts of the corporation against the liquidator thereof after the lapse of the winding up period of three (3) years. (Republic of the Philippines vs. Marsman Dev. Co., 44 SCRA 418 [1972].) The dissolution of a corporation does not extinguish the debts due or owing to it. A creditor of a dissolved corporation may follow its assets, as in the nature of a trust fund, into the hands of its former stockholders. Dissolution or even the expiration of the three-year liquidation period does not bar a corporation from enforcing its rights as a corporation, (see Sec. 145.) This rule applies to the tax obligations of a corporation to the government. While the government cannot collect taxes from a defunct corporation, it loses thereby none of its rights to assess taxes which had been due from the corporation, and to collect them from persons who, by reason of transactions with the corporation, hold property against which the tax can be enforced. (Tan Tiong Bio vs. Comm. of Internal Revenue, 4 SCRA 86 [1962].) (4) Approval of SEC not required. — There is also nothing in Section 122 which requires SEC's approval of distribution or liquidation of the assets of a dissolved corporation. The same is a matter of internal concern of the corporation and falls within the power of the directors and stockholders or duly appointed liquidation trustee. Liquidation of assets, however, is subject to the payment of debts of the corporation. (SEC Opinion, July 23, 1993.) (5) Authority of hold-over officers. — The hold-over officers of an

expired corporation are empowered to wind up the affairs of the corporation within the 3-year liquidation period. While Section 122 gives a dissolved corporation three (3) years to continue as a body corporation for purposes of liquidation, the disposition of the remaining undistributed assets must necessarily continue after such period. A contrary interpretation would have unjust and absurd results. (SEC Opinion, May 14, 1996; see Clemente vs. Court of Appeals, supra.) Liquidation by a receiver.

The liquidation by receivership is authorized by Section 119 by virtue of which upon the dissolution of the corporation, the

764


Sec. 122

Securities and Exchange Commission "may appoint a receiver to collect its assets and pay the debts of the corporation." (last par.) (1) Authority of receiver. — Being merely a ministerial officer, a receiver of a corporation has only such authority as is conferred by statute. (19 C.J.S. 1226.) Ordinarily, he may sue to enforce the stockholder's liability on unpaid subscription in representation of the corporation. (Ibid., 1236.) A call is considered a prerequisite to any action that a receiver may take to enforce unpaid subscriptions. (Ibid., 1239.) The appointment of a receiver operates to suspend the authority of a corporation and of its directors/trustees and officers over its property and effects, such authority being reposed in the receiver, and in this respect the receivership is equivalent to an injunction to restrain the corporation's officers from intermeddling with the property of the corporation in any way. (Villanueva vs. Court of Appeals, 244 SCRA 395 [1995]; Yam vs. Court of Appeals, 303 SCRA 1 [1999]; Abacus Real Estate Dev. Center, Inc. vs. Manila Banking Corporation, 455 SCRA 97 [2005].) (2) Status of receiver. — A receiver is not only a representative of the court. He also represents both the stockholders and the creditors of the corporation and as their trustee, he acts not for himself but for both and represents each. In some respect, he is the agent or representative of the corporation. (SEC Opinion, April 7, 1987, citing 16 Fletcher, p. 404.) He has, therefore, the power to vote the shares owned by the latter in other corporations. (3) Stay of pending actions. — Presidential Decree No. 902-A is

clear that "allocations for claims against corporations, partnerships or associations under management or receivership pending before any court, tribunal, board or body shall be suspended accordingly."" (Sec. 6[c] thereof.) 10

"The word "claim" must be construed to mean debts or demand of a pecuniary nature. An action for the nullification of a Special Power of Attorney and other documents based on an obligation of forgery is not a "claim" under Section 6(c) which provides for the suspension of all actions against corporations, partnerships or associations under management or receivership. (Finasia Investments & Finance Corp. vs. Court of Appeals, 237 SCRA 446 [1994].) "See Rizal Commercial Banking Corp. vs. Intermediate Appellate Court, 213 SCRA 830 (1992); Alemar's Sibal & Sons, Inc. vs. Elbinas, 186 SCRA 94 (1990); Philippine

The law does not make any exception in favor of labor claims. "The justification for the automatic stay of all pending actions for claims is to enable the management committee or the rehabilitation receiver to effectively exercise its/his powers free from any judicial or extrajudicial interference that might unduly hinder or prevent the 'rescue' of the debtor company. To allow such other actions to continue would only add to the burden of the management committee or rehabilitation receiver, whose time, effort and resources would be wasted in defending claims against the corporation instead of being directed toward its restructuring and rehabilitation." (Rubberworld [Phils.], Inc. vs. National Labor Relations Commission, 336 SCRA 433 [2000].) 12

(4) Equality among creditors. — When a corporation threatened

by bankruptcy is taken over by a receiver, all the creditors stand on equal footing. Its assets are held in trust for their equal benefit to preclude one from obtaining an advantage or preference over another by the expediency of an attachment, execution or otherwise. This is precisely the reason for the suspension of all pending claims against the corporation under receivership. Instead of creditors vexing the court with suits against the distressed firm, they are directed to file their claims with the receiver who is a duly appointed officer of the SEC (Alemar's Sibal & Sons, Inc. vs. Elbinias, 186 SCRA 94 [1990].), subject to the rules on preference of credits, to enable the receiver to effectively exercise his powers free from any judicial or extrajudicial interference that might unduly hinder the rescue of the distressed corporation. Jurisprudence has established that a stay of execution may be warranted by the fact that the corporation has been placed under rehabilitation receivership. (Alemar's Sibal & Sons, Inc. vs. National Labor Relations Commission, 322 SCRA 306 [2000].) Commercial International Bank vs. Court of Appeals, 172 SCRA 436 (1989); Clarion Printing House, Inc. vs. National Labor Relations Commission, 461 SCRA 272 (2005); Tyson's Super Concrete, Inc. vs. Court of Appeals, 461 SCRA 69 (2005). The appointment of a management committee or rehabilitation receiver may only take place after filing with the SEC of an appropriate petition for suspension of payments. Pursuant to the proviso in Section 6(c) taken together with Section 6(d) and Section 5(d), a court action is ipso jure suspended only upon the appointment of a management committee or a rehabilitation receiver. (Barotac Sugar Mills, Inc. vs. Court of Appeals, 275 SCRA 497 [1997]; see Annotation under Section 141, Corporation Code.) See Interim Rules of Procedure on Corporate Rehabilitation. (Appendix "B.") 12

766


(5) Duration of receivership.

Sec. 122

— The receivership, unless

otherwise specifically limited in its duration, shall exist indefinitely until the affairs of the dissolved corporation shall have been completely settled and liquidated. During its continuance, claims can be presented and allowed if they are not barred by the statute of limitations. In other words, the period of three (3) years prescribed by Section 122 is not applicable, (see Sumera vs. Valencia, 67 Phil. 721 [1939].) The receiver or a trustee (infra.) may act beyond the period. (Pepsi-Cola Products Philippines, Inc. vs. Court of Appeals, 443 SCRA 580 [2004].) Appointment of receiver discretionary. (1) Where corporation has been dissolved. — The appointment of

a receiver is addressed to the sound discretion of the court or the Securities and Exchange Commission (see Pres. Decree No. 902A, Sec. 6[c].) and such discretion should be exercised with great caution and only when the necessity therefor is clear, in view of the drastic nature and burdensome character of a receivership, involving as it does the appointment of a stranger who would take over the corporate business. (Chase vs. Court of First Instance of Manila, 18 SCRA 602 [1966]; China Banking Corp. vs. M. Michelin & Cie, 58 Phil. 261 [1933]; see Limsico vs. Bautista, 122 SCRA 337 [1983].) Thus, where, instead of appointing a receiver, the court adopted precautionary measures for the protection of the petitioner's rights and interests, the court cannot be said to have abused its discretion. (Chase vs. Court of First Instance of Manila, supra.) (2) Where there is no dissolution. — Even without dissolution,

the court has the authority to appoint a receiver for a corporation to protect and preserve its properties for the use and benefit of its creditors and others who may have similar interests in the property as where there is already a final and executory judgment against the corporation, which is in a precarious financial condition. (Central Sawmills, Inc. vs. Alto Surety and Ins. Co., 27 SCRA 247 [1969]; see Ching vs. Land Bank of the Phils., 201 SCRA 190 [1991].) Where corporate directors are guilty of breach of trust, minority stockholders may ask for receivership. (Chase vs. Court of First Instance, supra.) The court should appoint a

Sec. 122


767

receiver when necessary in order to protect the rights of minority stockholders especially when said stockholders are unable to obtain redress and protection of their rights within the corporation itself. (Financing Corp. of the Phils, vs. Teodoro, 93 Phil 678 [1953].) The appointment of a receiver for a going corporation is a last resort remedy, and should not be employed when another remedy is available. Misconduct of corporate directors or other officers, bad judgment, or even unauthorized use and misapplication of the company's funds will not justify the appointment of a receiver for the corporation if an appropriate relief can otherwise be had. Thus, the refusal to allow the stockholders (or members of a non-stock corporation) to examine the books of the company is a ground for appointing a receiver (or creating a management committee) since there are other adequate remedies, such as a writ of mandamus. (Ao-As vs. Court of Appeals, 491 SCRA 339 [2006]; see Sec. 74.) Liquidation by a trustee. (1) Meaning of trustee. — The word "trustee," as used in the law, must be understood in its general concept. It has been held that a counsel who prosecuted and defended the interest of a corporation and who in fact appeared in behalf of the corporation before and after its dissolution by amendment of its articles of incorporation (see Sec. 120.) may be considered a trustee of the corporation under Section 77 (now Sec. 122.), at least with respect to the matter in litigation only. The purpose in the transfer of the assets of the corporation to a trustee upon its dissolution is more for the protection of its creditors and stockholders. The appointment of said counsel can be considered a substantial compliance with Section 78 (par. 2.). (Gelano vs. Court of Appeals, 103 SCRA 90 [1981].) (2) Conveyance of corporate property. — The liquidation of the

corporation may be placed in the hands of a trustee or assignee to whom all the corporate assets are conveyed by resolution of the stockholders or members (see Sec. 40. ) at any time during 13

,3

tion.

It applies to the sale, etc. of all or substantially all the assets of an existing corpora-

768


Sec. 122

the three (3,-year period after the time when it would have been dissolved. (3) Effect of conveyance. — By the terms of Section 122 (par. 2.),

the effect of the conveyance is to make the trustee the legal owner of the property, subject to the beneficial interest therein of the creditors, stockholders, members, and other persons in interest. The trustee may sue and be sued as such in all matters connected with the liquidation. (Sumera vs. Valencia, 67 Phil. 721 [1939].) (4) Rules applicable. — The same rules governing duration and the time for filing of claim where the liquidation is done by a receiver apply to liquidation effected by a trustee. (5) Period of existence of trusteeship. — Where no time limit

has been fixed with respect to the existence of the trusteeship, the trustee has authority to close the affairs of the corporation even after the expiration of the statutory three-year period and claims not barred by the statute of limitations can be presented and allowed until the liquidation is terminated, (see National Abaca & Other Fibers Corp. vs. Pore, 2 SCRA 989 [1961]; Board of Liquidators vs. Heirs of Maximo Kalaw, 20 SCRA 987 [1967]; Pepsi-Cola Products Philippines, Inc. vs. Court of Appeals, 443 SCRA 580 [2004].) Since the law specifically allows a trustee to manage the affairs of the corporation in liquidation, any supervening fact, such as the dissolution of the corporation, the repeal of a law (see Sec. 145.), or any other fact of similar nature, would not serve as an effective bar to the enforcement of such right. (Reburiano vs. Court of Appeals, 301 SCRA 342 [1999]; Knecht vs. United Cigarette Corp., 384 SCRA 45 [2002].) (6) Where no receiver or trustee has been designated after disso-

lution. — If the three-year extended life has expired without a receiver or trustee having been expressly designated by the corporation within that period: (a) the board of directors or trustees itself may be permitted

to so continue as "trustees" by legal implication to complete the liquidation, (see Sec. 145.) (b) Still, in the absence of a board of directors or trustees, those having a pecuniary interest in the corporate assets,

including not only the stockholders but likewise the creditors

Sec. 122


769

of the corporation, acting for and in its behalf, may make proper representations with the Securities and Exchange Commission which has primary and sufficiently broad jurisdiction in matters of this nature, for working out a final settlement of the corporate concerns. (Clemente vs. Court of Appeals, 242 SCRA 717 [1995]; see Premier Development Banks vs. Flores, 574 SCRA 66 [2008].) (c) The only surviving stockholder or director of a corporation whose term of existence has expired may act as trusteein-liquidation after the 3-year period to liquidate has expired without the appointment of a trustee-in-liquidation. In case of death of one or more directors during or after the 3-year liquidation period, the surviving directors continue as trustees-in-liquidation, without prejudice to the right of a personin-interest (e.g., creditor or stockholder) to petition the courts for the appointment of a different trustee on account of failure to wind up the affairs of the corporation within a reasonable period. (SEC Opinion No. 10-96, Jan. 29, 2010.) (d) The counsel who prosecuted and defended the interest of

the corporation and who, in fact, appeared in behalf of the corporation, may be considered a trustee of the corporation at least with respect to the matter in litigation only. (Reburiano vs. Court of Appeals, supra.) Effect of dissolution on corporate power to enter into contracts. The dissolution of a corporation terminates its power to enter into contracts or to continue the business as a going concern, even though it continues its existence for a definite or indefinite time to wind up the business. (16 Fletcher, p. 859.) Under Section 122, the winding up period is only for the limited purposes enumerated to enable the dissolved corporation to settle its affairs gradually. (SEC Opinion, Aug. 24,1971.) Dissolution in its early stage is, in reality, a change in the permitted scope of activity rather than a change in the status. The result is not the death of the corporation but its retirement from active business. (Ballantine, Sec. 317.) Thus, a university whose charter expires in the middle of the academic year may continue holding classes up to the end

770


Sec. 122

of such year where the enrollment for such classes was made prior to the date of dissolution, but only as part of the winding up process of the affairs of the corporation. The university, however, cannot accept enrollment for a succeeding semester which starts after the expiration of the corporate term. Since collegiate courses are conducted by semesters, each semester would constitute a fully executed contract. Should the university then accept enrollment for the second semester classes, it would be entering into a new contract which is impossible of execution as its scheduled performance could only be made after the dissolution of its corporate existence. (SEC Opinion, Aug. 24,1971.) Distribution of corporate assets.

(1) General rule/exceptions. — Except by decrease of its capital stock as provided in Section 38 and as otherwise allowed by the Corporation Code (see Sees. 8, 9, 41, 43, 104, par. 1[4], 105.), no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. (Sec. 122, last par.) The Trust Fund Doctrine (see Sec.

41.) is the underlying principle behind the stringent procedural requirements to be complied with for the distribution of capital assets of the corporation in the instances when such distribution is allowed by the Corporation Code. (a) Distribution in exchange for shares of stock. — Thus,

the property contributed to the corporation in exchange for shares of stocks and forming part of the assets of the corporation cannot be withdrawn by the subscriber but only with the approval of the board of directors and stockholders, respectively, provided that no creditor is prejudiced by such withdrawal and provided further that the law, rules, and regulations pertinent to said withdrawal are duly observed and complied with, although stockholders owning stocks in exchange therefor are not precluded from assigning and/ or transferring their shareholdings to any person qualified in the absence of a valid and just restriction. (SEC Opinion, Aug. 5,1976.) (b) Distribution in pursuance of liquidation. — In a case, it

was held that where the purpose of a liquidation as well as

the distribution of the assets of the corporation is to transfer the title thereto from the corporation to the stockholders in proportion to their shareholdings, that transfer cannot be effected without the corresponding deed of conveyance from the corporation to the stockholders, and the certificate of liquidation executed by the stockholders, though it involves a distribution of the corporation's assets, should be considered as one in the nature and in substance a transfer or conveyance. (Stockholders of F. Guanzon & Sons, Inc. vs. Register of Deeds, supra.) (2) By act of stockholders. — The act of the stockholders distributing assets of the corporation among themselves is valid so long as all corporate creditors are paid and no one is prejudiced thereby. (3) Trust fund doctrine. — The "trust fund" doctrine (see Sec.

41.) considers the subscribed capital as a trust fund or equity in trust for the payment of the debts of the corporation, to which the creditors look for satisfaction. Until the liquidation of the corporation, no part of the subscribed capital may be returned or released to the stockholder (except in the redemption of redeemable shares) without violating this principle. Thus, dividends must never impair the subscribed capital; subscription commitments cannot be condoned or remitted; nor can the corporation buy its own shares using the subscribed capital as the consideration therefor. (National Telecommunications Commission vs. Court of Appeals, 311 SCRA 508 [1999].) Priority of application of assets.

The question of the right of a claimant against the assets of a corporation that is being dissolved and liquidated to priority in the payment of his claims becomes of importance only when the assets of the corporation are not sufficient to pay all claims. It is evident that if the corporate assets are sufficient to pay all claims, it cannot matter practically which claim is paid first or is entitled to preferential payment. (19 Am. Jur. 2d 1027-1029.) (1) When the corporation is insolvent, the creditors of the corporation are entitled to have all its assets distributed first

772


Sec. 122

among them according to their respective rights and priorities." This is in accordance with the trust fund doctrine. (19 Am. Jur. 2d 1029.) (2) Stockholders, members, directors, or officers of the corporation who are also its creditors as a result of a legitimate or proper loan or claim must be paid next. (Ibid., 1029-1030.) (3) The remaining assets are then to be distributed among the stockholders or members in proportion to their shareholdings or interest in the absence of any provision to the contrary, (see Stockholders of F. Guanzon & Sons, Inc. vs. Register of Deeds, 6 SCRA 373 [1966].) (a) Of course, holders of preferred stock as to assets have a preference over the common stockholders in the distribution of the surplus proceeds of the assets of the dissolved corporation. (b) The amount of capital refund that a stockholder will get in case of liquidation of a corporation will depend upon the financial condition thereof at the time. He may get more than his original capital investment or less or even none at all, depending upon the success or failure of the enterprise. (SEC Opinion, Feb. 22,1960.) (c) If, after the distribution to stockholders of corporate assets, unpaid debts of the corporation shall appear, the stockholders are liable to pay the debts to the extent of the value of the assets received by them. (d) Upon winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member who 'Secured creditors shall enjoy preference over unsecured creditors subject only to the provisions of the Civil Code (see Arts. 2246-2250 thereof.) on concurrence and preference of credits. Creditors of secured obligations may pursue their security interests or lien, or they may choose to abandon the preference and prove their credits as ordinary claims. The right to foreclose the mortgage under Article 2248 over a specific property whether or not the debtor-mortgagor is under insolvency or liquidation proceedings is merely suspended upon the appointment of a management committee or rehabilitation receiver. (Sec. 6[c].) Pres. Decree No. 902-A or upon the issuance of stay order by the trial court. (Sec. 4, Rule 4, Interim Rules of Procedure on Corporate Rehabilitation.) He may exercise the right to foreclose the mortgage upon the termination of the rehabilitation proceedings or upon the lifting of the stay order. (Consuelo Metal Corp. vs. Planter's Development Bank, 555 SCRA 465 [2008].)

is unknown or cannot be found shall be escheated to the city or municipality where such assets are located. (Sec 122 par 3.) Under the law, such distributive shares of the assets of the corporation upon its dissolution are not available for general distribution among the whole class of stockholders. The reason for this rule is that upon the dissolution of a corporation, the assets become a trust fund with the title of the stockholders becoming an equitable right to a distributive share therein, and that the stockholders, in respect of the liquidating dividend, are not mere creditors, but the money is set apart for them and belongs to them severally in equity and is, therefore, not available for general distribution. (19 Am. Jur. 2d 1035-1036.) There is nothing in Section 122 which requires that the distribution of the remaining assets of a dissolved corporation to either the creditors or stockholders should be approved by the Securities and Exchange Commission. The liquidation process is an internal concern of the corporation and falls within the powers of the directors and stockholders to effect. (SEC Opinions, April 30, 1986; Nov. 21,1997.) Refund to s t o c k h o l d e rs of their investment.

"Stock corporations derive their capital stock from the sale of shares or stock to the stockholders. The stockholders, in purchasing shares from the corporation, merely invest their capital in paying for those shares. Being investors, they expect the corporation to earn profits and to distribute the profits among them in the form of dividends. For this reason, stock corporations are also known as commercial corporations, that is, corporations organized for the purpose of earning profits to be divided among the stockholders." (1) Where shares with par value. — "When stock corporations

are dissolved, the assets are first applied to the payment of their obligations and the balance is then used to refund to the stockholders the amount they invested in the purchase of shares of the corporation. Where the shares of a stock corporation have par value, and unless the articles of incorporation or the

774


Sec. 122

by-laws and the certificates of the stock specify what amount is to be returned to the stockholders as their investment in the corporation, the stockholders shall be entitled to receive as a refund of their investment only an amount equal to the par value of each of the shares which they hold, even if in acquiring those shares they may have paid more than their par value." (2) Where shares without par value. — "When the shares of

stock of a corporation have no par value, in the absence of any provision in the articles of incorporation to the contrary, the stockholders shall be entitled to receive from said corporation upon its dissolution as a refund of their investment, the amount which they have paid to the corporation for the purpose of the said shares. If said shares, although belonging to the same class, have been issued at different times and have different prices as consideration, then the stockholders shall be entitled to receive as a refund of their investment the amount which they respectively paid for those shares." (3) Where shares acquired from prior stockholder. — "When

stockholders did not acquire their shares directly from the corporation but acquired them by transfer from another stockholder, the amount which the former shall be entitled from the corporation as a refund of their investment is not the price for which the shares were acquired from the prior stockholder, but the refund which the original stockholder to whom the shares were issued by the corporation would have been entitled to receive from the corporation had he not transferred his shares." (C.G. Alvendia, op. cit., pp. 33-34.)

— oOo —

Title XV FOREIGN CORPORATIONS Sec. 123. Definition and rights of foreign corporations. — For the purposes of this Code, a foreign corporation is done, formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or State. It shall have the right to transact business in the Philippines after it shall have obtained a license to transact business in this country in accordance with this Code and a certificate of authority from the appropriate government agency. (68a)

Definition of foreign corporation. (1) With respect to a particular State, a foreign corporation is a corporation created by or under the laws of another State or country. This is the traditional definition of the term. In the incorporating State, it is a domestic corporation. Thus, X corporation organized under the laws of the Philippines is a domestic corporation with respect to the Philippines and a foreign corporation with reference to any other State; if organized under the laws of Y country, it is domestic with reference to Y and a foreign corporation under the Corporation Code. (2) For licensing purposes, the Corporation Code under Section 123, defines a foreign corporation as one formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or State. (see Sec. 125, par. 2.) It does not 1

'Section 123 does not apply to foreign partnerships. ( S E C Opinion, May 25, 1982.) Neither does it cover joint ventures (see note 11 under Sec. 2.) formed outside the Philippines by two foreign corporations to establish a representative office in the Philippines. 775


776

Sec. 123

say that it is required that the laws under which foreign corporations are formed give Philippine nationals reciprocal rights. (State Investment House, Inc. vs. Citibank, N.A., 203 SCRA 9 [1991].) Under the Corporation Code, the existence of a foreign law allowing Filipino citizens and corporations to do business in the country of the foreign corporation is prescribed only as a condition for securing a license to transact business in the Philippines. It is not an essential element of being a foreign corporation. (3) During wartime, for reasons of national security, the control test (infra.) and not the incorporation test above shall

determine the nationality of a corporation, that is, a domestic corporation controlled by enemy aliens shall be deemed a foreign corporation with a nationality identical with that of its controlling stockholders. (Filipinas Cia de Seguros vs. Christern Huenefeld & Co., 89 Phil. 54 [1951].) Under the second test, the nationality of a corporation is that of the State of incorporation regardless of the nationality of its stockholders. (Sec. 123.) 2

Corporation may operate within jurisdictio n of another State.

As a rule, a foreign corporation can have no legal existence or status beyond the bounds of the State or sovereignty by which it is created or incorporated and organized. It exists only in conThe Securities and Exchange Commission has jurisdiction to issue licenses only to foreign corporations. (SEC Opinion, April 22,1985.) For tax purposes, a foreign corporation is either resident, if engaged in trade or business within the Philippines or having an office or place of business therein, and nonresident, if not engaged in trade or business within the Philippines and not having any office or place of business therein, (see Sec. 20[h, i], National Internal Revenue Code.) The first is taxed on its net income from sources within and without the Philippines and the second, only on its gross income from within the Philippines. (Sees. 24[a], 25[a], Ibid.) However, a corporation organized abroad and registered as doing business in the Philippines under the Corporation Code, of which 100% of the capital stock outstanding and entitled to vote is wholly owned by Filipinos may be considered a "Philippine National" under the Foreign Investments Act of 1991. (infra.) This situtation is the only exception to the place of incorporation test. (SEC Opinion No. 04-14, March 3, 2004.) W Corp. is owned 100% by X Corp., a Philippine corporation, X Corp. is in turn, wholly-owned by Y Corp., a domestic holding company, which is owned by Z Corp., a publicly listed company, 26% of the outstanding capital stock of which is owned by foreigners. W Corp. is not a corporation wholly-owned by Filipino citizens because Z Corp., the third degree parent of W Corp., is owned 26% by foreigners. (SEC Opinion No. 06-07, Jan. 31, 2006.) 2

Sec. 123

TITLE XV. FOREIGN CORPORATIONS

777

templation of law and by force of the law and where that law ceases to operate, the corporation can have no existence. (1) With consent of foreign state where business conducted. —

This principle, however, does not prevent a corporation from acting in another State or country with the latter's express or implied consent. This is the "consent doctrine" which is provided in Sections 125 and 126. But every power which a corporation exercises as such in another State depends for its validity upon the laws of the sovereignty in which it is exercised. A corporation can exercise none of the functions and privileges conferred by its charter in another State or country except by the comity and consent of such State or country. (20 C.J.S. 12.) 3

(2) Subject to conditions and restrictions it may impose. — The

State in extending to foreign corporations the privilege of doing business may impress such privilege with whatever conditions and restrictions it deems fit to impose. Thus, it is within the power and discretion of a State to require foreign corporations, as a condition precedent to the right to do business within the State, to take out a license, permit, or certificate from a designated officer or agency, giving such foreign corporations authority or permission to do so, and on compliance therewith, the transaction has been held to constitute a contract between the corporation and the State. (SEC Opinion, March 5,1959.) The conditions and requirements, of course, must be reasonable. Objectives of regulation of foreign corporations.

The objectives of the statutory provisions prescribing conditions under which foreign corporations are permitted to do business in a State other than that of their creation have been stated as follows: (1) to place them on an equality with domestic corporations;

The new type of problems caused by big multinational corporations suggests the need for special laws to regulate them. Created in one State, they transact business, maintain offices and operate plants or factories in numerous States. Most such corporations with worldwide activities have stockholders, directors, officers, and employees from different countries where they do business. 3


778

Sec. 123

(2) to subject them to inspection so that their condition may be known; and (3) to protect the residents of the State doing business with them by subjecting them to the courts of the State. Provisions of revenue requiring the payment of fees and taxes are only incidental. (17 Fletcher, p. 424.) License and certificate of authority required of foreign corporations.

Under Section 123, foreign corporations shall not be permitted to transact or do business in the Philippines until they have secured a license for that purpose from the Securities and Exchange Commission (see Sec. 126.) and a certificate of authority from the appropriate government agency. 4

The fact, however, that a foreign corporation may not transact business in the Philippines unless it has obtained a license for that purpose, nor maintain a suit in Philippine courts for recovery of any debt, claim or demand without such license, does not make such corporation any less a juridical person. Indeed, an exception to the license requirement has been recognized where a foreign corporation sues on an isolated transaction. (General Garments Corp. vs. Director of Patents, 41 SCRA 50 [1971].) Nationality of corporations with foreign equity. (1) Determination of nationality. — There are two rules for

determining the corporate nationality of a corporation: Under the "incorporation test," the nationality of a corporation is that of the state of incorporation regardless of the nationality of its stockholders. Under the "control test," it depends on the nationality of the controlling stockholders. The application of either test depends on the particular situation. The Department of Justice, in an opinion (No. 18, Jan. 19, 1989), applying the "control test," has laid down the rule adopted The Securities and Exchange Commission does not have rules and regulations governing the activities of foreign corporations in the Philippines before they are granted a license, the reason being that until they have obtained a license, they cannot transact business in the country. (SEC Opinion, March 29,1962.) 4

Sec. 123


779

by the Securities and Exchange Commission (SEC Opinion, Dec. 7,1993.) and now expressly embodied in the Foreign Investments Act (infra.) in the determination of the nationality of corporations formed or organized under Philippine law with alien equity as follows: "Shares belonging to corporations or partnerships at least 60% of the capital of which are owned by Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000 shares are registered in the name of a corporation or partnership at least 60% of the capital stock or capital, respectively, of which belong to Filipino citizens, all of said shares shall be recorded as owned by Filipinos. But if less than 60% or, say only 50% of the capital stock or capital belong to Filipino citizens, only 50,000 shares shall be counted as owned by Filipinos and the other 50,000 shares shall be recorded as belonging to aliens." (see SEC Opinions No. 07-20, Nov. 28, 2007 and No. 07-21, Nov. 28, 2007.) (2) BASIS of computation of 60-40 percentage requirement. —

Under existing laws, the basis is the total outstanding capital stock, irrespective of the amount of the par value of the shares, (see Sec. 137.) Once it is established that a corporation is at least 60% owned by Filipinos, it is no longer necessary to conduct any further inquiry as to the ownership of the shareholders since the entire company is already considered a Filipino entity. (SEC Opinion No. 07-18, Nov. 28, 2007.) However, while a corporation with a 60% Filipino equity ownership may be considered a Filipino corporation, it is not qualified to invest in or enter into a joint venture agreement with corporations or partnerships, the capital or ownership of which, under the Constitution or special laws, are limited to Filipino citizens. (SEC Opinion, Nov. 21, 1989.) The preferred stocks without voting rights are considered in the computation of the Filipino-foreign equity percentage requirement, unless the law covering the type of business to be undertaken provides otherwise. (SEC Opinions No. 04-40, Aug.


780

Sec. 123

10, 2004 and No. 04-29, April 20, 2004.) The shareholdings of former Filipino citizens who became citizens of foreign countries but who subsequently reacquired Philippine citizenship under the "Citizenship Retention and Re-Acquisition Act of 2003 (R.A. No. 9225)" are considered as Filipino investments. (SEC Opinion No. 04-38, July 6, 2004.) The Securities and Exchange Commission has done away with the strict application of the so-called "grandfather rule" and instead applied the more lenient "control test" above of determining corporate nationality, in line with the state policy to adopt a liberal interpretation or construction of our laws aimed at encouraging foreign investment. (SEC Opinion, Oct. 14, 1991.) The "control test" is now expressly embodied in the Foreign Investments Act of 1991 and its implementing rules and regulations. Under this test, once it is clearly established that an entity in 60% owned by Filipino citizens, further inquiry on the ownership of the corporate shareholders is not necessary. The test for compliance is based on the total outstanding capital stock irrespective of the amount of the par value of the shares. 5

(3) Rule under the Foreign Investments Act of 1991. — Under

R.A. No. 7042: (a) "a citizen of the Philippines, or (b) a domestic partnership or association wholly owned by citizens of the 6

T h e SEC employs the two (2) methods to determine the nationality of a corporation depending on the corporation's business. The "grandfather rule" is a method of determining the nationality of a corporation which is owned in part by another corporation by breaking down the equity structure of the shareholder corporation. This method can be useful when a corporation's economic activity is strictly limited by law to Filipino citizens, such as certain types of retail tradeing and mass media. On the other hand "control test" is much more liberal. Under this method, the corporation shall be considered a Filipino corporation if the Filipino ownership of its capital stock is at least 60% and where the 60%-40% Filipino-alien equity ownership is not in doubt. It is applied for corporations intending to engage in commerce where 60%-40% equity ratio is allowed by law. (SEC Opinion No. 07-19, Nov. 28, 2009.) sUnder Section 3 thereof, it is the test for compliance with the nationality requirement. It is based on the total outstanding or subscribed/issued applied stock irrespective of the amount of the par value of the shares. With respect to non-stock corporations, the nationality is computed on the basis of the nationality of its members and not on the membership contribution. (SEC Opinion No. 04-49, Dec. 22, 2004.) The control test under the act to determine Filipino nationality cannot be applied in a situation where the law requires a greater percentage of ownership. (SEC Opinions No. 04-41, Sept. 28, 2004 and No. 04-30, April 28, 2004.) 6

Sec. 123


781

Philippines, or (c) a corporation organized under the laws of the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned and held by Filipino citizens, or (d) a corporation organized abroad and registered as doing business in the Philippines under the Corporation Code of which 100% of the capital stock outstanding and entitled to vote is wholly owned by Filipinos, or (e) a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least 60% of the fund will accrue to the benefit of Philippine nationals" is deemed a "Philippine National." 7

Where a corporation and its non-Filipino stockholders own stocks in an enterprise registered with the Securities and Exchange Commission, at least 60% of the capital stock outstanding and entitled to vote of both corporations must be owned and held by Filipino citizens and at least 60% of the members of the board of directors of both corporations must be citizens of the Philippines in order that the corporation shall be considered a Philippine national. (Sec. 3[a] thereof, as amended by R.A. No. 8179.) The law applies the control test both with respect to the ownership

'Section 7(a) of the rules promulgated by the Securities and Exchange Commission on February 28, 1967 provides for the determination of Philippine nationality in case of a corporation as follows: "Shares belonging to corporations x x x at least 60% of the capital which is owned by Filipino citizens shall be considered as of Philippine nationality. X X X."

This rule follows the control test in determining the Philippine nationality of a corporation owning shares in another corporation engaged in the exploration, development and utilization of natural resources in this country. It is sufficient under the rule that the subscribing corporation is owned to the extent of at least 60% of its capital stock by Filipino citizens, to be considered a Philippine national. This is consistent with the provision of the Constitution which states, among others, that the exploration, etc. of our natural resources (which shall be under the control and supervision of the State) shall be limited to Filipino citizens or to corporations or associations at least 60% of the capital stock of which belongs to Filipino citizens. (Art. XII, Sec. 2[par. 1] thereof.) The rule, however, is intended to apply only to corporations and associations subject to our laws and not to foreign corporations not licensed to do business in the Philippines. As regards such foreign entities, their shares of stock in a Philippine corporation engaged in the exploration, etc. of our natural resources will be regarded as belonging to Filipinos only to the extent of the interest that Filipino citizens own in the foreign company. Thus, if the foreign entity is owned to the extent of 60% of its capital by Filipino citizens and 40% by aliens, the ownership of its shares in the Philippine corporation will be allocated as follows: 60% Filipino and 40% alien, (see SEC Opinion, June 9,1973.)


782

Sec. 123

of shares entitled to vote and the membership in the board of directors. 8

(4) Purpose of 60% requirement. — The purpose is to ensure

that corporations and associations allowed to operate a public utility shall be controlled by Filipino citizens. It does not suffice to simply say that a corporation is a Filipino-owned if it is 60% owned by another corporation which, in turn, 60% Filipinoowned. It is imperative that beneficial ownership must ultimately be in the hands of Filipinos, any attempt to defeat the same shall be subject to sanctions imposed under applicable laws and rules and regulations. (SEC Opinion No. 07-20, Nov. 28, 2007.) (5) Determining board seats allowable for foreign investors. —

Under the Constitution, the allowable foreign investment in a public utility is only up to the extent of 40% of the outstanding capital stock and foreign participation in the governing body shall be limited to their proportionate share in the capital. (Art. XII, Sec. 11' thereof.) If, for example, the corporation's board of directors is composed of nine (9) members, foreign investors are entitled only to 40% of the nine (9) seats. By mathematical computation, 40% of nine (9) is 3.6 and 60% is 5.4.

"Under Article 7(13) of Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987, as amended by R.A. No. 7888, the Board of Investments (BOI) may recommend the suspension of the nationality requirement with respect to specified foreign investments, thus: "(13)To the extent that such activities are allowed by the Constitution and relevant laws, to recommend to the President of the Philippines, the suspension of the nationality requirement provided in this Code in cases of ASEAN projects, or investments by ASEAN nationals, regional ASEAN or multilateral financial institutions including their subsidiaries in preferred projects and/or projects allowed through either financial or technical assistance agreements entered into by the President, and in the case of regional complementation for the manufacture of a particular product which seeks to take advantage of economics of scale. For the purpose of this Act, a multilateral financial institution shall refer to a financial agency or entity, and its affiliates which satisfy the following qualifications: (1) The institution is either owned or controlled by member countries but does not possess any national identity; (2) The institution sources its funds from capital stock subscriptions and contributions by member countries; and (3) The primary responsibility of the institution is to provide funds for developmental purposes and international economic stability." This provision (see Note 1 to Sec. 140.) does not qualify whether the 60% ownership of capital shall be common or preferred, voting or non-voting.

Sec. 123


783

Under the accepted rule of rounding off numbers, the decimal figures to the right of a specified number of places are dropped after increasing the final remaining figure by one (1) if the first digit dropped is 5 or greater. (Third New Int. Diet., p. 1979 [1976].) Thus, applying the rule, 3.6 is considered 4 and 5.4 as only five. Accordingly, for purposes of computation, 40% of 9 is 4 and 60% is 5. (SEC Opinion, Oct. 14,1991.) A corporation organized under the laws of another State is a foreign corporation notwithstanding that 60% or even 100% of its capital stock is owned by Filipino citizens, (see Sec. 123.) (6) Determination of required Filipino interest in a corporation for purposes of land ownership. — Save in cases of hereditary

succession, private lands may be transferred to corporations provided they are "qualified to acquire or hold lands of the public domain." (Art. XII, Sec. 7 thereof.) Sections 22 and 23 of C. A. No. 141, otherwise known as the Public Land Act, "provide as to who are qualified to own private lands. With respect to corporations, it is required that at least 60% of the capital stock belongs to citizens of the Philippines," without qualifying whether the required ownership of "capital stock" are voting or non-voting. Hence, the criterion of "beneficial ownership" should be met, not merely the "control of the corporation." (SEC Opinion, Dec. 27,1995.) Under the Foreign Investment Act and its amended implementing rules and regulations, the term "Philippine national" includes a "corporation organized under the laws of the Philippines of which at least sixty percent (60%) of the capital state outstanding and entitled to vote is owned and held by citizens of the Philippines." Such a corporation is qualified to own land in the Philippines, or to acquire the entire capital of a Philippine corporation which owns lands in the Philippines. (SEC Opinion No. 09-09, April 28, 2009.) 10

A condominium corporation that owns the land on which the condominium project is situated is considered engaged in a partially nationalized activity, and, therefore, is covered by the "Anti-Dummy Law." Pursuant to Section 5 of the Condominium Act (R.A. No. 4726.), no transfer of a unit and of an undivided interest in the common areas shall be valid if the concomitant transfer of the appurtenant membership or stockholdings in the corporation will cause the alien interest in such corporation to exceed the 40% of its entire capital stock. (SEC Opinion No. 09-17, July 22, 2009.) 10

784


Sec. 124

If the foreign shareholdings of a foreign landholding corporation exceeds 40%, it is not the foreign stockholders' ownership of the shares which is adversely affected but the capacity of the corporation to own land — that is, the corporation becomes disqualified to own land. No law disqualifies a person from purchasing shares in a landholding corporation even if it will exceed the allowed foreign equity. What the law disqualifies is the corporation from owning land. (J.G. Summit Holdings, Inc. vs. Court of Appeals, 450 SCRA 169 [2005].) Sec. 124. Application to existing foreign corporations. — Every foreign corporation which on the date of the effect-ivity of this Code is authorized to do business in the Philippines under a license theretofore issued to it, shall continue to have such authority under the terms and conditions of its license, subject to the provisions of this Code and other special laws, (n)

Where license issued before effectivity of the Code. A foreign corporation authorized to transact business in the Philippines under a license issued pursuant to the Corporation Code shall be bound by the terms and conditions of such license and the provisions of the Code. If the license was issued before the effectivity of the Code, it "shall continue to have such authority under the terms and conditions of its license," but "subject to the provisions of this Code and other special laws." Thus, a foreign corporation is not required by the Code to obtain a new license to be able to continue transacting business in the Philippines. It should be noted that the present Code has expanded the definition of a foreign corporation to include the requirement that the laws of the foreign corporation "allow Filipino citizens and corporations to do business in its own State or country." (see Sec. 123.) Unless this requirement is satisfied, a foreign corporation cannot be licensed to transact business in the Philippines. But if, on the date of the effectivity of the Code, the foreign corporation is already authorized to do business here under a license theretofore issued to it, then, it may continue to

Sec. 125


785

have such authority even if the requirement of reciprocity is not met. However, under Section 148, it is given a period of not more than two (2) years from the effectivity of the Code within which to comply with the same. Sec. 125. Application for a license. — A foreign corporation applying for a license to transact business in the Philippines shall submit to the Securities and Exchange Commission a copy of its articles of incorporation and bylaws, certified in accordance with law, and their translation to an official language of the Philippines, if necessary. The application shall be under oath and shall specifically set forth the following, unless already stated in its articles of incorporation: 1.

The date and term of incorporation;

2. The address, including the street number, of the principal office of the corporation in the country or state of incorporation; 3. The name and address of its resident agent authorized to accept summons and process in all legal proceedings and, pending the establishment of a local office, all notices affecting the corporation; 4. The place in the Philippines where the corporation intends to operate; 5. The specific purpose or purposes of the corporation which it intends to pursue in the transaction of its business in the Philippines: Provided, That said purpose or purposes are those specifically stated in the certificate of authority issued by the appropriate government agency; 6. The names and addresses of the present directors and officers of the corporation; 7. A statement of its authorized capital stock and the aggregate number of shares which the corporation has authority to issue, itemized by classes, par value of shares, shares without par value, and series, if any; 8. A statement of its outstanding capital stock and the aggregate number of shares which the corporation has issued, itemized by classes, par value of shares, shares without par value, and series, if any;


786

9.

Sec. 126

A statement of the amount actually paid in; and

10. Such additional information as may be necessary or appropriate in order to enable the Securities and Exchange Commission to determine whether such corporation is entitled to a license to transact business in the Philippines, and to determine and assess the fees payable. Attached to the application for license shall be a duly executed certificate under oath by the authorized official or officials of the jurisdiction of its incorporation, attesting to the fact that the laws of the country or state of the applicant allow Filipino citizens and corporations to do business therein, and that the applicant is an existing corporation in good standing. If such certificate is in a foreign language, a translation thereof in English under oath of the translator shall be attached thereto. The application for a license to transact business in the Philippines shall likewise be accompanied by a statement under oath of the president or any other person authorized by the corporation, showing to the satisfaction of the Securities and Exchange Commission and other governmental agency in the proper cases that the applicant is solvent and in sound financial condition, and setting forth the assets and liabilities of the corporation as of the date not exceeding one (1) year immediately prior to the filing of the application. Foreign banking, financial and insurance corporations shall, in addition to the above requirements, comply with the provisions of existing laws applicable to them. In the case of all other foreign corporations, no application for license to transact business in the Philippines shall be accepted by the Securities and Exchange Commission without previous authority from the appropriate government agency, whenever required by law. (68a) Sec. 126. Issuance of a license. — Where the Securities and Exchange Commission is satisfied that the applicant has complied with all the requirements of this Code and other special laws, rules and regulations, the Commission shall issue a license to the applicant to transact business in the Philippines for the purpose or purposes specified in such license. Upon issuance of the license, such foreign corporation may commence to transact its business in the

Sec. 126


787

Philippines and continue to do so for as long as it retains its authority to act as a corporation under the laws of the country or state of its incorporation, unless such license is sooner surrendered, revoked, suspended or annulled in accordance with this Code or other special laws. Within sixty (60) days after the issuance of the license to transact business in the Philippines, the licensee, except a foreign banking or insurance corporation, shall deposit with the Securities and Exchange Commission for the benefit of present and future creditors of the licensee in the Philippines, securities satisfactory to the Securities and Exchange Commission, consisting of bonds or other evidence of indebtedness of the Government of the Philippines, its political subdivisions and instrumentalities, or of government-owned or -controlled corporations and entities, shares of stock in "registered enterprises" as this term is defined in Republic Act No. 5186, shares of stock in domestic corporations registered in the stock exchange, or shares of stock in domestic insurance companies and banks, or any combination of these kinds of securities, in the actual market value of at least one hundred thousand (P100,000.00) pesos: Provided, however, That within six (6) months after each fiscal year of the license, the Securities and Exchange Commission shall require the licensee to deposit additional securities equivalent in actual market value to two percent (2%) of the amount by which the licensee's gross income for that fiscal year exceeds five million (P5,000,000.00) pesos. The Securities and Exchange Commission shall also require deposit of additional securities if the actual market value of the securities on deposit has decreased by at least ten percent (10%) of their actual market value at the time they were deposited. The Securities and Exchange Commission may

"The Investments Incentives Act. This Act has been repealed by Presidential Decree No. 1789, the Omnibus Investments Code, which codified the Investments Incentives Act, Export Incentives Act (R.A. No. 6135, as amended.), Agricultural Investments incentives Decree (R.A. No. 1159, as amended.), and the Foreign Business Regulation Act. (R.A. No. 5455.) Executive Order No. 226 (July 1987) is the new Omnibus Investments Code. The Foreign Investments Act (R.A. No. 7042.), "an act to promote foreign investments, prescribing the procedures for registering enterprises doing business in the Philippines, and for other purposes," repealed Articles 44 to 56 of Book II (Foreign Investments Without Incentives) of Executive Order No. 226.

788


Sees. 127-128

at its discretion release part of the additional securities deposited with it if the gross income of the licensee has decreased, or if the actual market value of the total securities on deposit has increased by more than ten percent (10%) of the actual market value of the securities at the time they were deposited. The Securities and Exchange Commission may, from time to time, allow the licensee to substitute other securities for those already on deposit as long as the licensee is solvent. Such licensee shall be entitled to collect the interest or dividends on the securities deposited. In the event the licensee ceases to do business in the Philippines, the securities deposited as aforesaid shall be returned, upon the licensee's making application therefor and proving to the satisfaction of the Securities and Exchange Commission that the licensee has no liability to Philippine residents, including the Government of the Republic of the Philippines, (n) Sec. 127. Who may be a resident agent. — A resident agent may be either an individual residing in the Philippines or a domestic corporation lawfully transacting business in the Philippines: Provided, That in case of an individual, he must be of good moral character and of sound financial standing, (n) Sec. 128. Resident agent; service of process. — The Securities and Exchange Commission shall require as a condition precedent to the issuance of the license to transact business in the Philippines by any foreign corporation that such corporation file with the Securities and Exchange Commission a written power of attorney designating some person who must be a resident of the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against such corporation, and consenting that service upon such resident agent shall be admitted and held as valid as if served upon the duly authorized officers of the foreign corporation at its home office. Any such foreign corporation shall likewise execute and file with the Securities and Exchange Commission an agreement or stipulation, executed by the proper authorities of said corporation, in form and substance as follows: "The (name of foreign corporation) does hereby stipulate and agree, in consideration of its being

Sees. 125-128


789

granted by the Securities and Exchange Commission a license to transact business in the Philippines, that if at any time said corporation shall cease to transact business in the Philippines, or shall be without any resident agent in the Philippines on whom any summons or other legal processes may be served, then in any action or proceeding arising out of any business or transaction which occurred in the Philippines, service of any summons or other legal process may be made upon the Securities and Exchange Commission and that such service shall have the same force and effect as if made upon the duly authorized officers of the corporation at its home office." Whenever such service of summons or other process shall be made upon the Securities and Exchange Commission, it must, within ten (10) days thereafter, transmit by mail a copy of such summons or other legal process to the corporation at its home or principal office. The sending of such copy by the Commission shall be a necessary part of and shall complete such service. All expenses incurred by the Commission for such service shall be paid in advance by the party at whose instance the service is made. In case of a change of address of the resident agent, it shall be his or its duty to immediately notify in writing the Securities and Exchange Commission of the new address. (72a; and n) Application for and issuance of license.

A foreign corporation" applying for a license to transact business in the Philippines must comply with the following requirements and conditions precedent to the issuance of the license by the Securities and Exchange Commission: (1) Submission of required documents. — It shall submit to

the Securities and Exchange Commission a certified copy of its articles of incorporation, with a translation to an official language of the Philippines, if necessary, and the application for a license which shall be under oath and shall specifically set forth the "It includes corporations incorporated abroad owned or controlled by Filipinos. (SEC Opinion, March 26, 1963.)


790

Sees. 125-128

matters enumerated by law, unless already stated in its articles of incorporation (Sec. 125, par. 1.); (2) Accompanying documents to application. — The application

shall be accompanied by the following: (a) A duly executed certificate under oath by the authorized official or officials of the jurisdiction of its incorporation, attesting to the fact that the laws of the country or State of the applicant allow Filipino citizens and corporations to do business therein and the applicant is an existing corporation of good standing, with a translation of the certificate in English under oath of the translator if it is in a foreign language (ibid., par. 2.); (b) A sworn statement of the president or any authorized officer of the corporation, showing to the satisfaction of the Securities and Exchange Commission and other government agency in proper cases that the applicant is solvent and in sound financial condition and setting forth its assets and liabilities for the previous year (Ibid., par. 3.); (c) A certificate of authority from the appropriate government authority, whenever required by law (Ibid., last par.; Sec. 123.); and (d) A written power of attorney designating a resident agent on whom summons and other legal processes against the corporation may be served and a written agreement or stipulation consenting that such service may be made upon the Securities and Exchange Commission if at any time it shall cease to transact business in the Philippines, or shall be without any resident agent." (Sees. 127,128.) Under the Rules and Regulations implementing R.A. No. 7042, a foreign corporation is required to submit the following documents to secure a license to do business: (1) Name verification slip; (2) Certified copy of board resolution authorizing the establishment of an office in the Philippines; designating the resident agent to whom summons and other legal processes may be served in behalf of the foreign corporation; and stipulating that in the absence of such agent or upon cessation of its business in the Philippines, the SEC shall receive any summons or legal processes as if the same is made upon the corporation at its home office; 12

(3) Financial statements for the immediately preceding year at the time of filing of the application, certified by an independent certified public accountant of the home country;

Sees. 125-128


791

(3) Compliance with provisions of special laws. — Foreign bank-

ing, financial and insurance corporations shall, in addition to the above requirements, comply with the provisions of existing laws applicable to them (Sec. 125, last par.); and (4) Issuance of license to transact business. — If the applicant

shows to the satisfaction of the Securities and Exchange Commission that it has complied with the above requirements of the Code and those imposed by other special laws, rules and regulations, the Commission shall issue a license authorizing it to transact business in the Philippines for the purpose or purposes specified therein. (Sec. 126, par. 1.) 13

Conditions subsequent to issuance of license. Upon the issuance of the license, the foreign corporation may (4) Certified copies of the articles of incorporation/partnership with an English translation thereof if in a foreign language; (5) Proof of inward remittance such as bank certificate of inward remittance of credit advises; and (6) Other documents which the SEC may require, such as those for the issuance by the SEC of a license to transact business in the Philippines. For representative offices, the amount remitted initially should be at least US$30,000. If the paid-in equity/capital is in kind, additional requirements shall be submitted to the SEC pursuant to its existing rules and regulations. All documents executed abroad should be authenticated by the Philippine Embassy or Consular Office. In the case of an existing corporation intending to increase foreign equity participation, all documents required of the proposed transaction under applicable laws, rules and regulations shall be submitted. Upon fulfillment of all SEC requirements and favorable evaluation by the SEC, the Certificate of Registration for domestic corporations and partnerships, or license to do business in the case of a foreign corporation, shall be issued by the SEC. In case of disapproval, the SEC shall inform the applicant in writing of the reasons for the disapproval of the registration. Within fifteen (15) working days from official acceptance of the application, the SEC shall act on the same. Otherwise, the application shall be considered as automatically approved if it is not acted upon within said period for a cause not attributable to the applicant. (Sees. 2, 3 thereof.) "Registration of a foreign corporation with the Securities and Exchange Commission requires that the same is doing business in the Philippines; hence, a firm name belonging to a foreign corporation cannot be registered here just for the sole purpose of precluding the possibility of any group capitalizing on said firm name in the Philippines. (SEC Opinion, Oct. 7, 1974; see Sec. 2, R.A. No. 166 [Trademark Law].) The Commission may exempt foreign corporations from its licensing requirements upon appropriate application for exemption to promote equity, justice, and national interest. Thus, it may determine on a case-to-case basis whether a particular act or limited undertaking of a foreign corporation constitutes an act of doing or transacting business in the Philippines. (SEC Opinion, May 25, 1982.)

792


Sees. 125-128

commence to transact its business in the Philippines and continue to do so for so long as it retains the authority to act as a corporation under the laws of the State of its incorporation, unless such license is sooner surrendered, revoked, suspended or annulled in accordance with the Code or other special laws. (Ibid.) (1) The foreign corporation shall transact business only for the purpose or purposes for which it is authorized under its license (Ibid.); (2) Within 60 days after the issuance of the license, the licensee, except a foreign banking or insurance corporation (which shall be governed by the pertinent law), shall deposit with the Securities and Exchange Commission for the benefit of present and future creditors in the Philippines satisfactory securities in the actual market value of at least P100,000. (Ibid., par. 2.) The deposit requirement is also a means of compelling foreign firms to invest in or buy Philippine securities; 14

(3) Within six (6) months after each fiscal year of the license, it shall deposit additional securities equivalent in actual market value to 2% of the amount by which the licensee's gross income for that fiscal year exceeds P5 million. Such deposit shall be increased if the actual market value of the securities has decreased by at least 10% of such value at the time they were deposited (Ibid.); and

(4) It must comply with the provisions of existing laws, rules and regulations; otherwise, its license may be revoked, suspended, or annulled by the Securities and Exchange Commission, (see Sec. 134.) Licensing of Regional or Area Headquarters. As defined in R.A. No. 8756, a multinational company means a foreign company or a group of foreign companies with business establishments in two or more countries. (Sec. 2[2] thereof.) "Under the guidelines issued by the SEC on April 23, 1982, the following firms are exempted from the investment requirement: (1) Foreign banks, including offshore banking units; (2) foreign insurance corporations; (3) foreign non-stock corporations; (4) foreign corporations with representative offices here; and (5) regional or area headquarters of multinational companies registered under Presidential Decree No. 218.

Sees. 125-128


793

Regional or Area Headquarters (RHQs) means an office whose

purpose is to act as an administrative branch of a multinational company engaged in international trade which principally serves as a supervision, communications and coordination center for its subsidiaries, branches or affiliates in the Asia-Pacific Region and other foreign markets and which does not earn or derive income in the Philippines. (Sec. 2[2] thereof.) (1) Qualification. — Any foreign business entity formed, organized and existing under any laws other than those of the Philippines whose purpose, as expressed in its organizational documents or by resolution of its Board of Directors or its equivalent, is to supervise, superintend, inspect or coordinate its own affiliates, subsidiaries or branches in the Asia-Pacific Region and other foreign markets may establish a regional or area headquarters in the Philippines, by securing a license therefor from the Securities and Exchange Commission, upon the favorable recommendation of the Board of Investments. (2) Minimum

requirements.

—

The

following

minimum

requirements shall, however, be complied with by the said foreign entity: (a) A certification from the Philippine Consulate/ Embassy, or a duly authenticated certification from the Department of Trade and Industry or its equivalent in the foreign firm's home country that said foreign firm is an entity engaged in international trade with affiliates, subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets. (b) A duly authenticated certification from the principal officer of the foreign entity to the effect that the said foreign entity has been authorized by its Board of Directors or governing body to establish its regional or area headquarters in the Philippines, specifying that: 1) The activities of the regional or area headquarters shall be limited to acting as a supervisory, communications and coordinating center for its subsidiaries, affiliates and branches in the region; 2) The regional or area headquarters will not derive any income from sources within the Philippines and will

794


Sees. 125-128

not participate in any manner in the management of any subsidiary or branch office it might have in the Philippines nor shall it solicit or market goods and services whether on behalf of its mother company or its branches, affiliates, subsidiaries or any other company; and 3) The regional or area headquarters shall notify the Board of Investments and the Commission of any decision to close down or suspend operations of its headquarters at least 15 days before the same is effected. (c) An undertaking that the multinational company will remit into the country such amount as may be necessary to cover its operations in the Philippines but which amount will not be less than $50,000.00 or its equivalent in other foreign currencies annually. Within 30 days from receipt of certificate of registration from the Commission, the multinational company will submit to the Commission a certificate of inward remittance from a local bank showing that it has remitted to the Philippines the amount of at least $50,000.00 or its equivalent in other foreign currencies and converted the same to Philippine currency. Annually, within 30 days from the anniversary date of the multinational company's registration as a regional or area headquarters with the Commission, it will submit proof to the Commission of inward remittance amounting to at least $50,000.00 or its equivalent in other foreign currencies during the past year. (d) Any violation by the regional or area headquarters of a multinational company of any of the provisions of the Omnibus Investments Code, or its implementing rules and regulations, or other terms and conditions of its registration, or any provision of existing laws, shall constitute a sufficient cause for the cancellation of its license or registration." (Sec. 58, Omnibus Investments Code of 1987 [Exec. Order No. 226], as amended by R.A. No. 8756.) Licensing of Regional Operating Headquarters. As defined by R.A. No. 8756, a Regional Operating Headquarters (ROHQs) means a foreign business entity which is allowed to derive income in the Philippines by performing qualifying

Sees. 125-128


795

services to its affiliates, subsidiaries or branches in the Philippines, in the Asia-Pacific Region and in other foreign markets (Sec. 2[3], thereof.) (1) Qualification. — Any foreign business entity formed, organized and existing under any laws other than those of the Philippines may establish a regional operating headquarters in the Philippines to service its own affiliates, subsidiaries or branches in the Philippines, in the Asia-Pacific Region and other foreign markets. ROHQs will be allowed to derive income by performing the qualifying services enumerated under (b), 1, infra. ROHQs of non-banking and non-financial institutions are required to secure a license from the Securities and Exchange Commission, upon the favorable recommendation of the Board of Investments. ROHQs of banking and financial institutions, on the other hand, are required to secure licenses from the Commission and the Bangko Sentral ng Pilipinas, upon the favorable recommendation of the Board of Investments. (2) Minimum

requirements.

—

The

following

minimum

requirements shall be complied with by the said foreign entity: (a) A certification from the Philippine Consulate/Embassy, or a duly authenticated certification from the Department of Trade and Industry or its equivalent in the foreign firm's home country that said foreign firm is an entity engaged in international trade with affiliates, subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets. (b) A duly authenticated certification from the principal officer of the foreign entity to the effect that the said foreign entity has been authorized by its Board of Directors or governing body to establish its regional operating headquarters in the Philippines, specifying that: 1) The regional operating headquarters may engage in any of the following qualifying services: a) General administration and planning; b) Business planning and coordination; c) Sourcing/procurement of raw materials and components;

796


Sees. 125-128

d) Corporate finance advisory services; e) Marketing control and sales promotion; f) Training and personnel management; g) Logistics services; h) Research and development services, and product development; i)

Technical support and maintenance;

j)

Data processing and communication; and

k) Business development. ROHQs are prohibited from offering qualifying services to entities other than their affiliates, branches or subsidiaries, as declared in their registration with the Commission nor shall they be allowed to directly and indirectly solicit or market goods and services whether on behalf of their mother company, branches, affiliates, subsidiaries or any other company. 2) The regional operating headquarters shall notify the Board of Investments, the Securities and Exchange Commission and the Bangko Sentral ng Pilipinas, as the

case may be, of any decision to close down or suspend operations of its headquarters at least 15 days before the same is effected. (c) An undertaking that the multinational company will initially remit into the country such amount as may be necessary to cover its operations in the Philippines but which amount will not be less than $200,000.00 or its equivalent in other foreign currencies. Within 30 days from receipt of certificate of registration, the multinational company will submit to the Commission a certificate of inward remittance from a local bank showing that it has remitted to the Philippines the amount of at least US $200,000.00 or its equivalent in other foreign currencies and converted the same to the Philippine currency. (d) Any violation by the regional operating headquarters of a multinational company of the provisions of the Omnibus

Sees. 125-128


797

Investment Code, or its implementing rules and regulations, or other terms and conditions of its registration, or any provision of existing laws, shall constitute a sufficient cause for the cancellation of its license or registration.'" (Sec. 59, Omnibus Investments Code of 1987 [Exec. Order No. 226], as amended by R.A. No. 8756.) R e s i d e n t agent.

The resident agent is an individual who must be of good moral character and of sound financial standing, residing in the Philippines, or a domestic corporation lawfully transacting business in the Philippines (Sec. 127.), designated in a written power of attorney, by a foreign corporation authorized to transact business in the Philippines, "on whom any summons and other legal processes may be served in all actions or other legal proceedings against such corporation." (1) Function of resident agent. — The only function of a resi-

dent agent is to receive in behalf of a foreign corporation notices, summons and other legal processes in connection with actions against such corporation. He has no control over the assets of the corporation. The service of any such papers on such resident agent has the same force and effect as if made upon the duly authorized officers of the foreign corporation at its home office. (Sec. 128, par. 1.) Such agent, as a representative of the foreign corporation, is tasked only to receive legal processes on behalf of its principal and not to answer personally for any claim against the foreign corporation. Being a mere agent and representative, he is not the real party-in-interest in an action by or against his principal. (Smith Bell & Co., Inc. vs. Court of Appeals, 267 SCRA 530 [1997].) 15

The resident agent is not specifically authorized to execute a certificate of non-forum shopping as required by Section 5, Rule 7 of the Rules of Court. This is because while a resident agent may be aware of actions filed against his principal, he may not be aware of actions initiated by his principal, whether in the Philippines against a domestic corporation or private individual, or in the country where such corporation was organized and registered against a Philippine registered corporation or a Filipino citizen. (Expertravel & Tours, Inc. vs. Court of Appeals, 459 SCRA 147 [2005].) 15

798


Sees. 125-128

(2) Modes of service of summons and notices. — Under Section

12, Rule 14 of the Rules of Court on the manner of acquiring jurisdiction upon a foreign private juridical entity, service may be made on the foreign corporation's "resident agent designated in accordance with law for that purpose, or, if there be no such agent, on the government official designated by law to that effect, or on any of its officers or agents within the Philippines." Where the foreign corporation has designated a resident agent to receive service of summons and other notices affecting it, that designation is exclusive and service is without force and effect unless made upon him. The two other modes of service are allowed only when the foreign corporation has neglected or refused to designate such agent. (Poizat vs. Morgan, 28 Phil. 597 [1914]; H.B. Zachry Co. International vs. Court of Appeals, 232 SCRA 329 [1994].) It is immaterial whether the "agent" be general or special. As such, it does not necessarily connote an officer of the corporation. (Pabon vs. National Labor Relations Commission, 296 SCRA 7 [1998]; Aboitiz International Forwarders, Inc. vs. Court of Appeals, 488 SCRA 492 [2006].) Where the complaint alleges that the foreign corporation has an agent in the Philippines, summons can validly be served thereto even without prior evidence of the truth of such factual allegation. (Signetics Corporation vs. Court of Appeals, 225 SCRA 737 [1993].) As used in Section 12, the term "agent" refers to its general meaning, i.e., one who acts in behalf of the principal. (Signetics Corporation vs. Court of Appeals, 225 SCRA 737 [1993].) (3) Suit and judgment against foreign corporation. — Service

upon any agent of a foreign corporation, whether or not engaged in business in the Philippines, constitutes personal service upon the corporation and, accordingly, judgment may be rendered against said foreign corporation. Indeed, if a foreign corporation not engaged in business in the Philippines is not barred from seeking redress from courts in the Philippines, a fortiori, that same corporation cannot claim exemption from being sued in Philippine courts for acts done against a person or persons in the Philippines. (Facilities Management Corp. vs. De la Rosa, 89 SCRA 131 [1979]; Royale Crown Internationale vs. National Labor Relations Commission, 178 SCRA 569 [1989].)

Sees. 125-128


799

(4) Replacement of resident agent. — In the replacement of

a resident agent, the Securities and Exchange Commission requires the submission of a duly authenticated copy of the board resolution or a certification from the authorized officer of the company formally revoking his appointment as a resident agent of the corporation, accompanied by a duly authenticated written power of attorney designating the substitute or the new resident agent. The appointment of a resident agent of a foreign corporation is revocable at any time at the instance of the corporation. (SEC Opinion, Sept. 4,1990.) (5) Establishing fact of doing business. — For purposes of ac-

quiring jurisdiction by way of service of summons, it is not required that the fact of doing business in the Philippines must first be proved. It is sufficient that such fact is established by appropriate private allegations in the complaint. If in fact a foreign corporation does not do business here, that is a matter that should be ventilated in the trial on the merits, but not in a motion to dismiss. (Signetics Corporation vs. Court of Appeals, supra.) P u r p o s e of law in requiring license.

The object of the statute in requiring that foreign corporations doing business in the Philippines be licensed to do so and that they appoint an agent for service of process is to subject the foreign corporation doing business in the Philippines to the jurisdiction of its courts. It is not to prevent the foreign corporation from 16

Our laws and jurisprudence indicate a purpose to assimilate foreign corporations, duly licensed to do business in the Philippines to the status of domestic corporation. Courts have held that a domestic corporation is regarded as having a residence within the State where it is engaged in the particulars of the corporate enterprise, and not only at its chief place or home office. In other words, a corporation may have a residence (i.e., the place where it operates and transacts business) separate from its domicile (i.e., the State of its formation or organization). It is not really the grant of a license to a foreign corporation to do business in the Philippines that makes it a resident; the license merely gives legitimacy to its doing business here. What effectively makes such a foreign corporation a resident corporation in the Philippines is its actually being in the Philippines doing business here, "locality of existence" being the "necessary element in x x x (the) signification" of the term "resident foreign corporation." Thus, the National Internal Revenue Code (P.D. No. 1158, as amended.) declares that the term "resident foreign corporation" applies to a foreign corporation engaged in trade or business within the Philippines. (Sec. 22[h, I] thereof.) The Offshore Banking Law (Pres. Decree No. 1034.) states that "branches, subsidiaries, affiliates, extension offices I6

800


Sees. 125-128

performing single or isolated acts, but to bar it from acquiring a domicile for the purpose of business without taking steps necessary to render it amenable to suit in the local courts. (Marshall-Wells Co. vs. Elser & Co., 46 Phil. 71 [1924].) In other words, what the law seeks to prevent is a foreign corporation doing business in the Philippines without a license from gaining access to Philippine courts. (Hang Lung Bank, Ltd. vs. Saulog, 201 SCRA 137 [1991].) It was never the purpose of the legislature to exclude a foreign corporation which happens to obtain an isolated order for business from the Philippines, and thus, in effect, to permit persons to avoid their contracts made with such foreign corporation. (Marshall vs. Elser & Co., supra.) The requirement enables our government to exercise jurisdiction over foreign corporations doing business in the Philippines for the regulation of their activities in the country. By securing a license, a foreign corporation gives assurance that it will abide by the decisions of our courts, even if adverse to it. (Eriks Pte., Ltd. vs. Court of Appeals, 267 SCRA 567 [1997].) The law, however, "must be given a reasonable, not an unduly harsh interpretation which does not hamper the development of trade relations and which fosters friendly commercial intercourse among countries" (Home Insurance Co. vs. Eastern Shipping Lines, 123 SCRA 424 [1983].) consistently with the need to enforce our laws that regulate the conduct of foreigners who desire to do business in our country. (Eriks Pte., Ltd. vs. Court of Appeals, 267 SCRA 567 [1997].)

or any other units of a corporation or juridical person organized under the laws of any foreign country operating in the Philippines shall be considered residents of the Philippines." (Sec. l[e] thereof.) The General Banking Act (R.A. No. 337, as amended.) places "branches and agencies in the Philippines of foreign banks x x (which are) called Philippine branches in the same category as commercial banks, savings associations, savings and mortgage banks, development banks, rural banks, x x x" (which have been formed and organized under Philippine laws). The Supreme Court itself has held that a foreign corporation liedtly doing business in the Philippines, which is a defendant in a civil suit, may not be considered a "nonresident" within the scope of the legal provision authorizing attachment against a defendant "not residing in the Philippines." (State Investment House, Inc. vs. Citibank, N.A., 203 SCRA 9 |1991].)

Sees. 125-128


801

It must be emphasized that a foreign corporation doing business in the Philippines with or without a license is subject to process and jurisdiction of the local courts (Marubeni Nedeland B.V. vs. Tensuan, 190 SCRA 105 [1990].), and if it is not doing business, a license is not required. Meaning of "transacting business." (1) Circumstances of each case. — No general rule or governing principle can be laid down as to what constitutes "doing" or "engaging" or "transacting" business. Indeed, the accepted rule in jurisprudence is that each case must be judged in the light of its peculiar environmental circumstances, considering the purposes and the language of the statute or statutes applicable. This is essentially a question of fact. The true test, however, seems to be whether the foreign corporation is continuing the body or substance of the business or enterprise for which it was organized or whether it has substantially retired from it and turned it over to another." (Mentholatum Co., Inc. vs. Mangalman, 72 Phil. 524 [1941].) "All the combined acts of the foreign corporation in the state must be considered, and every circumstance is material which indicates a purpose on the part of the corporation to engage in some part of its regular business." (Pacific Micronesian Line, Inc. vs. Del Rosario, 96 Phil. 23 [1954]; 17 Fletcher, pp. 465-466.) The expression should not be given such a strict and literal construction as to make it apply to any corporate dealing whatever. (MR Holdings, Ltd. vs. Bajar, 380 SCRA 617 [2002].) (2) Continuous business acts or transactions. — It should ap-

pear that the corporation and its officers intended to establish a continuous business, such as the appointment of a local agent, and not one of the temporary character. (Marshall-Wells Co. vs. Elser & Co., 46 Phil. 70 [1924]; see Far East Int'l. Import & Export Corp. vs. Nankai Kogyo Co., Ltd., 6 SCRA 725 [1962].) Transactions which are occasional, incidental, and casual — not of a character to indicate a purpose to engage in business — do not constitute the doing or engaging in business contemplated by law. (Lorenzo Shipping Corp. vs. Chubb and Sons, Inc., 431 SCRA 266 [2004].) The term "doing business" implies continuity of conduct by the foreign corporation in that respect, such as the investment


802

Sees. 125-128

of capital and the maintenance of an office for the transaction of business with those incidental circumstances which attest to the corporate intention to avail itself of the privilege of doing business. (Perm. Collieries Co. vs. Mokeover, 183 N.Y. 98.) (a) Thus, where FC, a foreign corporation which habitually imports garments from the Philippines, sends its order to DC,

a commercial broker duly incorporated under the laws of the Philippines, which, for a fee, looks for a local manufacturer, say M, and if M agrees to produce the goods in accordance with the specification of FC, DC then cables FC for confirmation of the order, after which the finished products are sent directly by M to FC, FC must be regarded as doing business within the Philippines and, therefore, should obtain a license from the Securities and Exchange Commission pursuant to Section 68 (now Sees. 125, 126.) of the Corporation Law as well as Republic Act No. 5455. (infra.) (SEC Opinion, Nov. 6, 1975.) (b) Similarly, in a case, a foreign corporation with an "exclusive distributing agent in the Philippines" and which had been selling its products here, was held to be doing business

in the Philippines. (Mentholatum Co., Inc. vs. Mangalman, supra.)

(c) Likewise, where a foreign insurance corporation engages in regular marine insurance business here by issuing twelve (12) marine insurance policies abroad to cover different

foreign shipments to the Philippines, said policies being made payable here, and said insurance company appoints and keeps an agent here to receive and settle claims, said foreign corporation was regarded as doing business here. (General Corp. of the Phils, vs. Union Society of Canton, Ltd., 87 Phil. 313 [1950].) It has also been held that a foreign corporation which sold its products 16 times over a five-month

period to the same Filipino buyer without first obtaining a license was prohibited from maintaining an action to collect payment therefor in Philippine courts. (Eriks Pte., Ltd. vs. Court of Appeals, 267 SCRA 567 [1997].) (d) In another case, a foreign corporation which had been collecting premiums on its outstanding policies, incurring the

Sees. 125-128


803

risks and /or enjoying the benefits consequent thereto was held to be transacting business within the meaning of the law. (Manufacturers Life Ins. Co. vs. Meer, 89 Phil. 351 [1951].) But the mere issuance abroad by a foreign corporation of marine insurance policies to cover international-bound cargoes shipped by a Philippine carrier and the payment of the claims of consignees do not constitute doing business in the Philippines by an unlicensed foreign corporation. (Universal Shipping Lines, Inc. vs. Intermediate Appellate Court, 188 SCRA 170 [1990]; see Aetna Casualty & Surety Co. vs. Pacific Star Line, 80 SCRA 635 [1977].) (e) Similarly, a foreign corporation engaged in the business of manufacturing and selling computers worldwide, which had installed at least 26 different products in several

corporations in the Philippines since 1976, registered its name with the Philippine Patents Office, allowed its registered logo and trademark to be used and made it known that there exists a designated distributor in the Philippines as published in its advertisements, its controller in Asia having visited the office of its distributor for at least four times where it conducted training programs in the Philippines, cannot unilaterally declare that it is not doing business in the Philippines. (Wang Laboratories, Inc. vs. Mendoza, 156 SCRA 44 [1987].) (f) Foreign airline companies which sell tickets in the Philippines through their local agents, whether called

liaison offices, agencies or branches, are considered under the National Internal Revenue Code as resident foreign corporations engaged in trade or business in the Philippines. Such activities show continuity of commercial dealings or arrangements and performance of acts or works or the exercise of some functions normally incident to and in progressive prosecution of commercial gain or for the purpose and object of the business organization. (Comm. of Internal Revenue vs. American Airlines, Inc., 180 SCRA 274 [1989].) Indeed, the sale of tickets is the very lifeblood of the airline business, the generation of sales being the paramount object. (Comm. of Internal Revenue vs. Japan Airlines, Inc., 202 SCRA 450 [1991]; Comm. of Internal Revenue vs. British Overseas Airways Corp., 140 SCRA 395 [1987].)


804

Sees. 125-128

(g) Where a foreign corporation has been continuously, for several years, acting as a supervision, communications, and coordination center for its home office's affiliates and in the pro-

cess has named its local agent and has employed Philippine nationals as sales representatives, it is clear from this uninterrupted performance by the foreign corporation of acts pursuant to its primary purposes and functions as a regional/area headquarters for its home office that it is doing business in the Philippines. (Georg Grotjahn GMBH & Co. vs. Isnani, 235 SCRA 216 [1994].) (3) Isolated business acts or transactions. — Where a foreign

corporation has not engaged in its general business in the State, but had done only those acts which are preliminary to the doing of the business for which it was incorporated, such acts will not be regarded as the doing of business in the State. (17 Fletcher, p. 476.) The authorities are to the effect that where the corporation enters into a single agreement, or engaged in some other isolated or casual business act or transaction within a particular State, with no intention to repeat the same or make such State a basis for the conduct of any part of its corporate business, such corporation cannot be said to be doing business or transacting business within the State, within the meaning of the usual statutory provisions regulating the transaction of business by foreign corporations. (17 Fletcher, p. 478; see MR Holdings Ltd. vs. Bajar, supra.)

(a) Thus, where the only acts performed in the Philippines by a foreign corporation were the negotiations and signing of two agreements, to wit: one, for the sale to a domestic corporation of a veneer plant, and the other, for the exclusive right to purchase all core veneer that the domestic corporation would produce for a period of five (5) years, as to which neither of the parties has as yet commenced performance of their respective obligations thereunder — there have been no payments, no shipments, nor deliveries made under the contracts — and the foreign corporation has no branch office in the Philippines, but for purposes of said contracts was represented by its president who was a transient visitor, it cannot

Sees. 125-128


805

be said that the mere entering into said contracts can by itself be considered as transacting business in the Philippines for which a license is necessary. (SEC Opinion, Feb. 15,1963.) (b) Also, engaging the services of a cook, not as part of the

operation of the business of the foreign corporation but merely to employ as member of the crew in one of its ships (Pacific Micronesian Lines, Inc. vs. Del Rosario, supra.), obtaining an isolated order for business in the Philippines (Marshall-Wells Co. vs. Elser & Co., supra.), and carrying cargo to and from the Philippine ports on only two occasions (Eastboard Navigation,

Ltd. vs. Ysmael & Co., 102 Phil. 1 [1957].), were held not to constitute "transacting" business within the meaning of the rule. (c) The acts of a foreign shipping corporation which did not have a branch office in the Philippines in making only two calls on the Philippines to load cargoes for foreign destination on

two occasions in 1963 and 1964, and collecting freight fees on these transactions were held as a casual business activity not amounting to engaging in trade or business in the Philippines for income tax purposes. (N.V. Reedery vs. Comm. of Internal Revenue, 162 SCRA 487 [1988].) (d) Where the only act done by the foreign corporation was to employ a Filipino as a member of the crew on one of its ships,

it was held that the act was an isolated, incidental, or casual transaction, not sufficient to indicate a purpose to engage in business. (Pacific Micronesian Lines, Inc. vs. Del Rosario, 96 Phil. 23 [1954].) (e) The mere act of signing a loan agreement in Manila cover-

ing a $100 million loan of the Central Bank to be extended by foreign banks where such signing is merely a preliminary act of the parties for the loan itself and the delivery of funds will be consummated abroad cannot also be considered as indicating a purpose to engage in business as would necessitate the licensing of foreign lenders in accordance with Philippine laws. (SEC Opinion, Oct. 7,1981.) However, the real estate mortgage agreement, the mortgagee being a foreign corporation, is subject to the provisions of R.A. No. 133 (as amended by R.A. Nos. 4381 and 4882.) im-

806


Sees. 125-128

posing certain restrictions upon the mortgagee or his successor-in-interest, if disqualified to acquire or hold lands of the public domain in the Philippines, by forbidding him to take possession of the mortgaged property during the existence of the mortgage; neither is possession allowed after default of the mortgagor except for the sole purpose of foreclosure, receivership, enforcement of other proceedings and in no case for a period of more than five (5) years from the actual possession and such alien mortgagee cannot participate in the bidding nor take part in any sale of such real property in case of foreclosure. (SEC Opinion, March 29, 1995, citing Pena, Registration of Land Titles and Deeds, 1982 Rev. Ed.) (f) Where a foreign corporation entered into an agreement to buy tons of crude coconut oil from a local corporation but the latter failed to make the delivery, resulting in losses to the foreign corporation which had to cover its oil needs in the open market at a price substantially in excess of the contract, and in order to recover its losses, it entered into two other transactions with the same local entity, said foreign corporation did not do business within the meaning of the law, because there was in reality only one agreement, for the three seemingly different conditions were entered into only in an effort to enable the seller to fulfill the basic agreement and in no

way indicated an intent on the part of the foreign corporation to engage in a continuity of transactions in the Philippines. (Antam Consolidated, Inc. vs. Court of Appeals, 143 SCRA 288 [1986].) (g) A view subscribed by many authorities is that mere ownership by a foreign corporation of a property in a certain state, unaccompanied by its active use in furtherance of the business for which it was formed, is insufficient in itself to constitute doing business. Thus, a foreign corporation which becomes the assignee of mining properties, facilities and equipment cannot automatically be considered as doing business, nor presumed to have the intention engaging in mining business. (MR Holdings, Ltd. vs. Bajar, 380 SCRA 617 [2002].) (h) A foreign corporation which will take part in a joint venture project for an activity which will be done only once

Sees. 125-128


807

and not continually (although the project will be 910 days) is considered as engaged in an isolated transaction for which it need not register with the SEC. (SEC Opinion No. 04-34, June 8, 2004.) (4) Single act or transaction

in pursuance of corporations

ordinary business. — It is not really the fact that there is only a single act done that is material. The other circumstances of the case must be considered. A single act or isolated business transaction may bring the corporation within the purview of the statute where it is an act of the ordinary or customary business of the corporation. In such a case, the single act or transaction is not merely incidental, casual, sporadic, occasional, or isolated but is of such character as distinctly to indicate a purpose on the part of the foreign corporation to do other business in the State, and to make the State a base of operations for the conduct of the corporation's ordinary business, (see General Corp. of the Phils, vs. Union Society of Canton, Ltd., supra; Wang Laboratories, Inc. vs. Mendoza, supra.)

It is the performance by the foreign corporation of the act or acts for which it was created, the frequency or the amount or volume of the business being immaterial, that determines whether it is required to secure a license or not. (see Granger Associates vs. Microwave Systems, Inc., 189 SCRA 631 [1990].) Whether a foreign corporation is engaged in business does not necessarily depend upon the number and quantity of its transactions although they are evidence of such intention, but more upon the nature and character of the transaction, (see Eriks Pte., Ltd. vs. Court of Appeals, 267 SCRA 567 [1997].) (a) Accordingly, the act of defendant foreign corporation in purchasing 7,770 dozens of soccer uniforms from a domestic corporation and opening an irrevocable letter of credit in favor

of the latter, was held to be within the ordinary course of business of the company considering that it was engaged in the manufacture of uniforms, being of such a character as to indicate a purpose to do business. (Litton Mills, Inc. vs. Court of Appeals, 256 SCRA 696 [1996].) (b) In a case involving an action against a Japanese corporation which entered into a contract with the plaintiff to

808


Sees. 125-128

import scrap iron from the Philippines, it appearing that the corporation rented an office and sent no less than one of its officers to the Philippines "to look into the operation of mines, thereby

revealing the defendant's desire to continue engaging in business here, after receiving the shipment of scrap iron under consideration, making the Philippines a base of operations," the court ruled that from the facts the corporation was doing business in the Philippines. (Far East IntT. Import & Export Corp. vs. Nankai Kogyo Co., Ltd., supra.) (c) And if the corporation is doing that for which it was cre-

ated, the amount or volume of the business done is immaterial and a single act of that character may constitute doing business. (17 Fletcher, p. 474.) Thus, where X, a foreign corporation, which is primarily an engineering consulting firm, has entered into a contract with the National Waterworks and Sewerage Authority (NAWASA) for the purpose of rendering services for a period of three (3) years as technical consultant in engineering, during the construction of interim projects of the NAWASA for the improvement of Manila's water supply, and during the effectivity of the contract, X will send to the Philippines not more than eight (8) technical men to advise the NAWASA in the supervision of construction work, X, as engineering consultant, will be transacting that business in the Philippines for which it was organized, although under a single contract, for which a license is necessary under Sections 125 and 126. It is immaterial that X has no intention of entering into other contracts in the Philippines. (SEC Opinion, Jan. 19,1965; see SEC Opinion, Feb. 20,1976.) (d) Similarly, a foreign corporation was considered as doing business in the Philippines for having entered into a contract with a Philippine corporation for the manufacture and distribution of the formers welding products and equipment, as

said foreign corporation was carrying out the purposes for which it was created, i.e., the manufacture and marketing of said products, with the terms and conditions of the contract indicating that it established within the country a continuous business, and not merely one of temporary character, which fact was even more strengthened by its admission that it was negotiating with another group for the transfer of the dis-

Sees. 125-128


809

tributorship and franchising rights from said Philippine corporation. (Top-Weld Manufacturing, Inc. vs. ECED, S.A., 138 SCRA 118 [1985]; see Communication Materials and Design, Inc. vs. Court of Appeals, 260 SCRA 673 [1996]; Merill Lynch Futures, Inc. vs. Court of Appeals, 211 SCRA 824 [1992].) (e) The act of appointing representatives or distributors, operating under the full control of the foreign corporation, domiciled in the Philippines, or who, in any calendar year, stay in the country for a period or periods totalling 180 days or more, is an act of doing business. (Sec. 3[d], R.A. No. 7042 [The Foreign Investments Act], as amended; SEC Opinion No. 09-07, April 17,2009.) (f) Also, a foreign corporation, by participating in bidding for the operation of a waste management center exhibits its intent to transact business in the Philippines. A corporation may be considered as "doing business" when it performs acts for which it was created or exercises some of the functions for which it was organized. (European Resources & Technologies, Inc. vs. Ingenieuburo, etc., 435 SCRA 246 [2004]; SEC Opinion No. 09-18, July 14, 2009.) (5) Contracts consummated outside the State or by independent

agents. — As a general rule, a foreign corporation will not be regarded as doing business in the State simply because it enters into contracts with residents of the State where such contracts are consummated outside the State or by an alleged agent, whether a corporation or a natural person, where such activities are not under the direction and control of the foreign corporation but are engaged in by the alleged agent as an independent business. (a) Thus, sales made to customers in the State by an independent dealer who has purchased and obtained title from the corporation to the products sold are not a doing of business by the corporation. (Columbia Pictures, Inc. vs. Court of Appeals, 261 SCRA 144 [1996].) (b) A reinsurance company is not doing business in a certain State merely because the property or lives which are insured by the original insurer company are located in that State. The reason for this is that a contract of reinsurance is generally a separate and distinct arrangement from the


810

Sees. 125-128

original contract of insurance, whose contracted risk is insured in the reinsurance agreement. Hence, the original insured has generally no interest in the contract of reinsurance. (Avon Insurance PLC vs. Court of Appeals, 278 SCRA 312 [1997].) (c) But a foreign corporation not engaged in business in the Philippines can still be sued in Philippine courts for acts done against a person or persons in the Philippines prejudicial to the rights they may have acquired in their transactions with such foreign corporation, (see Facilities Management Corp. vs. De La Osa, 89 SCRA 131 [1979], infra.) Meaning of phrase under investment laws. The Corporation Code does not define the phrase "doing or transacting business." The Omnibus Investments Code (Exec. Order No. 226 [July 16, 1987], Sec. 44 thereof.) and the Foreign Investments Act of 1991 (R.A. No. 7042, Sec. 2[d] thereof.), however, give a definition which may be adopted for purposes of the Corporation Code. Under said laws, "doing business" by a foreign corporation shall include: 17

(1) Soliciting orders, purchases (sales) and service contracts (see Marubeni Nedeland B.V. vs. Tensuan, 190 SCRA 105 [1990].); (2) Opening offices, whether called "liaison" offices or branches; (3) Appointing representatives or distributors who are domiciled in the Philippines or who in any calendar year stay in the Philippines for a period or periods totalling 180 days or more; 18

(4) Participating in the management, supervision or control of any domestic business firm, entity or corporation in the Philippines; and (5) Any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent See also Section 1(g) of Implementing Rules and Regulations which enumerate particular acts deemed included in the phrase "doing business" under the Omnibus Investments Code. 17

A foreign corporation with an agent or distributor in the Philippines of its products is considered doing business in the Philippines but is not so considered if such middleman is an independent dealer acting in his own name and for his own account. (Hahn vs. Court of Appeals, 266 SCRA 527 [1997].) 19

Sees. 125-128


811

the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or for the purpose and object of the business organization. (Sec. 65, Exec. Order No. 226; Sec. 3[d], R.A. No. 7042.) What the Corporation Code seeks to prevent through the provisions on licensing requirements, is the circumvention by foreign corporations of said requirements through the device of employing local representatives. A foreign corporation doing business through an indentor is not deemed doing business in the Philippines." The phrase "doing business" does not include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account. (Ibid.) A foreign corporation which invests merely as a limited partner in a Philippine limited partnership and does not take part in the management and control of the partnership is not doing business in the Philippines. 20

"An indent is denned as a purchase of goods especially when sent from a foreign country. There are three parties to an indent transaction, namely, the buyer, the indentor, and its supplier who is usually a non-resident manufacturer residing in the country where the goods are to be bought. An indentor may be best described as one who for compensation, acts as one middleman in bringing a purchase and sale of goods between a foreign supplier and a local purchaser. He is in the same class as a commercial broker and a commission merchant. He is to some extent an agent of both the vendor and the vendee. (Schmid & Oberly, Inc. vs. RJL Martinez Fishing Corp., 166 SCRA 493 [1988].) Ûnder the Rules implementing R.A. No. 7042, the following are also not considered "doing business": (1) The publication of a general advertisement through any print or broadcast media; (2) Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines; (3) Consignment by a foreign entity of equipment with a local company to be used in the processing of products for export; (4) Collecting information in the Philippines; and (5) Performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis, such as installing in the Philippines machinery it has manufactured or exported to the Philippines, servicing the same, training domestic workers to operate it, and similar incidental services. (Sec. l[f] thereof.)

812


Sec. 129

Sec. 129. Law applicable. — Any foreign corporation lawfully doing business in the Philippines shall be bound by all laws, rules and regulations applicable to domestic corporations of the same class, save and except such only as provide for the creation, formation, organization or dissolution of corporations or such as fix the relations, liabilities, responsibilities, or duties of stockholders, members or officers of corporations to each other or to the corporation. (73a) Laws applicable to foreign corporations.

(1) Philippine laws. — A foreign corporation licensed to do business in the Philippines is subject to the laws of the Philippines. (2) Laws of state of creation. — But matters relative to:

(a) the creation, formation, organization, or dissolution of corporations; and (b) the relations, liabilities, responsibilities, or duties of members, stockholders, or officers of corporations to each other or to the corporation, are governed by the laws of the State of its creation. In other words, matters relating to the organization or internal affairs of the corporation are governed by the laws of the home or incorporating State unless they offend any public policy of the Philippines. Thus, the right of the stockholders in a foreign corporation ( -g-> right to receive dividends, right to inspect corporate books, etc.) relating as they do merely to the internal management of the affairs of the corporation shall not be governed by the Philippine corporation laws but by the law under which such foreign corporation was incorporated. Therefore, the by-laws of a foreign corporation fixing the relations, etc. of members, etc. to each other or the corporation need not be filed with the Securities and Exchange Commission. (SEC Opinion, Oct. 17,1975.) But the amendment of its corporate name is subject to Philippine laws, not being one of those enumerated in Section 129. (SEC Opinion, Feb. 8,1988.) e

(3) Proof of foreign laws. - It is well-settled that foreign laws do not prove themselves in our jurisdiction and our courts are

Sec. 130


813

not authorized to take judicial notice of them. Like any other fact, they must be alleged and proved; otherwise, that will be presumed to be the same as those of the Philippines. (Collector of Internal Revenue vs. Fisher, 1 SCRA 93 [1961].) Powers of a foreign corporation subject to Philippine laws. (1) Although the power of a foreign corporation depends upon the law of the State from which its existence is derived, in the exercise of such power in another jurisdiction, the corporation must conform to the local laws and public policy. (a) The validity of and effect of its acts in States other than the State of incorporation, even though such acts are within its charter, must depend upon the law of the jurisdiction in which such exercise takes place and in which such acts are done. (b) Its submission to do business within the State is not by right, but by comity only, and it is, in respect of business done within the State, generally subject to, and bound by, the local laws, and unable to exercise powers or perform acts whether authorized by its charter or not, which are contrary thereto. (c) The general rule is that it tacitly submits itself, when it voluntarily enters the State and engages in business there, to the valid laws of the State and to the jurisdiction of process of its courts to the extent required by such laws. (36 Am. Jur. 2d 63.) (2) Conformably to Section 129, the license that is issued by the Securities and Exchange Commission to foreign corporations desiring to do business in this jurisdiction contains, among others, the conditions that such corporations be "subject to the prohibitions and limitations of the laws of the Philippines as regards foreign corporations and as regards domestic corporations of like nature." (SEC Opinion, March 5,1963.) Sec. 130. Amendments to articles of incorporation or by-laws of foreign corporations. — Whenever the articles of incorporation or the by-laws of a foreign corporation

814


Sec. 130

authorized to transact business in the Philippines are amended, such foreign corporation shall, within sixty (60) days after such amendment becomes effective, file with the Securities and Exchange Commission, and in the proper cases with the appropriate government agency, a duly authenticated copy of the articles of incorporation or by-laws, as amended, indicating clearly in capital letters or by underscoring the change or changes made, duly certified by the authorized official or officials of the country or State of incorporation. The filing thereof shall not of itself enlarge or alter the purpose or purposes for which such corporation is authorized to transact business in the Philippines, (n) A m e n d m e n t of articles of incorporation and by-laws.

(1) Effectivity. — The amendments to the articles of incorporation or the by-laws of a foreign corporation licensed to transact business in the Philippines may become effective even before they are filed with the Securities and Exchange Commission, and in the proper cases, with the appropriate government agency. (Sec. 130.) With respect to domestic corporations, the amendment to the articles of incorporation shall take effect only upon its approval by the Securities and Exchange Commission. (Sec. 16, last par.) (2) Need for amended license. — The filing of the amended arti-

cles of incorporation or by-laws by the foreign corporation, however, does not of itself enlarge or alter the purpose or purposes for which it is authorized to transact business in the Philippines. (Sec. 130.) (a) The foreign corporation must first obtain an amended license showing the other or additional purposes which it intends to pursue in the transaction of its business in the Philippines (Sees. 131, 125[5].); otherwise, its license shall be subject to revocation by the Commission, (see Sec. 134[7].) (b) But an isolated or incidental transaction by a foreign corporation outside its corporate franchise does not constitute engaging in that line of business which would require the filing of an amended license. Thus, a foreign corporation licensed to do business in the Philippines may lease a

Sec. 131


815

condominium unit held in ownership by such corporation and acquired in line with the purposes for which it ventured to operate in the Philippines, without being considered as engaging in the leasing business, where the end envisioned was not realized and the foreign corporation would want to exercise its prerogative as unit owner to recover its investment by resale or lease thereof, for such contract of lease may be considered merely as an isolated and incidental transaction which the foreign corporation may validly enter into without the need to amend the license issued to it. (SEC Opinion, July 27,1976.) Sec. 131. Amended license. — A foreign corporation authorized to transact business in the Philippines shall obtain an amended license in the event it changes its corporate name, or desires to pursue in the Philippines other or additional purposes, by submitting an application therefor to the Securities and Exchange Commission, favorably endorsed by the appropriate government agency in the proper cases, (n) W h e n a m e n d e d license required.

Section 131 requires a foreign corporation authorized to transact business in the Philippines to obtain an amended license in case: (1) it changes its corporate name; or (2) it desires to pursue in the Philippines other or additional purposes. In the first case, the amendment is necessary because the foreign corporation is authorized to do business under its original corporate name as stated in its articles of incorporation (see Sec. 125, par. 1.) and not in its new name, and in the second case, only "for the purpose or purposes specified in such license." (Ibid., [5]; Sec. 126, par. 1.) and not for the "other or additional purpose." The application for an amended license must be submitted to the Securities and Exchange Commission favorably endorsed by the appropriate government agency in the proper cases. A foreign corporation that fails to comply with Section 131 and conducts business operations in the Philippines may not in-

816


Sec. 132

tervene in any action before any court or administrative agency here but such corporation may be sued. (Sec. 133.) Sec. 132. Merger or consolidation involving a foreign corporation licensed in the Philippines. — One or more foreign corporations authorized to transact business in the Philippines may merge or consolidate with any domestic corporation or corporations if such is permitted under Philippine laws and by the law of its incorporation: Provided, That the requirements on merger or consolidation as provided in this Code are followed. Whenever a foreign corporation authorized to transact business in the Philippines shall be a party to a merger or consolidation in its home country or state as permitted by the law of its incorporation, such foreign corporation shall, within sixty (60) days after such merger or consolidation becomes effective, file with the Securities and Exchange Commission, and in proper cases with the appropriate government agency, a copy of the articles of merger or consolidation duly authenticated by the proper official or officials of the country or state under the laws of which such merger or consolidation was effected: Provided, however, That if the absorbed corporation is the foreign corporation doing business in the Philippines, the latter shall at the same time file a petition for withdrawal of its license in accordance with this Title, (n) Merger or consolidation involving a foreign corporation.

(1) With a domestic corporation. — The merger or consolidation is allowed provided that such is permitted under Philippine laws and by the law of incorporation in the home country or State of the licensed foreign corporation and the requirements on merger or consolidation as provided in the Code (Title IX.) are followed, (pars. 1-2.) In other words, there must be concurrent legislation in each State of constituent foreign and domestic corporations authorizing the merger, for neither corporation can have authority to merge or consolidate except by virtue of a law of the State creating it. (a) Corporations have no inherent power to merge or consolidate with foreign corporations. As there is presently

Sec. 133


817

no express provision in the Corporation Code or any other statute authorizing merger of a domestic corporation with a foreign corporation, such merger is not allowed in our jurisdiction, but should the merger take place in foreign jurisdiction, the corresponding dissolution of the domestic corporation should be effected in accordance with the Code to safeguard the interest of third parties. (SEC Opinion, Oct. 23,1985.) (b) To achieve a combination, however, it is not always necessary to resort to the statutory provisions on merger or consolidation. One obvious alternative of two corporations is to have one of them sell all its assets to the other in exchange for the latter's stock. If the acquiring corporation also assumes the payment of the corporation's liabilities and the latter shortens its term, dissolves, liquidates and distributes the stock received to its stockholders in exchange for its own stock, as a liquidating distribution, the parties would end up in the same position they would have been under the statutory provisions on merger or consolidation. (SEC Opinion, Dec. 13,1985, citing Campos & Campos, The Corporation Code, 1981 ed., p. 959.) (2) With another foreign corporation. — If the licensed foreign

corporation is a party to the merger or consolidation in its home country or State as permitted by the law of its incorporation, it must file the articles of merger or consolidation as prescribed in Section 132 and at the same time, if it is the absorbed corporation, a petition for withdrawal of its license as provided in Section 136. (par. 2.) It is, in effect, dissolved because of the merger or consolidation. Sec. 133. Doing business without a license. — No foreign corporation transacting in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines; but such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws. (69a)


818

Sec. 133

Effects of doing business without a license.

Section 133 states the effects as follows: (1) Suit by foreign corporation. — The foreign corporation transacting business without a license or its successors or assigns shall not be permitted, subject to certain exceptions (infra.), to maintain or intervene in any action, suit, or proceeding in any court or administrative agency of the Philippines. If a foreign corporation operates in the Philippines without submitting to its laws, it is only just that it be not allowed to invoke them in our courts when it should need them later for its protection. (Granger Associates vs. Microwave Systems, Inc., 189 SCRA 63 [1990].) It has been held, however, that a counterclaim filed by the defendant against a foreign corporation doing business without a license partakes of the nature of a complaint and/or cause of action against the plaintiff corporation, making the latter a defendant thereto, so that it cannot be said that said foreign corporation is maintaining a suit and consequently, Section 69 (now Sec. 133.) of the Corporation Law is not applicable. (Phil. Columbia Enterprises Co. vs. Lantin, 39 SCRA 376 [1971].) To be doing or "transacting business in the Philippines for purposes of Section 133, the foreign corporation must actually transact business in the Philippines, that is, perform specific business transactions within the Philippine territory on a continuing business in its own name and for its own account. If a foreign corporation does not transact such kind of busines in the Philippines, even if it exports its products to the Philippines, the Philippines has no jurisdiction to require such foreign corporation to secure a Philippine license in order to initiate and maintain a suit in the Philippines. (B Van Zuiden Bros. Ltd. vs. GTVL Manufacturing Industries, Inc., 523 SCRA 233 [2007].) (2) Suit against foreign corporation. — Such corporation may, however, be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws under the doctrine of quasi-estoppel 21

In the United States, statutes permitting a resident of one State to sue in the State court a corporation from another State are called "long arm statutes." 21

Sec. 133

"TITLE XV. FOREIGN CORPORATIONS

819

by acceptance of benefits. It shall not be allowed, under any circumstances, to invoke its lack of license to impugn their jurisdiction. (Marubeni Nedeland B.V. vs. Tensuan, 190 SCRA 105 [1990].) It is against justice and equity for an unlicensed foreign corporation to execute contracts with domestic firms and then repudiate their obligations thereunder or plead immunity to Philippine jurisdiction just because it has not obtained license in the Philippines. (SEC Opinion, Jan. 10,1995.) It has been held that where a local plaintiff and a foreign corporation have agreed on Philippine courts as venue of action,

evidence as to whether such foreign corporation was doing business in the Philippines is no longer necessary before it can be sued, and for the expeditious determination of the controversy, summons by publication can be made on it. (Lingner & Fisher GMBH vs. Intermediate Appellate Court, 125 SCRA 522 [1983].) (3) Application of the principle of estoppel. — The rule is that a

party is estopped to challenge the personality of a corporation after having acknowledged the same by entering into a contract with it. And the doctrine of estoppel to deny corporate existence applies to foreign as well as to domestic corporations. The principle that one who has dealt with a corporation of foreign origin as a corporate entity is estopped to deny its corporate existence and capacity, will be applied to prevent a person contracting with a foreign corporation from later taking advantage of the latter's non-compliance with the law, chiefly in cases where such person has received the benefits of the contract. The rule is deeply rooted in the time-honored axiom that no person ought to derive any advantage of his own wrong. This is especially true where the business relations with the foreign corporation spanned a number of years and it would appear quite inequitable for such person who was aware of the absence of the requisite license on the part of the foreign corporation to evade payment of an otherwise legitimate indebtedness due and owing to the latter. (Merill Lynch Futures, Inc. vs. Court of Appeals, 211 SCRA 824 [1992]; Communication Materials and Design, Inc. vs. Court of Appeals, 260 SCRA 673 [1996]; Subic Bay Metropolitan Authority vs. Universal International Group of Taiwan, 340 SCRA 359 [2000]; Agent Technologies, etc. vs. Integrated Silicon,


820

Sec. 133

etc., 427 SCRA 593 [2004]; European Resources & Technologies, Inc.'vs. Ingenieuburo, etc., 435 SCRA 246 [2004].) (4) Continuation of doing business. — Furthermore, it is im-

plied from the rule established in Section 123 (2nd sentence) that the foreign corporation shall not be permitted to continue transacting business in the Philippines, unless it shall have obtained the license required by law and, until it complies with the law, shall not be permitted to maintain any suit in the local courts, (see Marshall-Wells Co. vs. Elser & Co., 46 Phil 70 [1924]; Converse Rubber Corp. vs. Jacinto Rubber & Plastics Co., Inc., 97 SCRA 158 [1980].) (5) Penal sanction. — The prohibition against doing business without first securing a license is given penal sanction under the general provision of Section 144 of the Corporation Code. (6) Right to relief by other guilty party. — A party to a contract

in pari delicto with a foreign corporation doing business in the Philippines without a license is not entitled to relief from the latter. Thus, where a contract entered into by a Philippine corporation with a foreign corporation for the manufacture and marketing of the latter's products is illegal for failure to secure a prior license from the Board of Investments (under R.A. No. 5455.), the former cannot ask the court to prohibit the foreign corporation from terminating the contract and giving the production and distributorship rights to another. The parties are charged with knowledge of existing law at the time they enter into a contract and at the time it is to become operative. Moreover, a person is presumed to be knowledgeable about his own State law than his alien or foreign contemporary. (Top-Weld Manufacturing, Inc. vs. ECED, S.A., 138 SCRA 118 [1985].) 22

Suit by an unlicensed foreign corporation. It is not the lack of the prescribed license (to do business in the Philippines) but doing business without such a license which bars a foreign corporation from access to our courts. (Universal Shipping Lines, Inc. vs. Intermediate Appellate Court, 188 SCRA ''See Note 6.

Sec. 133


821

178 [1990]; Huang Lung Bank, Ltd. vs. Saulog, 201 SCRA 137 [1991]; MR Holdings, Ltd. vs. Bajar, 380 SCRA 617 [2002]; Aboitiz Shipping Corp. vs. Insurance Company of America, 561 SCRA 262 [2008].) A foreign corporation without a license is not ipso facto barred from bringing an action in Philippine courts. Thus, a foreign corporation not transacting business in the Philippines may maintain an action in our courts for relief, even if it has no license; reciprocally, such corporation may likewise be sued in Philippine courts for acts done against a person or persons in the Philippines, provided that in this case, it would not be impossible for court processes to reach the foreign corporation, a matter that can later be consequential in the proper execution of judgment. (Signetics Corporation vs. Court of Appeals, 225 SCRA 737 [1993].) 23

(1) To seek redress for an isolated business transaction. — The im-

plication of the law is that it was never the purpose of the legislature to exclude a foreign corporation which happens to obtain an isolated order for business from the Philippines from receiving redress in Philippine courts and thus, in effect, to permit persons to avoid contracts made with such foreign corporation or shield debtors from their legitimate obligations. (General Garments The SEC has issued rules (dated Nov. 5, 1962) requiring submission of reports by unlicensed foreign firms having liaison representatives in the Philippines, to wit: (1) Every foreign national who shall act as a liaison representative of a foreign firm which is not licensed to engage in business in the Philippines or as a prearranged employee between said firm and a domestic company, shall register with the Securities and Exchange Commission upon his arrival in and departure from this country within five days from the date of such arrival or before such departure; (2) Every contract or document executed by and between a foreign firm not licensed to transact business but having liaison representatives in the Philippines and a Philippine resident, to be performed or carried out in this country shall be reported to, and a true copy thereof duly certified as such by, its legal keeper filed with the said Commission within one month from the signing of the contract or document; (3) Every foreign firm not licensed to transact business but having liaison representative in the Philippines shall file with the Commission at the end of each month, a certified statement of monetary remittances in the form of cash, bank drafts, bills of exchange, letters of credit or similar commercial documents it has made during the month, to its liaison representatives in this country, signed by its senior representatives; and (4) A quarterly report of the activities of the liaison representatives of every unlicensed foreign firm maintaining offices in the Philippines shall be filed with the Commission within fifteen days after the close of such quarters. 23

822


Sec. 133

Corp. vs. Director of Patents, 41 SCRA 50 [1971]; National Sugar Trading Corp. vs. Court of Appeals, 246 SCRA 465 [1995]; Eriks Pte., Ltd. vs. Court of Appeals, 267 SCRA 567 [1997].) (a) The doctrine of lack of capacity to sue based on failure to first acquire a local license is based on considerations of sound public policy. It was never intended to favor domestic corporations who enter into solitary transactions with unwary foreign firms and then repudiate their obligations simply because the latter are not licensed to do business in the Philippines. "It is a common ploy of defaulting local companies which are sued by unlicensed foreign companies not engaged in business in the Philippines to invoke lack of capacity to sue." (Antam Consolidated, Inc. vs. Court of Appeals, 143 SCRA 288 [1986]; Communication Materials and Design, Inc. vs. Court of Appeals, 260 SCRA 673 [1996]; Subic Bay Metropolitan Authority vs. Universal Group of Taiwan, 340 SCRA 359 [2000].) (b) To deny a foreign corporation not licensed to do business in the Philippines the right to file an action in our courts for an isolated transaction in this country will hamper the growth and development of business relations between Filipino citizens and foreign nationals and, in effect, allow the law to serve as a protective shield for unscrupulous Filipino citizens who have business relationships abroad. (Huang Lung Bank, Ltd. vs. Saulog, supra; see Comm. of Customs vs. K.M.K. Gani, 182 SCRA 591 [1990].) The term "isolated transaction" has not been construed to literally mean "one" or a mere single act. (Lorenzo Shipping Corp. vs. Chubb and Sons, Inc., 431 SCRA 266 [2004].) The ascertainment of whether a foreign corporation is merely suing on an isolated transaction or is actually doing business in the Philippines requires evidence of a preponderant set of facts. It cannot be answered through conjectures or unsubstantiated allegations. (Rimbunan, etc. vs. Oriental Wood Processing Corp., 470 SCRA 650 [2005].) (2) To protect its corporate reputation, name and goodwill. —

Similarly, an unlicensed foreign corporation which has never transacted business in the Philippines may maintain an action

Sec. 133


823

in our local courts for the purpose of protecting its reputation, corporate name and goodwill acquired through the sale by importers and the use within the country of its products bearing its corporate name or trademark, or whenever that reputation, corporate name and goodwill have, through the natural development of trade, established themselves. (a) The right to the use of the corporate trade name is property right, a right in rem, which the foreign corporation may assert and protect in any of the courts in the world, even in countries where it does not transact any business. (Western Equipment & Supply Co. vs. Reyes, 51 Phil. 115 [1927]; General Garments Corp. vs. Director of Patents, supra; Converse Rubber Corp. vs. Jacinto Rubber & Plastics Co., Inc., 97 SCRA 158 [1980]; Universal Rubber Products, Inc. vs. Court of Appeals, 130 SCRA 104 [1984]; Converse Rubber Corp. vs. Universal Rubber Products, Inc., 147 SCRA 154 [1987].) (b) A foreign corporation has an exclusive right to the use of its name which may be protected by injunction upon a principle similar to that upon which persons are protected in the use of trademarks and trade names. (Philips Export B.V. vs. Court of Appeals, 206 SCRA 457 [1992].) It may sue in our jurisdiction for infringement of trademark and unfair competition although it is not doing business in the Philippines (Puma Sportschwhfabriken Rudolf Dassler, K.G. vs. Intermediate Appellate Court, 158 SCRA 233 [1988].) under Section 21-A of the Trademark Law. (R.A. No. 166, as amended.) 24

But it is not sufficient for a suing foreign corporation under Section 21-A to simply allege its alien origin. Rather, it must additionally allege its personality to sue, i.e., that it is not doing business in the Philippines and that its action for infringement is anchored on an isolated transaction. (Philip Morris, Inc. vs. Court of Appeals, 224 SCRA 580 [1993].) Also, a foreign corporation cannot sue for unfair competition in Philippine courts under Section 21-A unless it complies with the legal requirements thereof that its trademark has "Repealed by R.A. No. 8293, the Intellectual Property Code, which now governs registration and protection of trademarks, trade names and service marks, patents i copyrights.

824


Sec. 133

been registered with the Philippine Patent Office and that it shows that the country of which it is a citizen, or in which it is domiciled, grants a similar privilege to corporations of the Philippines. (Leviton Industries vs. Salvador, 114 SCRA 420 [1982].) (3) To enforce its right not arising out of a business transaction. —

Neither does the prohibition apply to a suit based on an act not arising out of a business transaction in the Philippines. (a) Thus, it has been held that a foreign corporation without a license to engage in business in the Philippines may maintain a suit to recover the value of goods that were part of the shipment which was erroneously discharged in Manila and received by the defendant and not returned (Swedish East Asia Co., Ltd. vs. Manila Port Service, 25 SCRA 633 [1968].); or to recover damages sustained by cargo shipped by a foreign corporation on defendant's vessel (Aetna Casualty & Surety Co. vs. Pacific State Lines, 80 SCRA 635 [1977].); or caused by failure of a shipping corporation to deliver goods shipped to it by the foreign corporation to their proper destination. (Bulakhidas vs. Navarro, 142 SCRA 1 [1986].) (b) A foreign insurance corporation may, as insurersubrogee, sue in Philippine courts to recover from a Philippine carrier the amounts paid by it to the consignee of the cargoes insured, upon the marine insurance policies issued by it abroad to cover international-bound cargoes shipped by said carrier, even if it has no license to do business in the country. (Universal Shipping Lines, Inc. vs. Intermediate Appellate Court, supra.) Suit against an unlicensed foreign corporation. If a foreign corporation not engaged in business in the Philippines is not barred from seeking redress from courts in the Philippines, a fortiori, that same corporation cannot claim exemption from being sued in Philippine courts for actionable wrongs or acts done against a person or persons in the Philippines (Facilities Management Corp. vs. De la Osa, 89 SCRA 131 [1979]; FBA Aircraft, SA vs. Zosa, 110 SCRA 1 [1981].) and whether a foreign corporation actually doing business in the Philippines does or

Sec. 133


825

does not have a license or authority to do so, it is amenable to process under the jurisdiction of the local courts. The rule is necessary for the protection of the citizens because otherwise, a foreign corporation illegally doing business here, because of its neglect or refusal to obtain the corresponding license and authority to do business, may successfully, though unfairly, plead such neglect or illegal act so as to avoid service and thereby impugn the jurisdiction of the local courts. (Gen. Corp. of the Phils, vs. Union Society of Canton, Ltd., 87 Phil. 313 [1950].) Where a foreign corporation appears to have constituted a domestic liason office as its representative and its fully subsidized extension office in the Philippines, the latter can be charged for the liabilities incurred by the former in the country. (Mavest [U.S.A.], Inc. vs. Sampaguita Garment Corporation, 470 SCRA 440 [2005].) Facts showing capacity to sue. (1) Appropriate allegations in complaint by plaintiff foreign corpo-

ration. — A foreign corporation is either engaged in business in the Philippines or it is not so engaged. In the first, the corporation can maintain suit in this jurisdiction if it is duly licensed. In the second, it can maintain such suit if the transaction sued upon is singular and isolated, in which case no license is required. In either case, compliance with the requirement of license, or that the fact that the suing corporation is exempt therefrom (i.e., it is not doing business in the Philippines), as the case may be, cannot be inferred from the mere fact that the party suing is a foreign corporation. In any case, the right of a foreign corporation to sue is subject to provisions of special laws. (a) The qualifying circumstances, being an essential part of the plaintiff's capacity to sue, must be affirmatively pleaded in the complaint; otherwise, the court may choose 25

În a case, there is no allegation in the complaint for the recovery of value of shipment lost that the transaction sued upon by an unlicensed foreign corporation (insurance company and subrogee) is singular or isolated. The court held that even assuming the incapacity on the part of the foreign corporation to sue, no such incapacity may be attributed to its co-plaintiff, a domestic corporation (consignee of the shipment and subrogor). If necessary, the latter could quite easily execute a cancellation of the deed of subrogation. (Olympia Business Machines Co. vs. E. Razon, Inc., 155 SCRA 208 [1987].)


826

Sec. 133

to deny it the right to sue. These are matters peculiarly within the knowledge of the plaintiff alone, and it would be unfair to impose upon the defendant the burden of asserting and proving the contrary. Hence, the ultimate fact that a foreign corporation is not doing business in the Philippines must first be disclosed for it to be allowed to sue in Philippine courts under the isolated transaction rule. (Atlantic Mutual Ins. Co. and Continental Ins. Co. vs. Cebu Stevedoring Co., Inc., 17 SCRA 1037 [1966]; Comm. of Customs vs. K.M.K. Gani, 182 SCRA 591 [1990]; New York Marine Managers, Inc. vs. Court of Appeals, 249 SCRA 416 [1995].) 26

(b) A court need not go beyond the allegations in the complaint to determine whether or not a defendant foreign corporation is doing business for the purpose of Section 14 (service of summons upon a private corporation), Rule 14 of the Rules of Court. (Litton Mills, Inc. vs. Court of Appeals, 256 SCRA 696 [1996].) A determination that the foreign corporation is doing business is only tentative and is made only for the purpose of enabling the local court to acquire jurisdiction over the foreign corporation through service of summons. Such determination does not foreclose a contrary finding should evidence later shows that it is not transacting business in the country. (Hahn vs. Court of Appeals, 266 SCRA 537 [1997].) It has been held that the "isolated transaction rule" applies only to foreign corporations. Any other business entity such as Section 4, Rule 8 of the Revised Rules of Court provides: "Sec. 4. Capacity. — Facts showing the capacity of a party to sue or to be sued or the authority of a party to sue or be sued in a representative capacity or the legal existence of an organized association of persons that is made a party must be averred." Under the former Rules of Court (Sec. 11, Rule 15.) in force prior to the promulgation of the Revised Rules of Court on January 1, 1964, it was not necessary to aver the capacity of a party to sue except to the extent required to show jurisdiction of the court. 26

The ruling in the Atlantic case seems to have set aside previous pronouncements (Spreckels vs. Ward, 12 Phil. 414 [1909]; Marshall-Wells Co. vs. Elser & Co., 46 Phil. 70 [1924]; The Fletcher American National Bank of Indianapolis vs. Ang Cheng Lian, 65 Phil. 385 [1938].) imposing upon the defendant the duty of showing that a particular foreign corporation may not sue in our courts — that failure by the foreign corporation to comply with Sections 68 and 69 (now Sees. 125, 126, 133.) may be pleaded as an affirmative defense; thereafter, the defendant must prove that the plaintiff: (1) is a foreign corporation, (2) is transacting business in the Philippines, and (3) has not obtained the license required by the law.

a single proprietorship or a partnership cannot avail of the right to sue within Philippine jurisdiction under the rule. (Comm. of Customs vs. K.M.K. Gani, supra.) (2) Specific denial by defendant of plaintiff's capacity. — A

general denial is inadequate to attack a foreign corporation's lack of capacity as against its positive averment that it is authorized to do so. Section 4, Rule 8 of the Rules of Court requires that "a party desiring to raise an issue as to the legal existence of any party or the capacity shall do so by specific denial, which shall include such supporting particulars as are particularly within pleader's knowledge." (Home Insurance Co. vs. Eastern Shipping Lines, 123 SCRA 424 [1983].) But a factual finding by the trial court that a foreign corporation was doing business in the Philippines without license is binding on the Supreme Court in the absence of exceptional circumstances that warrant a different conclusion, and the foreign corporation has the burden of showing that such finding falls under the exception and should be reviewed and reversed. (Granger Associates vs. Microwave Systems, Inc., 189 SCRA 631 [1990].) Validity of contracts of unlicensed foreign corporations .

If the foreign corporation does business in the Philippines without obtaining the required license (Sees. 123, 133.), are contracts entered into by it in the course of its transacting business void, or merely voidable or unenforceable? The Corporation Code is silent on this question, while American decisions are conflicting. (1) Contract void. — Article 5 of the Civil Code provides as follows: "Acts executed against the provisions of mandatory or prohibitory laws shall be void except when the law itself authorizes their validity." It has been opined that under the above provision, such contracts are void and, therefore, subsequent compliance with the legal requirement will not cure the defect of the contract. (SEC Opinion, March 12, 1975.)

Sec. 134


828

(2) Contract valid as to innocent parties. — It has been held,

however, that such a contract "shall prejudice only the guilty corporation and not innocent parties who may have dealt with the said corporation in good faith" (Bough vs. Cantiveros, 40 Phil. 209 [1919].) for it is unjust that the non-complying foreign corporation and persons standing in its shoes should escape liability on contracts had by it by setting up its non-compliance. 27

(3) Contract enforceable upon compliance with the law. — "The

better reason, the wiser and fairer policy, and the greater weight lie with those decisions which hold that where (as in our Corporation Code, Sec. 144.) there is a prohibition with a penalty, with no express or implied declaration respecting the validity or enforceability of contracts made by qualified foreign corporations, the contracts x x x are enforceable x x x upon compliance with the law." (Home Insurance Co. vs. Eastern Shipping Lines, 123 SCRA 424 [1983], citing Peter & Burghard Stone Co. vs. Cerper, 172 N.E. 319 [1930]; see Eriks Pte., Ltd. vs. Court of Appeals, 267 SCRA 567 [1997].) It is not necessary to declare the contract null and void as against the erring foreign corporation. The penal sanction for the violation and the denial of access to our courts and administrative bodies are sufficient from the viewpoint of legislative policy. The lack of capacity at the time of the execution of the contracts is cured by the subsequent registration of the unlicensed foreign corporation.

(Ibid.)

Sec. 134. Revocation of license. — W i t h o u t prejudice to other grounds provided by special laws, the license of a foreign corporation to transact business in the Philippines may be revoked or suspended by the Securities and Exchange Commission upon any of the following grounds: "Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be observed: (1) When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the contract, or demand the performance of the other's undertaking; (2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what he has given without any obligation to comply with his promise." (Civil Code) 27

Sec 135


1. Failure to file its annual report or pay any fees as required by this Code; 2. Failure to appoint and maintain a resident agent in the Philippines as required by this Title; 3. Failure, after change of its resident agent or of his address, to submit to the Securities and Exchange Commission a statement of such change as required by this Title; 4. Failure to submit to the Securities and Exchange Commission an authenticated copy of any amendment to its articles of incorporation or by-laws or of any articles of merger or consolidation within the time prescribed by this Title; 5. A misrepresentation of any material matter in any application, report, affidavit or other document submitted by such corporation pursuant to this Title; 6. Failure to pay any and all taxes, impost, assessments or penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions; 7. Transacting business in the Philippines outside of the purpose or purposes for which such corporation is authorized under its license; 8. Transacting business in the Philippines as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the Philippines; or 9. Any other ground as would render it unfit to transact business in the Philippines. (71a) Sec. 135. Issuance of certificate of revocation. — Upon the revocation of any such license to transact business in the Philippines, the Securities and Exchange Commission shall issue a corresponding certificate of revocation, furnishing a copy thereof to the appropriate government agency in the proper cases. The Securities and Exchange Commission shall also mail to the corporation at its registered office in the Philippines a notice of such revocation accompanied by a copy of the certificate of revocation, (n)

829

830


Sec. 136

Revocation of license of foreign corporation. Section 134 enumerates the grounds for revoking or suspending the license of a foreign corporation by the Securities and Exchange Commission. The grounds are without prejudice to other grounds provided by special laws. After revocation, the Securities and Exchange Commission is required to issue a corresponding certificate of revocation, furnishing a copy thereof to the appropriate government agency in the proper cases and mailing a notice of such revocation accompanied with a copy of the certificate to the foreign corporation. (Sec. 135.) Effects of revocation. (1) The revocation of the license of a foreign corporation cannot affect the validity of contracts entered into by it before the revocation nor its right to maintain an action to enforce them. (Billmeyer Lumber Co. vs. Merchants' Coal Co., 69 S.E. 1073.) It may still bring or maintain an action based on such contracts. But contracts entered into by it after revocation are invalid and unenforceable without prejudice to the rights of innocent parties. As to such contracts, the effect is the same as if a license had never been granted to the foreign corporation, (supra.) (2) It has been opined, however, that the revocation shall not affect the validity of contracts entered into by a foreign corporation after revocation. The only effect of the revocation is that the foreign corporation cannot seek redress from the courts to enforce such contracts. It simply removes its legal standing to sue. (SEC Opinion No. 10-07, Feb. 5,2010.) If innocent parties can still enforce such contracts, it really makes no difference whether they are considered valid or invalid. (3) Pursuant to Section 133, such foreign corporation can no longer transact business in the Philippines, and it cannot maintain any suit or action in any court or administrative agency in the Philippines although it may be sued on any valid cause of action. Sec. 136.

Withdrawal of foreign corporation. — Subject

to existing laws and regulations, a foreign corporation

Sec. 136


831

licensed to transact business in the Philippines may be allowed to withdraw from the Philippines by filing a petition for withdrawal of license. No certificate of withdrawal shall be issued by the Securities and Exchange Commission unless all the following requirements are met: 1. All claims which have accrued in the Philippines have been paid, compromised or settled; 2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions have been paid; and 3. The petition for withdrawal of license has been published once a week for three (3) consecutive weeks in a newspaper of general circulation in the Philippines, (n)

Withdrawal of a foreign corporation. Section 136 prescribes the rules for the withdrawal of a foreign corporation from business in the Philippines. (1) A petition for withdrawal of license must be filed with the Securities and Exchange Commission which shall issue a certificate of withdrawal only after compliance with all the requirements mentioned in Section 136. 28

(2) To ascertain that the foreign corporation has no outstanding liabilities to residents in the Philippines, the Commission shall have to make an examination and inspection of its books and records. If the Commission is aware of pending cases against the To legally effect the withdrawal of a foreign corporation's license to transact business in the Philippines, the Securities and Exchange Commission requires the submission of the following: (1) The letter-petition of the resident agent requesting the withdrawal of the license to do business; (2) Filing fee of P10.00; (3) A copy of the resolution of the Board of Directors authorizing the closing of the Philippine branch and empowering the resident agent to effectuate the withdrawal thereof, duly authenticated in accordance with law, to be submitted in triplicate; (4) Latest balance sheet and sworn statement that no creditors will be prejudiced by the withdrawal, also to be submitted in triplicate; (5) Proof of publication of the Notice of Withdrawal once a week, for three (3) consecutive weeks in a newspaper of general circulation in the Philippines; and (6) The license issued by the Commission to the corporation which shall be surrendered. (SEC Opinion, Aug. 22, 1969.) 2S

832


Sec. 136

foreign corporation, it may not declare that such corporation has no outstanding liabilities in the Philippines, (see Scottish Union & National Insurance Co. vs. Macadaeg, 91 Phil. 89 [1952].) (3) The courts may review the action of the Commission approving the withdrawal of a foreign corporation, for the law should not be interpreted as to permit a foreign corporation to escape the results of pending action against it by withdrawing from the Philippines with all the securities it has deposited, provided it gets the sanction of the Securities and Exchange Commission, (see Ibid.) Suits against a foreign corporation that has c e a s e d to do business .

When the right to do business of a foreign corporation duly licensed to do so in another State is revoked or such foreign corporation subsequently withdraws its business from that State, the cessation of its business works a quasi-dissolution of the foreign corporation. Consequently, the corporation is placed in the same situation in that State as if its charter had expired or terminated. (SEC Opinion, March 5, 1963.) It is subject to the rules of law governing expired domestic corporations in respect to action against it. (Ibid., citing Frazier vs. Steel & Tube [W. Va.], 132S.E.723,45ALR1442.) Accordingly, Section 122 (corporate liquidation) applies to a branch of a foreign corporation withdrawing from doing business in the Philippines, insofar as suits by or against it are concerned, in connection with its business transactions done in the Philippines.

— oOo —

Title XVI MISCELLANEOUS PROVISIONS Sec. 137. Outstanding capital stock defined. — The term "outstanding capital stock," as used in this Code, means the total shares of stock issued to subscribers or stockholders, whether or not fully or partially paid (as long as there is a binding subscription agreement), except treasury shares, (n) O u t s t a n d i n g capital s t o c k d e f i n e d . Outstanding capital stock, as defined in Section 137, includes

all shares of stock issued to subscribers or stockholders of a stock corporation which are fully paid, and in case they are unpaid or only partially paid, as long as there is binding subscription agreement between the subscriber or stockholder and the corporation, (see Sec. 60.) The term refers to the "total shares," that is, the number of shares, and thus includes unpaid subscriptions except when the subscription agreement provides otherwise. Except treasury shares which are excluded from the meaning of the terms, Section 137 makes no distinction between the different classes of shares. 1

2

Distinguished f r o m issued an d subscribed shares.

(1) An "outstanding" share of stock is necessarily "issued" but an "issued" share may not have the status of an "outstandAlthough they are in the nature of unissued shares as long as they are held in the treasury (see Sec. 57.), for they may be issued again to subscribers or stockholders. For purposes of the next paragraph of Article 6, right of holders of non-voting shares to vote in the eight (8) cases enumerated "outstanding capital stock" as denned in Article 137, shall be deemed to include preferred shares. (SEC Memo. Cir. No. 4, Series of 2004.) 1

2

833


834

Sec. 137

ing" share such as treasury shares, (see Sec. 9.) To be considered outstanding, the share of stock must be held by persons other than the corporation itself. An "issued" share may refer to any of the following: (a) Shares acquired by subscription which are fully paid; (b) Shares (subscribed shares) acquired by subscription which are unpaid or partially paid; (c) Shares acquired by a stockholder by transfer from a previous stockholder; (d) Shares acquired by a stockholder by purchase of treasury shares from the corporation; and (e) Treasury shares or shares issued and subsequently reacquired by the corporation and which remain in the treasury. All the issued shares of a corporation except treasury shares are outstanding. So, the term "issued" share is broader than "outstanding" share. 3

(2) Technically speaking, shares that are fully paid are "issued" not merely "subscribed" shares although the latter are also categorized as "issued" and, therefore, "outstanding" even if unpaid or only partially paid. (Sec. 137.) In its strict signification, the term "subscribed" shares should be limited to shares acquired by subscription which are unpaid or only partially paid. But a subscription to shares in a corporation (see Sec. 60.) does not constitute the subscriber a stockholder until the acceptance by the corporation of the subscription. Prior to such acceptance, the subscription amounts to nothing more than an offer to take stock, and, therefore, the subscribed shares cannot be considered issued or outstanding. The payments due on the subscribed 4

Under Section 6 (par. 6 and last par.), except in the eight (8) cases enumerated when even non-voting shares may also vote, whenever a vote is necessary to approve a particular corporate act, such vote "shall be deemed to refer only to stock with voting rights." This means that in the determination of the percentage of votes necessary for the approval of any such corporate acts, the phrase "outstanding capital stock" refers only to voting shares. 3

In fine, all outstanding shares are "issued" but not all issued shares are "outstanding" as in the case of treasury shares. All subscribed shares (assuming there is a bind4

Sees. 138-139

TITLE XVI. MISCELLANEOUS PROVISIONS

835

shares become a debt to the corporation payable on the date specified in the contract of subscription or on the date stated in the call made by the board of directors. (Sec. 67, par. 2.) Sec. 138. Designation of governing boards. — The provisions of specific provisions of this Code to the contrary notwithstanding, non-stock or special corporations may, through their articles of incorporation or their by-laws, designate their governing boards by any name other than as board of trustees, (n) Designation o f g o v e r n i n g b o a r d s .

The authority given by Section 138 covers only non-stock corporations (see Title XI.) and special corporations. (Title XIII.) It accommodates the practice in various non-stock corporations where their governing boards are called by a name other than as "board of trustees." Thus, the governing board of a non-stock educational corporation may be designated as board of regents, board of governors, etc. Educational institutions may be organized as stock corporations. (Sec. 108, last par.) Sec. 139. Incorporation and other fees. — The Securities and Exchange Commission is hereby authorized to collect and receive fees as authorized by law or by rules and regulations promulgated by the Commission, (n) Collection of fees.

The Securities and Exchange Commission is authorized to collect and receive fees as authorized by law (such as Pres. Decree No. 902-A, R.A. No. 1143, R.A. No. 3531, and B.P Big. 178.) and by rules and regulations promulgated by it. Thus, the Commission collects fees, among others, for examining and filing articles of incorporation and the by-laws, and amendments thereto, certificates of increase or decrease of the capital ing subscription agreement) are "outstanding" but not all outstanding shares are "subscribed" as in the case of: (a) shares acquired by subscription but which are already fully paid, and (b) shares acquired by transfer from a previous stockholder or by purchase from a corporation of treasury shares.

836


Sec. 140

stock, or certificates incurring, creating, or increasing bonded indebtedness; for granting exemption of securities from its registration requirements, etc. (see Appendix "G.") (1) Nature of fees. — The incorporation fee is not a tax in the

appropriate sense of the word and the legislature, by its imposition, does not impliedly divest itself of powers of taxing a corporation. (18 Am. Jur. 2d 588.) The fees collected by the Commission are for purely regulatory purposes in the exercise of police power; hence, they should only be of sufficient amount to cover the expenses of direct regulation and the incidental expenses. Taxes, on the other hand, are imposed for revenue purposes. As a general rule, there is no limit as to the amount or rate of tax that may be imposed. (2) Revision, etc. of fees. — The Commission is authorized

to recommend to the President the revision, alteration, amendment, or adjustments of the charges and fees which by law it is authorized to collect. (Pres. Decree No. 902-A, Sec. 7.) In fine, fees and charges collected under rules promulgated by the Securities and Exchange Commission may be revised, amended, or adjusted by the Commission itself, but those which by law it is authorized to collect may be revised, etc. only by the President on its recommendation. Before, the incorporation and other fees were fixed by law, particularly Section 8 of the former Corporation Law such that the same could be changed only by amending the law. Now, changes can easily be effected whenever warranted by prevailing conditions. Sec. 140. Stock ownership in certain corporation. — Pursuant to the duties specified by Article XIV* of the Constitution** the National Economic and Development Authority shall, from time to time, make a determination of whether the corporate vehicle has been used by any corporation or by business or industry to frustrate the provisions thereof or of applicable laws and shall submit to the Batasang

•Now Article XII. "Refers to the 1973 Constitution in force at the time of the enactment of the Corporation Code.

Sec. 140


837

Pambansa*** whenever deemed necessary, a report of its findings including recommendations for their prevention or correction. Maximum limits may be set by the Batasang Pambansa for stockholdings in corporations declared by it to be vested with a public interest pursuant to the provisions of this section, belonging to individuals or groups of individuals related to each other by consanguinity or affinity or by close business interests, or whenever it is necessary to achieve national objectives, prevent illegal monopolies or combinations in restraint of trade, or to implement national economic policies declared in laws, rules and regulations designed to promote the general welfare and foster economic development. In recommending to the Batasang Pambansa corporations, businesses or industries to be declared vested with a public interest and in formulating proposals for limitations on stock ownership, the National Economic and Development Authority shall consider the type and nature of the industry, the size of the enterprise, the economies of scale, the geographic location, the extent of Filipino ownership, the labor intensity of the activity, the export potential as well as other factors which are germane to the rationalization and promotion of business and industry, (n) Limitation of stock o w n e r s h i p in corporations vested with public interest.

Congress may set maximum limits for stockholdings in corporations declared by it to be vested with public interest upon the recommendation of the National Economic and Development Authority or NED A, belonging to individuals or groups of individuals related to each other by consanguinity or affinity or by close business interests, or whenever necessary to achieve national objectives, prevent illegal monopolies or combinations in restraint of trade, or to implement national economic policies. (Sec. 140, pars. 2, 3.) The pertinent provisions of the Constitution relating to the NEDA and prescribing limits to ownership and management of "'Now, Congress.


838

Sec. 140

certain corporations are found in Sections 2, 3, 9, 10, 11, and 19, Article XII; in Section 4(2), Article XIV; and in Section 11, Article XVI thereof. Section 140 (par. 1.) imposes upon the NEDA the 5

"Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are owned by the State. With the exception of agricultural lands, all other natural resources shall not be alienated. The exploration, development, and utilization of natural resources shall be under the full control and supervision of the State. The State may directly undertake such activities, or it may enter into coproduction, joint venture, or production-sharing agreements with Filipino citizens, or corporations or associations at least sixty per centum of whose capital is owned by such citizens. Such agreements may be for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and under such terms and conditions as may be provided by law. In cases of water rights for irrigation, water supply, fisheries, or industrial uses other than the development of water power, beneficial use may be the measure and limit of the grant. The State shall protect the nation's marine wealth in its archipelagic waters, territorial sea, and exclusive economic zone, and reserve its use and enjoyment exclusively to Filipino citizens. The Congress may, by law, allow small-scale utilization of natural resources by Filipino citizens, as well as cooperative fish farming, with priority to subsistence fishermen and fishworkers in rivers, lakes, bays, and lagoons. The President may enter into agreements with foreign-owned corporations involving either technical or financial assistance for large-scale exploration, development, and utilization of minerals, petroleum, and other mineral oils according to the general terms and conditions provided by law, based on real contributions to the economic growth and general welfare of the country. In such agreements, the State shall promote the development and use of local scientific and technical resources. The President shall notify the Congress of every contract entered into in accordance with this provision, within thirty days from its execution." (Art. XII.) "Sec. 3. Lands of the public domain are classified into agricultural, forest or timber, mineral lands, and national parks. Agricultural lands of the public domain may be further classified by law according to the uses to which they may be devoted. Alienable lands of the public domain shall be limited to agricultural lands. Private corporations or associations may not hold such alienable lands of the public domain except by lease, for a period not exceeding twenty-five years, renewable for not more than twenty-five years, and not to exceed one thousand hectares in area. Citizens of the Philippines may lease not more than five hundred hectares or acquire not more than twelve hectares thereof by purchase, homestead, or grant. Taking into account the requirements of conservation, ecology, and development, and subject to the requirements of agrarian reform, the Congress shall determine, by law, the size of lands of the public domain which may be acquired, developed, held, or leased and the conditions therefor." (Ibid.) "Sec. 9. The Congress may establish an independent economic and planning agency headed by the President, which shall, after consultations with the appropriate public agencies, various private sectors, and local government units, recommend to Congress and implement continuing integrated and coordinated programs and policies for national development." (Ibid.) "Sec. 10. The Congress shall, upon recommendation of the economic and planning agency, when the national interest dictates, reserve to citizens of the Philippines or to cor5

Sec. 140


839

duty to make, from time to time, a determination of whether the corporate form of organization has been used to frustrate said provisions or those of applicable laws, and whenever it deems necessary, to submit to Congress a report of its findings including recommendations for their prevention or correction. porations or associations at least sixty per centum of whose capital is owned by such citizens, or such higher percentage as Congress may prescribe, certain areas of investments. The Congress shall enact measures that will encourage the formation and operation of enterprises whose capital is wholly owned by Filipinos. In the grant of rights, privileges, and concessions covering the national economy and patrimony, the State shall give preference to qualified Filipinos. The State shall regulate and exercise authority over foreign investments within its national jurisdiction and in accordance with its national goals and priorities." (Ibid.) "Sec. 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least sixty per centum of whose capital is owned by such citizens, nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines." (Ibid.) "Sec. 19. The State shall regulate or prohibit monopolies when the public interest so requires. No combinations in restraint of trade or unfair competition shall be allowed." (Ibid.) "Sec. 4. (2) Educational institutions, other than those established by religious groups and mission boards, shall be owned solely by citizens of the Philippines or corporations or associations at least sixty per centum of the capital of which is owned by such citizens. The Congress may, however, require increased Filipino equity participation in all educational institutions. The control and administration shall be vested in citizens of the Philippines." (Art. XTV.) "Sec. 11. (1) The ownership and management of mass media shall be limited to citizens of the Philippines, or to corporations, cooperatives or associations, wholly-owned and managed by such citizens. The Congress shall regulate or prohibit monopolies in commercial mass media when the public interest so requires. No combinations in restraint of trade or unfair competition therein shall be allowed. (2) The advertising industry is impressed with public interest, and shall be regulated by law for the protection of consumers and the promotion of the general welfare. Only Filipino citizens or corporations or associations at least seventy per centum of the capital of which is owned by such citizens shall be allowed to engage in the advertising industry. The participation of foreign investors in the governing body of entities in such industry shall be limited to their proportionate share in the capital thereof, and all the executive and managing officers of such entities must be citizens of the Philippines.' (Art. XVI.)

840


Sec. 140

Illegal monopolies a n d combinations in restraint of trade. (1) Constitutional provision. — The Constitution and the law

prohibit combinations in restraint of trade or unfair competition. Thus, Section 19 of Article XII of the Constitution provides: "The State shall regulate private monopolies when the public interest so requires. No combinations in restraint of trade or unfair competition shall be allowed." The use of the word "regulate" in the Constitution indicates that some monopolies, properly regulated, are in the public interest. In the field of public utilities, for instance, the force of competition when left wholly free, might be prejudicial to the common good. (2) Existing legislations. — "There are other legislations in our jurisdiction which prohibit monopolies and combinations in restraint of trade. Basically, these anti-trust laws or laws against monopolies or combinations in restraint of trade are aimed at raising levels of competition by improving the consumer's effectiveness as the final arbiter in free markets. These laws are designed to preserve free and unfettered competition as the rule of the trade. It rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest price and the highest quality x x x they operate to forestall concentration of economic power. The law against monopolies and combinations in restraint of trade is aimed at contracts and combinations that, by the inherent nature of the contemplated acts, prejudice public interest by unduly restraining competition or unduly obstructing the course of trade." (Gokongwei, Jr. vs. Securities and Exchange Commission, 89 SCRA 336 [1979], citing foreign cases.) 6

(3) Meaning of terms. — "The terms 'monopoly,' 'combination in restraint of trade' and 'unfair competition' appeared to have a well-defined meaning in other jurisdictions. A 'monopoly' embraces any combination the tendency of which is to prevent competition in the broad and general sense, or to control prices to the detriment of the public. In short, it is the concentration of the business in the hands of a few. The material consideration "Art. 186, Revised Penal Code; Art. 28, Civil Code; Sec. 4 (par. 5.), R.A. No. 5455; and Sec. 7(g), R.A. No. 6173; cf. Sec. 17 (par. 2.), Judiciary Act.

Sec. 141


841

in determining its existence is not that prices are raised and competition actually excluded, but that power exists to raise prices or exclude competition when desired. Further, it must be considered that the idea of monopoly is now understood to include a condition produced by the mere act of individuals. Its dominant thought is the notion of the exclusiveness or unity, or the suppression of competition by the unification of interest or management, or it may be thru agreement or concert for action. It is, in brief, unified tactics with regard to prices." (Ibid.) (4) Express agreement not necessary. — "From the foregoing

definitions, it is apparent that an express agreement is not necessary for the existence of combination or conspiracy in restraint to trade. It is enough that a concert of action is contemplated and that the defendants conformed to the arrangement, and what is to be considered is what the parties actually did and not the words they used. For instance, the Clayton Act (U.S.) prohibits a person from serving at the same time as a director in any two or more corporations, if such corporations are, by virtue of their business and location of operation, competitors so that the elimination of competition between them would constitute violation of any provision of the anti-trust laws. There is here a statutory recognition of the anti-competitive dangers which may arise when an individual simultaneously acts as a director of two or more competing corporations. A common director of two or more competing corporations would have access to confidential sales, pricing, marketing information and would be in a position to coordinate policies or to aid one corporation at the expense of another, thereby stifling competition." (Ibid.) Sec. 141. Annual report of 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 may require. Such report shall be submitted within such period as may be prescribed by the Securities and Exchange Commission, (n)

842


Sec. 141

The Securities and Exchange C o m m i s s i o n . (1) Creation and supervision. — The Securities and Exchange

Commission (SEC) was created by Commonwealth Act No. 83 (Sec. 3 thereof.), otherwise known as the Securities Act. (a) The Commission was placed by the Act under the executive supervision of the Department of Justice. Subsequently, it was transferred to the Department of Commerce and Industry. With the creation of the Department of Trade and Tourism, administrative supervision was transferred to this new Department which was later on split into the Department of Trade and the Department of Tourism (see Pres. Decree No. 189.), with the Commission remaining under the Department of Trade until the issuance of Presidential Decree No. 902-A which reorganized the Commission and placed it under the direct general supervision of the Office of the President. 7

(b) Letter of Instructions No. 1117 (dated April 3, 1981.) placed the Commission under the administrative supervision of the Cabinet Standing Committee "in order to assure better consonance of the operations and activities of the Securities and Exchange Commission with national policies and objectives relative to the regulation of the corporate sector, and in order to realize an effective link between the Commission and the President in the expeditious resolution of problems as may arise from such operations and activities." (c) "To align the thrusts and activities of the SEC more with the overall economic and financial programs of the government," the supervision of the Commission was assigned to the Ministry of Finance by virtue of Executive Order No. 708 (July 27, 1981) until it was detached from the Ministry (now Department) by Executive Order No. 127 (January 20, 1987). The Commission was transferred again to the Department of Finance by Executive Order No. 202 (September 22, 1994), as amended by Executive Order No. 285 (November 24, 1995). The Department exercised administrative supervision over the Commission with the relationship between the TMow, Department of Trade and Industry.

Sec. 141


843

two agencies being governed by Executive Order No. 292, the Administrative Code of 1987. (Subsec. 1, Sec. 38, Chap. 7, Book IV thereof.) (d) "To have a more efficient and more effective coordination between the SEC, now under the supervision of the Department of Finance, and other offices to enable SEC to perform its mandated functions consistent with [the] national policy and objective" to "encourage a more active participation of private corporations and enterprises in the development of the domestic capital market and the promotion of foreign investments," Executive Order No. 60 (Jan. 13, 1999) transferred direct supervisory power over the SEC to the Office of the President which "shall assume all oversight and other functions, administrative and otherwise, over the SEC." (e) Executive Order No. 192 (Jan. 11, 2000) reverted the SEC from the Office of the President again to the Department of Finance which assumed "administrative supervision over the Commission including but not limited to the formation of capital market development and savings mobilization policies, as may be consistent with the provisions of Section 38, Chapter 7, Title III, Book IV of the Administrative Code of 1987." (f) Executive Order No. 810 (July 8, 2009) transferred the administrative supervision of the Commission again to the Department of Trade and Industry. (2) Composition and appointment of members. — From a single-

headed agency, it was reorganized on September 29, 1975 into a collegial body of three, which was later expanded to include two additional Commissioners pursuant to Presidential Decree No. 1758 promulgated on January 2, 1981. Presidential Decree No. 902-A provided for a collegial body of a Chairman and four Associate Commissioners who shall be appointed by the President. (Sec. 2, par. 1 thereof.) This composition is retained by, R.A. No. 8799, the Securities Regulation Code. (Sec. 4, thereof.) (3) Terms of office of members. — The Chairman and the four Associate Commissioners first appointed shall serve for a period of seven (7) years each and who shall serve as such until their

844


Sec. 141

successors shall have been appointed and qualified. A Commissioner appointed to fill a vacancy occurring prior to the expiration of the term for which his/her predecessor was appointed shall serve only for the unexpired portion of the term. (Ibid.) (4) Qualifications. — The Commissioners must be naturalborn citizens of the Philippines, at least forty (40) years of age for the Chairperson and at least thirty-five (35) years of age for the Commissioners, of good moral character, of unquestionable integrity, of known probity and patriotism, and with recognized competence in social and economic disciplines. The majority of Commissioners, including the Chairperson, shall be members of the Philippine Bar. (Ibid.) (5) Chairperson. — The Chairperson is the chief executive officer of the Commission. The Chairperson shall execute and administer the policies, decisions, orders and resolutions approved by the Commission and shall have the general executive direction and supervision of the work and operation of the Commission and of its members, bodies, boards, offices, personnel and all its administrative business. (Ibid.) (6) Salary. — The salary of the Chairperson and the Commissioners shall be fixed by the President of the Philippines based on an objective classification system, at a sum comparable to the members of the Monetary Board and commensurate to the importance and responsibilities attached to the position. (Ibid.) (7) Meetings and quorum. — The Commission shall hold meetings at least once a week for the conduct of business or as often as may be necessary upon call of the Chairperson or upon the request of three (3) Commissioners. The notice of the meeting shall be given to all Commissioners and the presence of three (3) Commissioners shall constitute a quorum. In the absence of the Chairperson, the most senior Commissioner shall act as presiding officer of the meeting. (Ibid.) (8) Delegation of functions and administrative review. — The

Commission may, for purposes of efficiency, delegate any of its functions to any department or office of the Commission, an individual Commissioner or staff member of the Commission

Sec. 141


845

except its review or appellate authority and its power to adopt, alter and supplement any rule or regulation. The Commission may review upon its own initiative or upon the petition of any interested party any action of any department or office, individual Commissioner, or staff member of the Commission. (Ibid.) 8

(9) Judicial review of commission's orders. — A person aggrieved

by an order of the Commission may appeal the order to the Court of Appeals by petition for review in accordance with the pertinent provisions of the Rules of Court. (Sec. 70, SRC.) 9

Powers and functions of the Commission. The Securities and Exchange Commission shall act with transparency and shall have the powers and functions provided by the Securities Regulation Code, Presidential Decree No. Presidential Decree No. 902-A provides for the positions of Secretary and Executive Director as follows: "There shall be a Secretary to the Commission, who shall be of equal rank or level with that of a Director of the Department and shall be the recorder and official reporter of the proceedings of the Commission and shall have authority to administer oath in all matters coming under the jurisdiction of the Commission. "There shall be an Executive Director of the Commission who shall be responsible for the effective implementation of the policies, rules and standards promulgated by the Commission, to coordinate and supervise the activities of the different operating units, to report to the Chairman the operations of such units, and to perform such functions as may be assigned to him by the Chairman and/or by the Commissioner." T h e procedure for appeal is as follows: "(4) Period of appeal. — The appeal shall be taken within fifteen (15) days from notice of the ruling, award, order, decision, or judgment or from the date of its last publication, if publication is required by law for its effectivity. One (1) motion for reconsideration of said ruling, award, order, decision, or judgment may be allowed. If the motion is denied, the movant may appeal during the remaining period for appeal reckoned from notice of the resolution of denial. (5) How appeal taken. — Appeals shall be taken by filing a verified petition for review in six (6) legible copies, with the Court of Appeals, a copy of which shall be served on the adverse party and on the court or agency a quo. Proof of service of the petition on the adverse party and on the court or agency a quo shall be attached to the petition. (6) Contents of the petition. — The petition for review shall contain a concise statement of the facts and issues involved and the grounds relied upon for the review, and shall be accompanied by a duplicate, original or a certified true copy of the ruling, award, order, decision or judgment appealed from, together with certified true copies of such material portions of the record as are referred to therein and other supporting papers. The petition shall state the specific material dates showing that it was filed within the period fixed herein." The decision of the Court of Appeals may be appealed to the Supreme Court by petition for certiorari within fifteen (15) days from notice of judgment or of the denial of the motion for reconsideration filed in due time. (Rules of Court, Rule 45, Sec. 1.)

846


Sec. 141

902-A, the Corporation Code, the Investment Houses Law, the Financing Company Act and other existing laws. Pursuant thereto the Commission shall have, among others, the following powers and functions: (1) Have jurisdiction and supervision over all corporations, partnerships or associations who are the grantees of primary franchises and/or a license or permit issued by the Government; (2) Formulate policies and recommendations on issues concerning the securities market, advise Congress and other government agencies on all aspects of the securities market and propose legislation and amendments thereto; (3) Approve, reject, suspend, revoke or require amendments to registration statements, and registration and licensing applications; (4) Regulate, investigate or supervise the activities of persons to ensure compliance; (5) Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and other SROs; (6) Impose sanctions for the violation of laws and the rules, regulations and orders issued pursuant thereto; (7) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on and supervise compliance with such rules, regulations and orders; (8) Enlist the aid and support of and/or deputize any and all enforcement agencies of the Government, civil or military as well as any private institution, corporation, firm, association or person in the implementation of its powers and functions under this Code; (9) Issue cease and desist orders to prevent fraud or injury to the investing public; (10) Punish for contempt of the Commission, both direct and indirect, in accordance with the pertinent provisions of and penalties prescribed by the Rules of Court; (11) Compel the officers of any registered corporation or association to call meetings of stockholders or members thereof under its supervision;

Sec. 141


847

(12) Issue subpoena duces tecum and summon witnesses to

appear in any proceedings of the Commission and in appropriate cases, order the examination, search and seizure of all documents, papers, files and records, tax returns, and books of accounts of any entity or person under investigation as may be necessary for the proper disposition of the cases before it, subject to the provisions of existing laws; (13) Suspend, or revoke, after proper notice and hearing the franchise or certificate of registration of corporations, partnerships or associations, upon any of the grounds provided by law; and (14) Exercise such other powers as may be provided by law as well as those which may be implied from, or which are necessary or incidental to the carrying out of, the express powers granted the Commission to achieve the objectives and purposes of these laws. (Sec. 5, SRC.) Among the other powers provided in Section 6 of Presidential Decree No. 902-A are: (a) To issue preliminary or permanent injunctions, whether prohibitory or mandatory, in all cases in which it has jurisdiction, and in which cases the pertinent provisions of the Rules of Court shall apply; (b) To issue writs of attachment in cases in which it has jurisdiction, in order to preserve the rights of parties and in such cases the pertinent provisions of the Rules of Court shall apply; (c) To appoint one or more receivers of the property, real and personal, which is the subject of the action pending before the Commission x x x; 10

See Garcia vs. Philippine Airlines, Inc., 531 SCRA 564 (2007); Uniwide Holdings, Inc. vs. Jandees Transportation Co., Inc., 541 SCRA 158 (2007); Rizal Commercial Banking Corp. vs. Intermediate Appellate Court, 320 SCRA 279 (1999). The suspension contemplated under Section 6(c) of Pres. Decree No. 902-A refers only to claims involving actions which are pecuniary in value. A claim within the contemplation of Pres. Decree No. 902-A is construed to refer to debts or demands of a pecuniary nature. (Finasia Investments & Finance Corp. vs. Court of Appeals, 237 SCRA 446 [1994]; Malayan Insurance Co. vs. Victorias Milling Co., Inc., 586 SCRA 45 [2009].) The filing of a case for violation of the Bouncing Check Law (B.P. Big. 22) is not, however, a claim that can be enjoined within the purview of Section 6(c). The purpose of suspending the proceedings under Pres. Decree No. 902-A is to prevent a creditor from obtaining an advantage or 10

848


Sec. 141

(d) To create and appoint a management committee, board, or body upon petition or motu proprio" x x x ; (g) To pass upon the validity of the issuance and use of proxies and voting trust agreements for absent stockholders or members; (j) To authorize the establishment and operation of stock exchanges, commodity exchanges and such other similar organizations and to supervise and regulate the same, including the authority to determine their number, size and location, in the light of national or regional requirements for such activities with the view to promote, conserve or rationalize investment; and (k) To pass upon, refuse or deny, after consultation with the Board of Investments, Department of Industry, National Economic and Development Authority or any other appropriate government agency, the application for registration of any corporation, partnership or association or any form of organization falling within its jurisdiction, if their establishment, organization or operation will not be consistent with the declared national economic policies. (Sec. 6, thereof.)

preference over another and to protect and preserve the rights of party litigants as well as the interest of the investing public or creditors. (Rosario vs. Co, 563 SCRA 239 [2008].) "When the dissension among stockholders is such that the corporation cannot successfully carry on its corporate functions, the appointment of a management committee becomes imperative, especially where there is imminent danger of dissipation, loss, wastage or destruction of corporate assets. Mere disagreement amount stockholders as to the affairs of the corporation would not in itself suffice as a ground for the appointment of a management committee. (Jacinto vs. First Women's Credit Corporation, 410 SCRA 140 [2003].) Having the power to create a management committee, a regional trial court can order the reorganization of the existing management committee. The appointment of new members does not mean the creation of a new management committee. (Punongbayan vs. Punongbayan, Jr., 491 SCRA 477 [2006].) All actions for claims (whether secured or unsecured) against a corporation pending before any court, tribunal or board shall ipso jure be suspended in whatever stage such actions may be found upon the appointment by the SEC of a management committee or a rehabilitation receiver. (Philippine Airlines, Inc. vs. Zamora, 514 SCRA 584 [2007].) See Phil. Airlines, Inc. vs. PAL Employees Assoc., 525 SCRA 29 (2007); Union Bank of the Phils, vs. Conception, 525 SCRA 672 (2007); Cordova vs. Reyes, etc., Law Offices, 526 SCRA 300 (2007); Phil. Airlines, Inc. vs. Heirs of B.J. Zamora, 538 SCRA 456 (2007).

Sec. 141


849

Jurisdiction of Commission over corporations. The Securities and Exchange Commission has jurisdiction and supervision over all corporations, partnerships or associations, who are the grantees of primary franchise and /or a license or permit issued by the government to operate in the Philippines; and in the exercise of its authority, it has the power to enlist the aid and support of and/o r deputize any and all enforcement agencies of the government, civil or military, as well as any private institution, corporation, firm, association or person in the implementation of its powers and functions. (Sec. 5[a], [h], SRC.) It is the certificate of incorporation that gives juridical personality to a corporation and places it within the Commission's jurisdiction. This jurisdiction is not affected even if the authority to operate a certain specialized activity is withdrawn by the appropriate regulatory body other than the Commission. (Pilipinas Loan Company, Inc. vs. Securities and Exchange Commission, 356 SCRA 193 [2001]; Orosa, Jr. vs. Court of Appeals, 193 SCRA 391 [1991].) (1) Corporation covered. — Section 5 above plainly vests the Commission with jurisdiction and supervision over all corporations which are enfranchised to act as corporate entities. It by no means restricts that jurisdiction to entities other than those granted permits or licenses to operate by another government regulatory body. It is the certificate of incorporation that gives juridical personality to a corporation and places it within the Commission's jurisdiction, (see Oroza, Jr. vs. Court of Appeals, 193 SCRA 391 [1991].) The Commission's regulatory authority over private corporations provided in the Securities Regulation Code (supra.) encompasses a wide margin of areas, touching nearly all of a corporation's concerns. This authority springs from the fact that a corporation owes its existence to the concession of its corporate franchise from the State. (Philippine Stock Exchange, Inc. vs. Court of Appeals, 281 SCRA 232 [1997].) Thus, the determination as to which of two stock and transfer books (STB) is authentic and duly registered with it, whether a STB registration may be cancelled, or whether a certification with respect to a STB may be revoked, is an issue that necessarily belongs to the SEC as part of

850


Sec. 141

its regulatory jurisdiction, and not with the regional trial court. (Provident International Resources Corp. vs. Venus, 554 SCRA 540 [2008].) The Commission, however, has no jurisdiction over corporations created by a special law and not under the Corporation Code or the former Corporation Law. (infra.) Thus: (a) The SEC has no power of supervision or control over the activities of juridical entities known as "water districts" created by Presidential Decree No. 198 although considered as quasi-public corporations as they are entirely distinct from corporations organized under the Corporation Code. The function of supervision or control over them is entrusted by law to the Local Water Utilities Administration. (Marilao Water Consumers Assoc., Inc. vs. Intermediate Appellate Court, 201 SCRA 437 [1991]; see Davao City Water District vs. Civil Service Commission, 201 SCRA 593 [1991].) (b) Quo warranto actions against corporations or persons using corporate offices fall under the jurisdiction of the commission unless otherwise provided for by law, as in the case where the corporate entities involved are homeowners associations in which jurisdiction is lodged with the Home Insurance and Guarantee Corporation (HIGC), the new name given by Exec. Order No. 90, Section 1(d) to what was formerly the Home Financing Corporation (HFC) created under R.A. No. 580. Under Section 2 of Exec. Order No. 535, implemented by HIGC's Revised Rules of Procedure, the HIGC shall "exercise all the powers, authorities and responsibilities that are vested on the Securities and Exchange Commission with respect to homeowners association." (Unilongo vs. Court of Appeals, 305 SCRA 561 [2000].) (2) Matter or cases contemplated. — The jurisdiction of the SEC

is limited to matters intrinsically connected with the regulation of corporations, partnerships and associations. It is not vested with absolute jurisdiction and control in all matters affecting corporations, partnerships and associations, for to uphold such a proposition would remove without legal imprimatur from the regular courts all conflicts over matters involving or affecting

Sec. 141


851

them, regardless of the nature of the transactions which gave rise to such disputes. (Peneyra vs. Intermediate Appellate Court, 181 SCRA 244 [1990]; DMRC Enterprises vs. Este del Sol Mountain Reserve, Inc., 132 SCRA 293 [1984]; Dee vs. Securities and Exchange Commission, 199 SCRA 238 [1991].) (3) Jurisdiction and powers strictly construed. — Administrative

agencies like the Securities and Exchange Commission are tribunals of limited jurisdiction, and as such, can exercise only those powers which are specifically granted to them by their enabling statutes and their jurisdiction should be interpreted strictissimi juris. It is likewise the rule, however, that an administrative agency has also such powers as are necessarily implied in the exercise of its express powers. It is a well-settled rule, however, that findings of quasi-judicial agencies, like the Securities and Exchange Commission, which have acquired expertise in the matters entrusted to their jurisdiction are generally accorded by the Supreme Court not only great weight and respect but with finality if they are supported by substantial evidence. (4) Corporations subject to its secondary jurisdiction. — In cases

where a government agency regulates the operation of a certain type of business or activity by virtue of a special law, that agency has the primary jurisdiction over the same while the SEC assumes only secondary jurisdiction with respect to matters involving its authority to enforce the Corporation Code and the Securities Regulation Code. (a) Thus, the SEC has no jurisdiction over matters relating to the implementation of the Insurance Code (Pres. Decree No. 1460.) which is entrusted to the Insurance Commission. While it can impose sanctions on insurance companies for violations of the Corporation Code, it has no power to go after erring insurance companies for violation of the Insurance Code. (SEC Opinion, Oct. 9, 1989.) (b) Also, while the SEC has no jurisdiction over the business operation of the Philippine National Bank which was created by a special law and is not registered with it and although the bank's securities are exempt from registration requirements under the Revised Securities Act (now

852


Sec. 141

Securities Regulation Code), it has jurisdiction to intervene on matters pertaining to the listing of securities in the stock exchange. (SEC Opinion Oct. 10,1991.) Note: The SEC retains its administratie regulatory and oversight powers over all corporations, partnerships and associations which are grantees of primary franchises and/ or a license or permit issued by the Government, (see Orendain vs. B.F. Homes, Inc., 506 SCRA 348 [2006].) However, intra-corporate controversies have been transferred by R.A. No. 8799 (SRC) to regional trial courts, (see Appendix " C " ) Concomitant to the power of regional trial courts to hear and decide, intra-corporate controversies is to authority to issue orders necessary or incideental to the carrying out of the powers expressly granted to it. (Yuyuico vs. Quiambao, 513 SCRA 243 [2007].) Indemnifications and responsibilities of Commissioners. (1) The Securities and Exchange Commission shall indemnify each Commissioner and other officials of the Commission, including personnel performing supervision and examination functions for all costs and expenses reasonably incurred by such persons in connection with any civil or criminal actions, suits or proceedings to which they may be or made a party by reason of the performance of their functions or duties, unless they are finally adjudged in such actions or proceedings to be liable for gross negligence or misconduct. (a) In the event of settlement or compromise, indemnification shall be provided only in connection with such matters covered by the settlement as to which the Commission is advised by external counsel that the persons to be indemnified did not commit any gross negligence or misconduct. (b) The costs and expenses incurred in defending the aforementioned action, suit or proceeding may be paid by the Commission in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the Commissioner, officer or employee to repay

Sec. 141


853

the amount advanced should it ultimately be determined by the Commission that he/she is not entitled to be indemnified as provided in this subsection. (2) The Commissioners, officers and employees of the Commission who willfully violate the Securities Regulation Code or who are guilty of negligence, abuse or acts of malfeasance or fail to exercise extraordinary diligence in the performance of their duties shall be held liable for any loss or injury suffered by the Commission or other institutions as a result of such violation, negligence, abuse, malfeasance, or failure to exercise extraordinary diligence. (3) Similar responsibility shall apply to the Commissioners, officers and employees of the Commission for: (a) the disclosure of any information, discussion or resolution of the Commission of a confidential nature, or about the confidential operations of the Commission, unless the disclosure is in connection with the performance of official functions with the Commission or with prior authorization of the Commissioners; or (b) the use of such information for personal gain or to the detriment of the government, the Commission or third parties. Any data or information required to be submitted to the President and/or Congress or its appropriate committee, or to be published under the provisions of this Code shall not be considered confidential. (Sec. 6, SRC.) Jurisdiction over cases transferred to ordinary courts.

The jurisdiction of the Securities and Exchange Commission "over all cases enumerated under Section 5 of Presidential Decree No. 902-A is hereby transferred to the courts of general jurisdiction or the appropriate Regional Trial Court." The 12

"Congress recognized that the intra-corporate disputes are not that much of a technical matter that requires the competence of a specialized agency like the SEC. Thus, even a regular trial court can resolve such disputes.

854


Sec. 141

Supreme Court in the exercise of its authority may designate the Regional Trial Court branches that shall exercise jurisdiction over these cases. (Sec. 5.2, SRC.) (1) Cases transferred. — The cases enumerated in Section 5 of Presidential Decree No. 902-A, involve the following: 13

"(a) Devices or schemes employed by or any acts of the board of directors, business associates, its officers or partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stockholders, partners, or members of associations or organizations registered with the Commission; (b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members, or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the State insofar as it concerns their individual franchise or right to exist as such entity; (c) Controversies in the election or appointment of directors, trustees, officers or managers of such corporations, partnerships or associations; (d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in cases where the corporation, partnership or association possesses sufficient property to cover all its debts but foresees the impossibility of meeting them when they respectively fall due or in cases where the corporation, partnership or association has no sufficient assets to cover its liabilities, but is under management of a Rehabilitation Receiver or Management Committee created pursuant to this Decree." (2) Status or relationship contemplated. — Otherwise stated,

the controversy must pertain to any of the following relationships of the parties:

i3"Xhe Commission shall retain jurisdiction over pending suspension of payments/ rehabilitation cases filed as of 30 June 2000 until finally disposed."

Sec. 141


855

(a) between the corporation, partnership, or association and the public; or (b) between the corporation, etc., and its stockholders, partners, members, or officers; or (c) between the corporation, etc., and the State insofar as its franchise, permit or license to operate is concerned; or (d) among the stockholders, partners, or associates themselves. (Embassy Farms, Inc. vs. Court of Appeals, 188 SCRA 492 [1990]; Rivera vs. Florendo, 144 SCRA 643 [1986]; Abejo vs. De la Cruz, 149 SCRA 654 [1987]; Dee vs. Securities and Exchange Commission, 199 SCRA 239 [1991].) (3) Previous quasi-judicial powers of SEC delimited. — Before, to

determine which body, the Commission or the regular court, has jurisdiction over a dispute, not only the status or relationship of the parties (which requires that the controversy must arise out of intra-corporate or partnership relations) but also the nature of the question that is the subject of the controversy (which requires that the dispute among the parties be intrinsically connected with the regulation of the corporation, etc. or deal which its internal affairs) must be considered. Thus, not only every conflict or disagreement between a corporation and its stockholders could be resolved by the SEC in the exercise of its adjudicatory or quasi-judicial jurisdiction. If, for example, a person leases an apartment owned by a corporation of which he is a stockholder, a complaint for ejectment for non-payment of rentals would come under the jurisdiction of the regular courts. (Viray vs. Court of Appeals, 191 SCRA 308 [1990]; see Torio vs. Court of Appeals, 230 SCRA 626 [1994].) His position as a stockholder of the corporation is incidental only to the issue of his liability for unpaid rentals. A claim for unpaid wages and separation pay filed by a corporate officer against a corporation involves a labor dispute as it relates to an employer-employee relationship, which is distinct from the corporate relationship of one with the other. (Mainland Construction Co., Inc. vs. Movilla, 250 SCRA 290 [1995].) Article 226 of the Labor Code vests upon the Bureau of Labor Relations original and exclusive authority and jurisdiction to act on all

856


Sec. 141

inter-union and intra-union disputes. The controversy between two sets of officers of a labor union both claiming to be entitled to the release of the union dues collected by the company with whom it had an existing collective bargaining agreement is an intra-union dispute over which the SEC (now RTC) has no jurisdiction. (Cebu Seamen's Assoc., Inc. vs. Ferrer, 212 SCRA 50 [1992].) It has been held, however, that a corporate officer's dismissal is always a corporate act and its nature is not altered by the reason or wisdom which the board of directors may have in taking such action. The question of remuneration involving a person who is not a mere employee but a stockholder and officer of a corporation is not a simple labor problem but a matter that comes within the area of corporate officers and management and is, in fact, a corporate controversy in contemplation of the Corporation Code. (Velarde vs. Lopez, Inc., 419 SCRA422 [2003].) (4) Jurisdiction over all the cases now with appropriate regioanl

trial courts. — Now, in view of R.A. No. 8799 (SRC), every judicial controversy, whether or not it arises out of intra-corporate or partnership relations or deals with the internal affairs of a corporation, partnership, or association, including derivative suits and inspection of books, falls within the jurisdiction of the appropriate regional trial courts. Note: The Interim Rules of Procedure for Intra-corporate Controversies (Appendix " C " ) approved by the Supreme Court governing the procedure to be observed in civil cases involving controversies enumerated in Section 5 of Pres. Decree No. 902A jurisdiction over which has been transferred to Regional Trial Courts does not include controversies "between such corporation, partnership or association and the state insofar as it concerns their individual franchise or right to exist as such entity" mentioned in No. (l)(b) above. Section 5.2 of R.A. No. 8799 (SRC), however, is very clear that the jurisdiction that has been transferred is "over all cases enumerated under Section 5 of Presidential Decree No. 902-A." Submission of annual report to the C o m m i s s i o n .

Every corporation doing business in the Philippines is required to submit to the Securities and Exchange Commission

Sec. 141


857

within such period as may be prescribed by it an annual report of its operations for the preceding year, including an audited financial statement of its assets and liabilities and such other requirements (e.g., see Sec. 126.) as it may require. The annual report contemplated is separate and apart from the financial report which the board of directors or trustees is required to present to stockholders or members at the annual regular meeting of stockholders or members. (see Sec. 75, par. 2.) 14

Section 141 makes the submission of reportorial requirements obligatory. (SEC Opinion, Jan. 13, 1986.) However, in case of suspension of corporate business, a corporation may be exempted from submitting its annual financial statements by filing with the Securities and Exchange Commission in duplicate an affidavit of its manager stating the fact of suspension of the corporate business and the cause thereof. (SEC Opinion, Jan. 2, 1973.) 15

The sale or divestment by a public official of his corporate "The provisions of Section 141, together with Section 126 which requires a branch office of a foreign corporation to deposit with the SEC securities, basing the computation of the value of these securities and of penalties for failure to comply with reportorial requirements on the accumulated income of the branch office, show that complete financial statements must be submitted to enable the SEC to perform its monitoring functions. (SEC Opinion No. 07-04, April 20, 2007.) The SEC rules require that at the end of its fiscal year, each corporation, whether domestic or foreign, must prepare a balance sheet and related profit and loss statement duly audited and certified by an independent certified public accountant. Where the authorized capital stock or the paid-up capital, whichever is lower, is less than P50,000.00, the said financial statements may, instead, be attested and sworn to by the treasurer of the corporation. The deadline for submission of copy of said statements to the Commission is as follows: (1) For corporations whose securities are not registered under the Revised Securities Act —120 days from the end of the fiscal year of the corporation. A copy of the annual financial statements, duly stamped "Received" by the Bureau of Internal Revenue must also be submitted. (2) For corporations whose securities are registered under the Revised Securities Act including commercial paper issuers — 1 0 5 days from the end of the fiscal year of the corporation. In addition, written consent by the corporation allowing the SEC to obtain a copy of the annual financial statements filed with the Bureau of Internal Revenue must be submitted. (3) For securities brokers — sixty (60) days from the end of the fiscal year of the corporation. An application for extension of time of not exceeding thirty (30) days to file the annual financial statements may be entertained if presented before the due date and upon payment of a compromise penalty. See Appendices "I" and "J." 15

858


Sec. 142

shares before assuming office need not be reported to the Commission as no law requires it. Section 141 only requires submission of financial reports, not sales or disposal of stocks. (Trueste, Sr. vs. Sandiganbayan, 145 SCRA 508 [1986].) Corporations covered by the requirement.

It would seem that Section 141 applies only to stock corporations, whether they actually declare and distribute dividends or not, and not to non-stock corporations. This is evident from the fact that Section 141 limits its application to corporations "lawfully doing business in the Philippines." (1) It has been opined, however, that a corporation, whether stock or non-stock, may be deemed to be "doing business" when it engages in the exercise of its corporate purposes. Thus, while non-stock, non-profit corporations, including corporations sole, by their very nature do not undertake economic business ventures, they are considered doing or transacting business in the carrying of the purpose(s) for which they were organized. (SEC Opinion, July 3,1992.) Furthermore, Section 87 provides for the supplementary application of the Code provisions on stock corporations, (par. 2 thereof.) (2) Pension funds, retirement plans, and provident funds which are established within the corporation and are not separately registered with the Commission are not required to be audited by an external auditor as their auditing is the internal concern of the corporation. (SEC Opinion, Sept. 18,1989.) (3) Stock corporations such as banks and banking institutions, public utility corporations, insurance corporations, cooperative associations, labor unions, and other corporations governed by laws not entrusted to the Securities and Exchange Commission for enforcement are likewise excluded from the operation of Section 141. Sec. 142. Confidential nature of examination results. — 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

Sec. 142


859

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 presented as evidence before any court (n) Visitorial p o w e r in g e n e r a l . Visitorial power or right of visitation is the power of the State

through the proper governmental agency to examine the business affairs, administration, and condition of corporations. (1) Nature. — It is a public right as distinguished from the right of inspection of the corporate books and records by a stockholder (see Sec. 74, par. 2.), which is merely a private right existing in virtue of his stock ownership. (Harkness vs. Guthrine, 72 Utah 248, 75 P. 624.) (2) Purpose. — The purpose of visitation is to supervise and control the management of corporations and keep them within the limits of their legitimate powers. (Ibid.) (3) Scope. — It extends to "any corporation" transacting business in the Philippines (Sec. 142.) even, therefore, to corporations created by special laws and foreign corporations. In the exercise of its right of visitation, for purposes of taxation and regulation, or to facilitate the accomplishment of any other proper end, the State has the power to compel corporations to render reports. (18 Am. Jur. 2d 705.) Visitorial power granted certain governmental agencies.

The visitorial power is vested in the State, particularly in the lawmaking body. By special laws, the following, among others, have been granted visitorial powers which they may exercise motu proprio or upon complaint of a party-in-interest: (1) The Securities and Exchange Commission, as to books of

corporations and partnerships when such is necessary in the enforcement of the Corporation Law. (see C A . No. 287.) The Commission has the power to require corporations and partnerships registered with it to submit such reports, financial or otherwise,

860


Sec. 142

as may be necessary in the public interest or for the proper discharge of its duties, (see Sec. 141.) Under the Securities Regulation Code, it may order the examination, search and seizure of all documents, papers, files and records, tax returns, and books of accounts of any entity or person under investigation as may be necessary for the proper disposition of the cases before it, subject to the provisions of existing laws. Section 142 declares as confidential all interrogatories propounded by the Commission and the answers thereto by any corporation and the result of the examination of its operations, its books and records except (a) when otherwise provided by law or (b) when they are necessary to be presented as evidence before any court; (2) The Bureau of Internal Revenue, with respect to liability

of corporations for taxes (Sees. 232-235, Pres. Decree No. 1158 [National Internal Revenue Code], as amended.); (3) The Insurance Commission, over all insurance companies (Sees. 245-246, Pres. Decree No. 1460 [Insurance Code of 1978].); (4) The supervising and examining department head of the Bangko Sentral ng Pilipinas, over all banking and quasi-banking

institutions operating in the Philippines (Sec. 28, R.A. No. 7653 [the new Central Bank Act].); (5) The National Telecommunications Commission, as to radio

and television broadcasting companies, operators of radio communications systems, wire or wireless telephone systems, and other similar public utilities (see Sees. 14 and 15, Exec. Order No. 546.); (6) The Department of Labor and Employment or its duly author-

ized representative, as to employer's records and premises, when such is necessary to determine compliance with or in aid in enforcement of the Labor Code (Pres. Decree No. 442, as amended.) or the rules and the regulations issued thereunder (see Sec. 1, Rule VI, Book III, Rules and Regulations Implementing the Labor Code.); (7) The Commission on Audit, as to books, papers, and documents filed by individuals and corporations with, and which are

Sec. 142


861

in the custody of, government offices in connection with government revenue collection operations, for the sole purpose of ascertaining that all funds determined by the appropriate agencies as collectible and due the government have been actually collected, except as otherwise provided in the National Internal Revenue Code of 1986. (Sec. 28, Pres. Decree No. 1445 [Auditing Code of the Philippines].) The Commission has visitorial authority over non-government entities subsidized by the government, those required to pay levies or government share, those which have received counterpart funds from the government or are partly funded by donations through the government, the said authority, however, pertaining only to the audit of those funds or subsidiaries coming from or through the government. Upon direction of the President, the Commission shall likewise exercise visitorial authority over non-governmental entities whose loans are guaranteed by the government, but such authority shall pertain only to the audit of the government's contingent liability (Sec. 29, Ibid.); and (8) The National Housing Authority as to the business affairs,

administration, and condition of any person, corporation, partnership, cooperative, or association engaged in the business of selling subdivision lots and condominium units. For this purpose, the official authorized to do so shall have the authority to examine under oath the directors, officers, stockholders or members of any corporation, partnership, association, cooperative or other persons associated or connected with the business and to issue subpoena or subpoena duces tecum in relation to any investi-

gation that may arise therefrom. The Authority may also authorize the Provincial, City, or Municipal Engineer, as the case may be, to conduct an ocular inspection of the project to determine whether the development of said project conforms to the standards and specifications prescribed by the government. The books, papers, letters, and other documents belonging to the person or entities herein mentioned shall be open to inspection by the Authority or its duly authorized representative. (Sec. 34, Pres. Decree No. 957 [Subdivision and Condominium Buyers' Protective Decree], as amended.)


862

Sec. 143

Judicial supervision, generally.

Although the general visitorial powers of the State may be exercised by the courts, as a general rule, courts will refrain from interfering with the internal management of a corporation. It will not do so at the instance of minority stockholders as long as those in control are acting honestly and within their discretionary powers. The rule, however, is not absolute or inflexible. Where the action of a board of directors or the stockholders is an abuse of discretion, or is forbidden by law or is against public policy, or is ultra vires, or is a fraud upon minority stockholders, or will result in waste, dissipation, or misapplication of the corporate assets, the courts have the power to grant appropriate relief. (19 Am. Jur. 2d 834.) Sec. 143. Rule-making power of the Securities and Exchange Commission. — The Securities and Exchange Commission shall have the power and authority to implement the provisions of this Code, and to promulgate rules and regulations reasonably necessary to enable it to perform its duties hereunder, particularly in the prevention of fraud and abuses on the part of the controlling stockholders, members, directors, trustees or officers, (n) Rule-making power of the Securities and Exchange C o m m i s s i o n . (1) Rules governing corporations.

— In the exercise of its

general power and authority to implement the provisions of the Corporation Code, the Securities and Exchange Commission is empowered to promulgate rules and regulations governing corporations reasonably necessary to enable it to perform the duties imposed upon it by the Code, particularly in the prevention of fraud and abuses on the part of the controlling stockholders, members, directors, trustees, or officers. (Sec. 143.) 16

There are certain provisions in the 1999 SEC new Rules of Procedure that suggest Le availability of petitions for certiorari to be filed with the Commission en banc as against iterlocutory orders. (Yamaoka vs. Pescarich Manufacturing Corporations, 361 SCRA 672 l6

Sec. 143


863

(2) Rules governing securities. - To effect the provisions and

purposes of the Securities Regulation Code (SRC), the Commission may issue, amend, and rescind such rules and regulations and orders necessary or appropriate, including rules and regulations defining accounting, technical, and trade terms used in the SRC, and prescribing the form or forms in which information required in registration statements, applications, and reports to the Commission shall be set forth. (a) Forpurposesofitsrulesorregulations,theCommission may classify persons, securities, and other matters within its jurisdiction, prescribe different requirements for different classes of persons, securities, or matters, and by rule or order, conditionally or unconditionally exempt any person, security, or transaction, or class or classes of persons, securities or transactions, from any or all provisions of the SRC. (b) Failure on the part of the Commission to issue rules and regulations shall not in any manner affect the self-executory nature of the SRC. (c) The Commission shall promulgate rules and regulations providing for reporting, disclosure and the prevention of fraudulent, deceptive or manipulative practices in connection with the purchase by an issuer, by tender offer or otherwise, of and equity security of a class issued by it that satisfies the requirements of Subsection 17.2 (refers to Periodic and other Reports of Issuers) of the SRC. Such rules and regulations may require such issuer to provide holders of equity securities of such dates with such information relating to the reasons for such purchase, the source of funds, the number of shares to be purchased, the price to be paid for such securities, the method of purchase and such additional information as the Commission deems necessary or appropriate in the public interest or for the protection of investors, or which the Commission deems to be material to a determination by holders whether such security should be sold. (d) For the purposes of paragraph (c) above, a purchase by or for the issuer or any person controlling, controlled by, or under common control with the issuer, or a purchase subject to the control of the issuer or any such person, shall


864

Sec. 144

be deemed to be a purchase by the issuer. The Commission shall have the power to make the necessary implementing rules and regulations. Including exemptive rules and regulations covering situations in which the Commission deems it unnecessary or inappropriate that a purchase of the type described shall be deemed to be a purchase by the issuer for the purpose of some or all of paragraph (c). (e) The rules and regulations promulgated by the Commission shall be published in two (2) newspapers of general circulation in the Philippines, and unless otherwise prescribed by the Commission, the same shall be effective 15 days after the date of the last publication. (Sec. 72, SRC.) (3) Rules prescribing fines and/or penalties. — Furthermore, the

Commission may impose fines and/or penalties for violations of the Code, or any other laws being implemented by it, the pertinent rules and regulations, its orders, decisions and/or rulings. (Ibid., Sec. 6[f]; see also, Sec. l[b], R.A. No. 1143.) Thus, a corporation may be dissolved by the Commission on grounds provided by its rules and regulations. (Sec. 121.) The Commission is authorized to collect and receive fees under rules and regulations promulgated by it. (Sec. 139.) 17

(4) Entities not subject to rules. — Banks and banking insti-

tutions, public utility corporations, insurance corporations, cooperative associations, labor unions and other corporations governed by laws not entrusted to the Securities and Exchange Commission for enforcement or falling under the jurisdiction of government agencies other than the Commission are not subject to its rules, (see Sec. 4, SEC Rules and Regulations, dated March 5,1958.) Sec. 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 pesos (P1,000.00) but not more than ten thousand pesos (P10,000.00) 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

17

See Consolidated Scale of Fines (Appendix "H.")

Sec. 145


865

is committed by a corporation, the same may, after notice and hearing, be dissolved in appropriate proceedings before the Securities and Exchange Commission: 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 1/2a) General penalty.

In addition to specific penalties or sanctions provided by the Code for violation of any of its provisions or amendments thereto, the Code expressly provides under the above section a general penalty for violations "not otherwise specifically penalized therein." (1) If the violation is committed by a director or trustee, officer or stockholder or member of a corporation, he shall be punished by fine or by imprisonment, or both in the discretion of the court, (see Sec. 74, par. 3.) (2) If the violation is committed by the corporation, the same shall be dissolved after appropriate proceedings before the Securities and Exchange Commission (see Sec. 121.) without prejudice to the institution of appropriate action against the director, trustee or officer of the corporation responsible for the violation. Sec. 145. Amendment or repeal. — No right or remedy in favor of or against any corporation, its stockholders, members, directors, trustees, or officers, nor any liability incurred by any such corporation, stockholders, members, directors, trustees or officers, shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of this Code or of any part thereof, (n) Limitations on legislative power to a m e n d or repeal. (1) Right against impairment of obligations of contracts and vested

rights. — Under Section 145, any remedy or right already acquired

866


Sec. 146

by or against, or any liability already incurred by any corporation, its stockholders, members, directors, trustees, or officers shall not be removed or impaired by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of the Code or of any part thereof. There is here a recognition of the right against impairment of the obligations of a contract or of vested rights. (2) Right survives dissolution of corporation. — The reserved

power of "amendment, alteration, or repeal by the Congress" (see Constitution, Art. XII, Sec. 11.) is subject to the provision of the Constitution against impairing the obligation of contracts. (Art. Ill, Sec. 10 thereof.) The obligation of contracts entered into by the corporation and vested or acquired rights survive its dissolution. Thus, an educational institution whose charter has expired in the middle of a school year may continue holding classes up to the end of such school year where the enrollment for such classes was made prior to the date of its dissolution. (SEC Opinion, Aug. 24,1971.) (3) Right to compensation for property taken. — The right to

amend does not also authorize the taking of the corporation's property without just compensation. (Constitution, Art. Ill, Sec. 9.) Sec. 146. Repealing clause. — Except as expressly provided by this Code, all laws or parts thereof inconsistent with any provision of this Code shall be deemed repealed, (n)

Former Corporation Law repealed. There is no express repeal of Act No. 1459 (as amended.), the old Corporation Law. Repeals by implication are not favored as laws are presumed to be passed with full knowledge of existing laws. However, Act No. 1459 should be deemed repealed by the Code as the latter "is intended to supplant" the former, (see Explanatory Note to Cabinet Bill No. 3 which became B.R Big. 68; see Sec. 1.) While as a general rule, implied repeal of a former statute by a later one is not favored, yet if the later act covers the whole

Sec. 146


867

subject of the earlier one and is clearly intended as a substitute, it will operate as a repeal of the earlier act, and in such a revision of the law, whatever is excluded is discarded and repealed. {In re Guzman, 73 Phil. 52 [1941]; Joaquin vs. Navarro, 81 Phil. 373 [1948]; Iloilo Palay and Corn Planters Assoc., Inc. vs. Feliciano, 13 SCRA 377 [1965].) R e p e a l of other l a w s .

All other laws, decrees, executive orders, rules and regulations or parts thereof contrary to or inconsistent with any provision of the Corporation Code shall also be deemed repealed. (1) Presumption against implied repeals. — It has been held,

however, that a repealing clause which states that "all laws or parts thereof inconsistent with the provisions of this Act are hereby repealed or modified accordingly" is not an express repealing clause because it fails to identify or designate the Act or Acts that are intended to be repealed. Such being the case, the presumption against implied repeals still applies unless an irreconcilable inconsistency or repugnancy exists in the terms of the new and old laws. (Iloilo Palay and Corn Planters Assoc., Inc. vs. Feliciano, supra; Quimsing vs. Lachica, 2 SCRA 182 [1961].) (2) Suppletory application of Corporation Code. — The enact-

ment of a later general law cannot be construed to have impliedly repealed a previously enacted special law. The established rule is that a special statute, providing for a particular case or class of cases, is not repealed by a subsequent statute, general in its terms, provisions and applications, unless there is a specific and express repeal or at least the intent to repeal or alter is manifest, although the terms of the general law (like the Corporation Code) are broad enough to include the cases embraced in the special law (like the General Banking Law). (National Power Corporation vs. Area, 25 SCRA 931 [1968].) Such "particular case or class of cases" shall be governed by the provisions of the general law only "insofar as they are applicable" (see Sec. 4.), either because they are not inconsistent with or are expressly made applicable by the special law.

866


Sees. 147-148

Sec. 147. Separability of provisions. — Should any provision of this Code or any part thereof be declared invalid or unconstitutional, the other provisions, so far as they are separable, shall remain in force, (n) Sec. 148. Applicability to existing corporations. — All corporations lawfully existing and doing business in the Philippines on the date of the effectivity of this Code and heretofore authorized, licensed or registered by the Securities and Exchange Commission, shall be deemed to have been authorized, licensed or registered under the provisions of this Code, subject to the terms and conditions of its license, and shall be governed by the provisions hereof: Provided, That where any such corporation is affected by the new requirements of this Code, said corporation shall, unless otherwise herein provided, be given a period of not more than two (2) years from the effectivity of this Code within which to comply with the same, (n) Applicability of C o d e to existing corporations.

All lawfully existing corporations including foreign corporations licensed by the Securities and Exchange Commission before the effectivity of the Code shall be deemed licensed under the provisions of the Code, and shall continue to have such authority under the terms and conditions of their licenses but subject to the provisions of the Code. Where any such corporation is affected by new requirements of the Code (e.g., the 2 5 % / 2 5 % ratio requirement on the subscribed and paid-up capital of stock corporation under Section 13; requirement under Section 123 that the laws of a foreign corporation "allow Filipino citizens and corporations to do business in its own country or State"; requirement under Section 126 for foreign corporations to deposit with the SEC Philippine securities worth at least PI00,000), said corporation shall, unless otherwise provided, have a period of not more than two (2) years from the effectivity of the Code within which to comply with the same.

Sec. 149


869

For pre-war corporations without any provisions in their articles of incorporation as to their term of existence, the required 50-year term should be counted not from the date of registration, but from May 1, 1980, the effectivity date of the Corporation Code. (SEC Opinion, Sept. 25,1990.) Sec. 149. Effectivity. — This Code shall take effect immediately upon its approval.

Effectivity of the Code. The Corporation Code was approved on May 1, 1980. Notwithstanding the provision of Section 149, the Code did not take effect immediately upon its approval. The prior publication of laws is a requirement of constitutional due process and cannot be dispensed with. Laws take effect after 15 days following the completion of their publication in the Official Gazette, publication being counted from the date of release thereof for circulation. The law may provide for its publication in a newspaper of general circulation, (see Tanada vs. Tuvera, 146 SCRA 446 [1986]; Almario vs. Alba, 127 SCRA 69 [1984]; see Art. 2, Civil Code.) — oOo —

Appendix A THE SECURITIES REGULATION CODE* (R.A. NO. 8799) CHAPTER I TITLE AND DEFINITIONS S E C T I O N 1. Title. — This shall be k n o w n as "The Securities Regulation Code." SEC. 2. Declaration of State Policy. — The State shall establish a socially conscious, free market that regulates itself, encourage the widest participation of ownership in enterprises, enhance the democratization of wealth, promote the development of the capital market, protect investors, ensure full and fair disclosure about securities, m i n i m i z e if not totally eliminate insider trading and other fraudulent or manipulative devices and practices w h i c h create distortions in the free market. To achieve these ends, this Securities Regulation Code is hereby enacted. SEC. 3. Definition of Terms. — 3.1. "Securities" are shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract, instrument, whether w r i t t e n or electronic in character. It includes: (a) Shares of stock, bonds, debentures, indebtedness, asset-backed securities;

notes,

evidences

of

(b) Investment contracts, certificates of interest or participation in a profit sharing agreement, certificates of deposit for a future subscription; (c)

Fractional undivided interests in oil, gas or other mineral rights;

(d) Derivatives like option and warrants; (e) Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar instruments; (f) Proprietary corporations; and

or

non-proprietary

membership

certificates

in

(g) Other instruments as m a y in the future be determined by the Commission.

*With Implementing Rules and Regulations promulgated by the Securities and Exchange Commission.

870

Sec. 3

THE SECURITIES REGULATION CODE Appendix A

871

3.2. "Issuer" is the originator, maker, obligor, or creator of the security. 3.3. "Broker" is a person engaged in the business of b u y i n g and selling securities for the account of others. 3.4. "Dealer" means any person w h o buys and sells securities for h i s / h e r o w n account in the ordinary course of business. 3.5. "Associated person of a broker or dealer" is an employee thereof w h o , directly exercises control of supervisory authority, but does not include a salesman, or an agent or a person whose functions are solely clerical or ministerial. 3.6. "Clearing agency" is any person w h o acts as intermediary in m a k i n g deliveries u p o n paymen t to effect settlement in securities transactions. 3.7. "Exchange" is an organized marketplace or facility that brings together buyers and sellers and executes trades of securities a n d / o r commodities. 3.8. "Insider" means: (a) the issuer; (b) a director or officer (or person performing similar functions) of, or a person controlling the issuer; (c) a person whose relationship or former relationship to the issuer gives or gave h i m access to material informatio n about the issuer or the security that is not generally available to the public; (d) a government employee, or director, or officer of an exchange, clearing agency and / o r self-regulatory organization w h o has access to material information about an issuer or a security that is not generally available to the public; or (e) a person w h o learns such information by a communication f r o m any of the foregoing insiders. 3.9. "Pre-need plans" are contracts w h i c h provide for the performance of future services or the payment of future monetary considerations at the time of actual need, for w h i c h planholders pay in cash or installment at stated prices, w i t h or w i t h o u t interest or insurance coverage and includes life, pension, education, interment, and other plans w h i c h the Commission may from time to time approve. 3.10. "Promoter" is a person w h o , acting alone or w i t h others, takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor. 3.11. "Prospectus" is the document made by or on behalf of an issuer, underwriter or dealer to sell or offer securities for sale to the public through a registration statement filed w i t h the Commission. 3.12. "Registration statement" is the application for the registration of securities required to be filed w i t h the Commission. 3.13. "Salesman" is a natural person, employed as such or as an agent, by a dealer, issuer or broker to buy and sell securities. 3.14. "Uncertificated security" is a security evidenced by electronic or similar records. 3.15. "Underwriter" is a person w h o guarantees on a firm commitment a n d / o r declared best effort basis the distribution and sale of securities of any kind by another company.

872


Sec. 4

CHAPTER II

SECURITIES AND EXCHANGE COMMISSION SEC. 4. Administrative Agency. — 4.1. This Code shall be administered by the Securities and Exchange Commission (thereinafter referred to as the "Commission") as a collegial body, composed of a Chairperson and four (4) Commissioners, appointed by the President for a term of seven (7) years each and w h o shall serve as such until their successor shall have been appointed and qualified. A Commissioner appointed to fill a vacancy occurring prior to the expiration of the term for which h i s / h e r predecessor was appointed, shall serve only for the unexpired portion of such term. The incumbent Chairperson and Commissioners at the effectivity of this Code, shall serve the unexpired portion of their terms under Presidential Decree N o . 902-A. Unless the context indicates otherwise, the term "Commissioner" includes the Chairperson. 1

4.2. The Commissioners must be natural-bom citizens of the Philippines, at least forty (40) years of age for the Chairperson and at least thirty-five (35) years of age for the Commissioners, of good moral character, of unquestionable integrity, of k n o w n probity and patriotism, and w i t h recognized competence in social and economic disciplines: Provided, That the majority of Commissioners, including the Chairperson, shall be members of the Philippine Bar. 4.3. The Chairperson is chief executive officer of the Commission. The Chairperson shall execute and administer the policies, decisions, orders and resolutions approved by the Commission and shall have the general executive direction and supervision of the w o r k and operation of the Commission and of its members, bodies, boards, offices, personnel and all its administrative business. 4.4. The salary of the Chairperson and the Commissioners shall be fixed by the President of the Philippines based on an objective classification system, at a sum comparable to the members of the M o n e t a r y Board and commensurate to the importance and responsibilities attached to the position. 4.5. The Commission shall hol d meetings at least once a w e ek for the conduct of business or as often as m a y be necessary u p o n call of the Chairperson or upon the request of three (3) Commissioners. The notice of the meeting shall be given to all Commissioners and the presence of three (3) Commissioners shall constitute a quorum . In the absence of the Chairperson, the most senior Commissioner shall act as presiding officer of the meeting. 4.6. The Commission may, for purposes of efficiency, delegate any of its functions to any department or office of the Commission, an i n d i v i d u a l Commissioner or staff member of the Commission except its review or appellate authority and its p o w e r to adopt, alter and supplement any rule or regulation. The Commission m a y review u p o n its o w n initiative or u p o n the petition of any interested party any action of any department or office, i n d i v i d u al Commissioner, or staff member of the Commission.

GMCR vs. Bell, 271 SCRA 790 (1997); GSIS vs. Court of Appeals, 585 SCRA 679

Appendix A

SEC. 5. Powers and Functions of the Commission. — 5 . 1 . The Commission shall act w i t h transparency and shall have the powers and functions provided by this Code, Presidential Decree N o . 902-A, the Corporation Code, the Investment Houses Law, the Financing C o m p a n y A c t and other existing laws. Pursuant thereto the Commission shall have, among others, the following powers and functions: (a) H a v e jurisdiction and supervision over all corporations, partnerships or associations w h o are the grantees of primary franchises a n d / o r a license or permit issued by the Government; (b) Formulate policies and recommendations on issues concerning the securities market, advise Congress and other government agencies on all aspects of the securities market and propose legislation and amendments thereto; (c) A p p r o v e , reject, suspend, revoke or require amendments to registration statements, and registration and licensing applications; (d) Regulate, investigate or supervise the activities of persons to ensure compliance; (e) Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies a n d other SROs; (f) Impose sanctions for the violation of laws and the rules, regulations and orders issued pursuant thereto; 2

(g) Prepare, approve, a m e n d or repeal rules, regulations and orders, and issue opinions and provide guidance on and supervise compliance w i t h such rules, regulations and orders; (h) Enlist the aid and support of a n d / o r deputize any and all enforcement agencies of the Government, civil or military as well as any private institution, corporation, firm, association or person in the implementation of its powers and functions under this Code; (i) Issue cease and desist orders to prevent fraud or injury to the investing public; (j) Punish for contempt of the Commission, both direct and indirect, in accordance w i t h the pertinent provisions of and penalties prescribed by the Rules of Court; (k) Compel the officers of any registered corporation or association to call meetings of stockholders or members thereof under its supervision; (1) Issue subpoena duces tecum and summon witnesses to appear in any proceedings of the Commission and in appropriate cases, order the examination, search and seizure of all documents, papers, files and records, tax returns, and books of accounts of any entity or person under investigation as may be necessary for the proper disposition of the cases before it, subject to the provisions of existing laws;

^See Sec. 53.1.

874


Sec. 6

(m) Suspend, or revoke, after proper notice and hearing the franchise or certificate of registration of corporations, partnerships or associations, upon any of the grounds provided by law; and (n) Exercise such other powers as may be provided by la w as well as those which may be implied from, or which are necessary or incidental to the carrying out of, the express powers granted the Commission to achieve the objectives and purposes of these laws. 3

5.2. The Commission's jurisdiction over all cases enumerated under Section 5 of Presidential Decree N o . 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court: Provided, That the Supreme Court in the exercise of its authority m a y designate the Regional Trial Court branches that shall exercise jurisdiction over these cases. The Commission shall retain jurisdiction over pending cases involving intra-corporate disputes submitted for final resolution which should be resolved w i t h i n one (1) year from the enactment of this Code. The Commission shall retain jurisdiction over pending suspension of payments/rehabilitation cases filed as of 30 June 2000 until finally disposed. 4

SEC. 6. Indemnification and Responsibilities of Commissioners. — 6.1. The Commission shall indemnify each Commissioner and other officials of the Commission, including personnel performing supervision and examination functions for all costs and expenses reasonably incurred by such persons in connection w i t h any civil or criminal actions, suits or proceedings to w h i c h they may be or made a party by reason of the performance of their functions or duties, unless they are finally adjudged in such actions or proceedings to be liable for gross negligence or misconduct. In the event of settlement or compromise, indemnification shall be provided only in connection w i t h such matters covered by the settlement as to which the Commission is advised by external counsel that the persons to be mdemnified did not commit any gross negligence or misconduct. The costs and expenses incurred in defending the aforementioned action, suit or proceeding m a y be paid by the Commission in advance of the final disposition of such action, suit or proceeding u p o n receipt of an undertaking by or on behalf of the Commissioner, officer or employee to repay the amount advanced should it ultimately be determined by the Commission that h e / s h e is not entitled to be indemnified as provided in this subsection. 6.2. The Commissioners, officers and employees of the Commission w h o willfully violate this Code or w h o are guilty of negligence, abuse or acts of malfeasance or fail to exercise extraordinary diligence in the performance of their duties shall be held liable for any loss or injury suffered by the Commission or other institutions as a result of such violation, negligence, abuse, malfeasance, or failure to exercise extraordinary diligence.

'See Provident International Resources Corp. vs. Venus, 554 SCRA 540 (2008). *See GD Express Worldwide vs. Court of Appeals, 587 SCRA 333 (2009). Intemail Broadcasting Corporation vs. Jalandoon, 475 SCRA 446 (2005).

Appendix A

Similar responsibility shall apply to the Commissioners, officers and employees of the Commission for (1) the disclosure of any information, discussion or resolution of the Commission of a confidential nature, or about the confidential operations of the Commission, unless the disclosure is in connection w i t h the performance of official functions w i t h the Commission or w i t h prior authorization of the Commissioners; or (2) the use of such information for personal gain or to the detriment of the government, the Commission or third parties: Provided, however, That any data or information required to be submitted to the President a n d / o r Congress or its appropriate committee, or to be published under the provisions of this Code shall not be considered confidential. SEC. 7. Reorganization. — 7.1. To achieve the goals of this Code, consistent w i t h C i v i l Service laws, the Commission is hereby authorized to provide for its reorganization, to streamline its structure and operations, upgrade its h u m a n resource component and enable it to more efficiently and effectively perform its functions and exercise its powers under this Code. 7.2. A l l positions of the Commission shall be governed by a compensation and position classification systems and qualification standards approved by the Commission based on a comprehensive job analysis and audit of actual duties and responsibilities. The compensation pla n shall be comparable w i t h the prevailing compensation p l a n in the Bangko Sentral ng Pilipinas and other government financial institutions and shall be subject to periodic review by the Commission no more than once every t w o (2) years without prejudice to yearly merit reviews or increases based on productivity and efficiency. The Commission shall, therefore, be exempt f r o m laws, rules, and regulations on compensation, position classification and qualification standards. The Commission shall, however, endeavor to make its system conform as closely as possible w i t h the principles under the Compensation and Position Classification Act of 1989. (Republic Act No. 6758, as amended.)

CHAPTER III REGISTRATION OF SECURITIES SEC. 8. Requirement of Registration of Securities. — 8.1. Securities shall not be sold or offered for sale or distribution w i t h i n the Philippines, without a registration statement duly filed w i t h and approved by the Commission. Prior to such sale, information on the securities, in such form and with such substance as the Commission may prescribe, shall be made available to each prospective purchaser. 5

6

8.2. The Commission may conditionally approve the registration statement under such terms as it may deem necessary.

'Securities and Exchange Commission vs. Interport Resources Corp., 567 SCRA 354 (2008). 'Power Homes Unlimited Corp. vs. Securities and Exchange Commission, 546 SCRA 567 (2008).


876

Sees. 9-10

8.3. The Commission may specify the terms and conditions under which any written communication, including any summary prospectus, shall be deemed not to constitute an offer for sale under this Section. 8.4. A record of the registration of securities shall be kept in a Register of Securities in which shall be recorded orders entered by the Commission w i t h respect to such securities. Such register and all documents or information w i t h respect to the securities registered therein shall be open to public inspection at reasonable hours on business days. 8.5. The Commission may audit the financial statements, assets and other information of a firm applying for registration of its securities whenever it deems the same necessary to insure full disclosure or to protect the interest of the investors and the public in general. 7

SEC. 9. Exempt Securities. — 9.1. The requirement of registration under Subsection 8.1 shall not as a general rule apply to any of the following classes of securities: (a) A n y security issued or guaranteed by the Government of the Philippines, or by any political subdivision or agency thereof, or by any person controlled or supervised by, and acting as an instrumentality of said Government. (b) A n y security issued or guaranteed by the government of any country w i t h which the Philippines maintains diplomatic relations, or by any State, province or political subdivision thereof on the basis of reciprocity: Provided, That the Commission m a y require compliance w i t h the form and content of disclosures the Commission m a y prescribe. (c) Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body. (d) A n y security or its derivatives the sale or transfer of w h i c h , by law, is under the supervision and regulation of the Office of the Insurance Commission, Housing and L a n d Use Regulatory Board, or the Bureau of Internal Revenue. (e)

A n y security issued by a bank except its o w n shares of stock.

9.2. The Commission may, by rule or regulation after public hearing, a d d to the foregoing any class of securities if it finds that the enforcement of this Code w i t h respect to such securities is not necessary in the public interest and for the protection of investors. SEC. 10. Exempt Transactions. — 10.1. The requirement of registration under Subsection 8.1 shall not apply to the sale of any security in any of the following transactions: (a) At any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in insolvency or bankruptcy.

7

See Timeshare Realty Corporation vs. Lao, 544 SCRA 254 (2008).

Sec. 10


877

(b) By or for the account of a pledge holder, or mortgagee or any other similar lien holder selling or offering for sale or delivery in the ordinary course of business and not for the purpose of avoiding the provisions of this Code, to liquidate a bona fide debt, a security pledged in good faith as security for such debt. (c) An isolated transaction in w h i c h any security is sold, offered for sale, subscription or delivery by the owner thereof, or by his representative for the owner's account, such sale or offer for sale, subscription or delivery not being made in the course of repeated and successive transactions of a like character by such owner, or on his account by such representative and such owner or representative not being the underwriter of such security. (d) The distribution by a corporation, actively engaged in the business authorized by its articles of incorporation, of securities to its stockholders or other security holders as a stock d i v i d e n d or other distribution out of surplus. (e) The sale of capital stock of a corporation to its o w n stockholders exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection w i t h the sale of such capital stock. (f) The issuance of bonds or notes secured by mortgage upon real estate or tangible personal property, where the entire mortgage together w i t h all the bonds or notes secured thereby are sold to a single purchaser at a single sale. (g) The issue and delivery of any security in exchange for any other security of the same issuer pursuant to a right of conversion entitling the holder of the security surrendered in exchange to make such conversion: Provided, That the security so surrendered has been registered under this Code or was, w h e n sold, exempt from the provisions of this Code, and that the security issued and delivered in exchange, if sold at the conversion price, w o u l d at the time of such conversion fall w i t h i n the class of securities entitled to registration under this Code. U p o n such conversion the par value of the security surrendered in such exchange shall be deemed the price at which the securities issued and delivered in such exchange are sold. (h) Broker's transactions, executed upon customer's orders, on any registered Exchange or other trading market. (i) Subscriptions for shares of the capital stock of a corporation prior to the incorporation thereof or in pursuance of an increase in its authorized capital stock under the Corporation Code, when no expense is incurred, or no commission, compensation or remuneration is paid or given in connection w i t h the sale or disposition of such securities, and only w h e n the purpose for soliciting, giving or taking of such subscriptions is to comply w i t h the requirements of such law as to the percentage of the capital stock of a corporation which should be subscribed before it can be registered and duly incorporated, or its authorized capital increased.


878

Sees. 11-12

(j) The exchange of securities by the issuer w i t h its existing security holders exclusively, where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange. (k) The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines during any twelve-month period. (1)

The sale of securities to any number of the following qualified

buyers: (i)

Bank;

(ii) Registered investment house; (iii) Insurance company; (iv) Pension fund or retirement plan maintained by the Government of the Philippines or any political subdivision thereof or managed by a bank or other persons authorized by the Bangko Sentral to engage in trust functions; (v) Investment company; or (vi) Such other person as the Commission m a y by rule determine as qualified buyers, on the basis of such factors as financial sophistication, net w o r t h , knowledge, and experience in financial and business matters, or amount of assets under management. 10.2. The Commission m a y exempt other transactions, if it finds that the requirements of registration under this Code is not necessary in the public interest or for the protection of the investors such as by reason of the small amount involved or the limited character of the public offering. 10.3. A n y person applying for an exemption under this Section, shall file w i t h the Commission a notice identifying the exemption relied u p o n on such form and at such time as the Commission by rule m a y prescribe and w i t h such notice shall pay to the Commission a fee equivalent to one-tenth (1 / 1 0 ) of one percent (1%) of the m a x i m u m aggregate price or issued value of the securities. SEC. 11. Commodity Futures Contracts. — No person shall offer, sell or enter into commodity futures contracts except in accordance w i t h rules, regulations and orders the Commission m a y prescribe in the public interest. The Commission shall promulgate rules and regulations i n v o l v i ng commodity futures contracts to protect investors to ensure the development of a fair and transparent commodities market. SEC. 12. Procedure for Registration of Securities.' — 12.1. A l l securities required to be registered under Subsection 8.1 shall be registered through the filing by the issuer in the m a i n office of the Commission, of a sworn registration statement w i t h respect to such securities, in such f o r m and containing such information and documents as the Commission shall prescribe. The registration statement shall include any prospectus required or permitted to be delivered under Subsections 8.2, 8.3 and 8.4.

"See Note 5.

Sec. 12


879

12.2. In promulgating rules governing the content of any registration statement (including any prospectus made a part thereof or annexed thereto), the Commission m a y require the registration statement to contain such information or documents as it may, by rule, prescribe. It m a y dispense w i t h any such requirement, or m a y require additional information or documents, including w r i t t e n information f r o m an expert, depending on the necessity thereof or their applicability to the class of securities sought to be registered. 12.3. The information required for the registration of any k i n d , and all securities, shall include, among others, the effect of the securities issue on ownership, on the m i x of ownership, especially foreign and local ownership. 12.4. The registration statement shall be signed by the issuer's executive officer, its principal operating officer, its principal financial officer, its comptroller, its principal accounting officer, its corporate secretary or persons performing similar functions accompanied by a d u l y verified resolution of the board of directors of the issuer corporation. The w r i t t en consent of the expert named as having certified any part of the registration statement or any document used in connection therewith shall also be filed. W h e r e the registration statement includes shares to be sold by selling shareholders, a written certification by such selling shareholders as to the accuracy of any part of the registration statement contributed to by such selling shareholders shall also be filed. 12.5. (a) U p o n filing of the registration statement, the issuer shall pay to the Commission a fee of not more than one-tenth (1 / 1 0 ) of one per centum (1%) of the m a x i m u m aggregate price at w h i c h such securities are proposed to be offered. The Commission shall prescribe by rule diminishing fees in inverse proportion the value of the aggregate price of the offering. (b) Notice of the filing of the registration statement shall be immediately published by the issuer, at its o w n expense, in t w o (2) newspapers of general circulation in the Philippines, once a w e e k for t w o (2) consecutive weeks, or in such other manner as the Commission by rule shall prescribe, reciting that a registration statement for the sale of such security has been filed, and that the aforesaid registration statement, as w e l l as the papers attached thereto are open to inspection at the Commission during business hours, and copies thereof, photostatic or otherwise, shall be furnished to interested parties at such reasonable charge as the Commission may prescribe. 12.6. W i t h i n forty-five (45) days after the date of filing of the registration statement, or by such later date to which the issuer has consented, the Commission shall declare the registration statement effective or rejected, unless the applicant is allowed to amend the registration statement as provided in Section 14 hereof. The Commission shall enter an order declaring the registration statement to be effective if it finds that the registration statement together w i t h all the other papers and documents attached thereto, is on its face complete and that the requirements have been complied with. The Commission may impose such terms and conditions as may be necessary or appropriate for the protection of the investors. 12.7. U p o n effectivity of the registration statement, the issuer shall state under oath in every prospectus that all registration requirements have been


880

Sec. 13

met and that all information are true and correct as represented by the issuer or the one making the statement. A n y untrue statement of fact or omission to state a material fact required to be stated therein or necessary to make the statement therein not misleading shall constitute fraud.

SEC. 13. Rejection and Revocation of Registration of Securities. — 13.1. The Commission may reject a registration statement and refuse registration of the security thereunder, or revoke the effectivity of a registration statement and the registration of the security thereunder after due notice and hearing by issuing an order to such effect, setting forth its findings in respect thereto, if it finds that: (a)

The issuer: (i)

Has been judicially declared insolvent;

(ii) Has violated any of the provisions of this Code, the rules promulgated pursuant thereto, or any order of the Commission of which the issuer has notice in connection w i t h the offering for w h i c h a registration statement has been filed; (iii) Has been or is engaged or is about to engage in fraudulent transactions; (iv) Has made any false or misleading representation of material facts in any prospectus concerning the issuer or its securities; (v) Has failed to comply w i t h any requirement that the Commission m a y impose as a condition for registration of the security for which the registration statement has been filed; or (b) The registration statement is on its face incomplete or inaccurate in any material respect or includes any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading; or (c) The issuer, any officer, director or controlling person of the issuer, or person performing similar functions, or any underwriter has been convicted, by a competent judicial or administrative body, u p o n plea of guilty, or otherwise, of an offense involving m o r a l turpitude a n d / o r fraud or is enjoined or restrained by the Commission or other competent judicial or administrative body for violations of securities, commodities, and other related laws. For purposes of this subsection, the term "competent judicial or administrative body" shall include a foreign court of competent jurisdiction as provided for under the Rules of Court. 13.2. The Commission m a y compel the production of all the books and papers of such issuer, and m a y administer oaths to, and examine the officers of such issuer or any other person connected therewith as to its business and affairs. 13.3. If any issuer shall refuse to permit an examination to be made by the Commission, its refusal shall be ground for the refusal or revocation of the registration of its securities.

Sees. 14-15


881

13.4. If the Commission deems it necessary, it m a y issue an order suspending the offer and sale of the securities pending any investigation. The order shall state the grounds for taking such action, but such order of suspension although binding u p o n the persons notified thereof, shall be deemed confidential, and shall not be published. U p o n the issuance of the suspension order, no further offer or sale of such security shall be m a d e until the same is lifted or set aside by the Commission. Otherwise, such sale shall be void. 13.5. Notice of issuance of such order shall be given to the issuer and every dealer and broker w h o shall have notified the Commission of an intention to sell such security. 13.6. A registration statement m a y be w i t h d r a w n by the issuer only w i t h the consent of the Commission. SEC. 14. Amendments to the Registration Statement. — 14.1. If a registration statement is on its face incomplete or inaccurate in any material respect, the Commission shall issue an order directing the a m e n d m e n t of the registration statement. U p o n compliance w i t h such order, the amended registration statement shall become effective in accordance w i t h the procedure mentioned in Subsection 12.6 hereof. 14.2. An a m e n d m e n t filed prior to the effective date of the registration statement shall recommence the forty-five (45)-day period w i t h i n which the Commission shall act on a registration statement. An amendment filed after the effective date of the registration statement shall become effective only upon such date as detenrtined by the Commission. 14.3. If any change occurs in the facts set forth in a registration statement, the issuer shall file an amendment thereto setting forth the change. 14.4. If, at any time, the Commission finds that a registration statement contains any false statement or omits to state any fact required to be stated therein or necessary to m a k e the statements therein not misleading, the Commission m a y conduct an examination, and, after due notice and hearing, issue an Order suspending the effectivity of the registration statement. If the statement is d u l y amended, the suspension order m a y be lifted. 14.5. In making such examination the Commission or any officer or officers designated by it may administer oaths and affirmations and shall have access to, and m a y demand the production of, any books, records or documents relevant to the examination. Failure of the issuer, underwriter, or any other person to cooperate, or his obstruction or refusal to undergo an examination, shall be a ground for the issuance of a suspension order. SEC. 15. Suspension of Registration. — 15.1. If, at any time, the information contained in the registration statement filed is or has become misleading, incorrect, inadequate or incomplete in any material respect, or the sale or offering for sale of the security registered thereunder may work or tend to work a fraud, the Commission may require from the issuer such further information as may in its judgment be necessary to enable the Commission to ascertain whether the registration of such security should be revoked on any ground

882


Sees. 16-17

specified in this Code. The Commission may also suspend the right to sell and offer for sale such security pending further investigation, by entering an order specifying the grounds for such action, and by notifying the issuer, underwriter, dealer or broker k n o w n as participating in such offering. 15.2. The refusal to furnish information required by the Commission may be a ground for the issuance of an order of suspension pursuant to Subsection 15.1. U p o n the issuance of any such order and notification to the issuer, underwriter, dealer or broker k n o w n as participating in such offering, no further offer or sale of any such security shall be made until the same is lifted or set aside by the Commission. Otherwise, such sale shall be v o i d . 15.3. U p o n issuance of an order of suspension, the Commission shall conduct a hearing. If the Commission determines that the sale of any security should be revoked, it shall issue an order prohibiting sale of such security. Until the issuance of a final order, the suspension of the right to sell, though binding upon the persons notified thereof, shall be deemed confidential, and shall not be published, unless it shall appear that the order of suspension has been violated after notice. If, however, the Commission finds that the sale of the security w i l l neither be fraudulent nor result in fraud, it shall forthwit h issue an order revoking the order of suspension, and such security shall be restored to its status as a registered security as of the date of such order of suspension.

CHAPTER IV

REGULATION OF PRE-NEED PLANS SEC. 16. Pre-Need Plans. — No person shall sell or offer for sale to the public any pre-need plan except in accordance w i t h rules and regulations w h i c h the Commission shall prescribe. Such rules shall regulate the sale of pre-need plans by, among other things, requiring the registration of pre-need plans, licensing persons involved in the sale of pre-need plans, requiring disclosures to prospective plan holders, prescribing advertising guidelines, providing for uniform accounting system, reports and record keeping w i t h respect to such plans, imposing capital, bonding a n d other financial responsibility, and establishing trust funds for the payment of benefits under such plans.

CHAPTER V REPORTORIAL REQUIREMENTS SEC. 17. Periodic and Other Reports of Issuers. — 17.1. Every issuer satisfying the requirements in Subsection 17.2 hereof shall file w i t h the Commission: (a) W i t h i n one hundred thirty-five (135) days, after the end of the issuer's fiscal year, or such other time as the Commission m a y prescribe, an annual report which shall include, among others, a balance sheet, profit and loss statement and statement of cash flows, for such last fiscal year, certified by an independent certified public accountant, and a management discussion and analysis of results of operations; and

Sec. 18


883

(b) Such other periodical reports for interim fiscal periods and current reports on significant developments of the issuer as the Commission may prescribe as necessary to keep current information on the operation of the business and financial condition of the issuer. 17.2. The reportorial requirements of Subsection 17.1 shall apply to the following: (a) An issuer w h i c h has sold a class of its securities pursuant to a registration under Section 12 hereof: Provided, however, That the obligation of such issuer to file reports shall be suspended for any fiscal year after the year such registration became effective if such issuer, as of the first day of any such fiscal year, has less than one h u n d r e d (100) holders of such class of securities or such other n u m b e r as the Commission shall prescribe and it notifies the Commission of such; (b)

An issuer w i t h a class of securities listed for trading an Exchange;

and (c) An issuer w i t h assets of at least Fifty million pesos (P50,000,000.00) or such other amount as the Commission shall prescribe, and having t w o h u n d r e d (200) or more holders each holding at least one hundred (100) shares of a class of its equity securities: Provided, however, That the obligation of such issuer to file reports shall be terminated ninety (90) days after notification to the Commission by the issuer that the number of its holders holding at least one h u n d r e d (100) shares is reduced to less than one h u n d r e d (100). 17.3. Every issuer of a security listed for trading on an Exchange shall file w i t h the Exchange a copy of any report filed w i t h the Commission under Subsection 17.1 hereof. 17.4. A l l reports (including financial statements) required to be filed w i t h the Commission pursuant to Subsection 17.1 hereof shall be in such form, contain such information and be filed at such times as the Commission shall prescribe, and shall be in lieu of any periodical or current reports or financial statements otherwise required to be filed under the Corporation Code. 17.5. Every issuer which has a class of equity securities satisfying any of the requirements in Subsection 17.2 shall furnish to each holder of such equity security an annual report in such f o r m and containing such information as the Commission shall prescribe. 17.6. Within such period as the Commission may prescribe preceding the annual meeting of the holders of any equity security of a class entitled to vote at such meeting, the issuer shall transmit to such holders an annual report in conformity w i t h Subsection 17.5.

SEC. 18. Reports by Five per centum (5%) Holders of Equity Securities. — 18.1. In every case in which an issuer satisfies the requirements of Subsection 17.2 hereof, any person w h o acquires directly or indirectly the beneficial ownership of more than five per centum (5%) of such class or in excess of such lesser per centum as the Commission by rule may prescribe, shall, within ten (10) days after

884


Sec. 19

such acquisition or such reasonable time as fixed by the Commission, submit to the issuer of the security, to the Exchange where the security is traded, and to the Commission a s w o m statement containing the following information and such other information as the Commission may require in the public interest or for the protection of investors: (a) The personal background, identity, residence, and citizenship of, and the nature of such beneficial ownership by, such person and all other persons by w h o m or on whose behalf the purchases are effected; in the event the beneficial owner is a juridical person, the lines of business of the beneficial owner shall also be reported; (b) If the purpose of the purchases or prospective purchases is to acquire control of the business of the issuer of the securities, any plans or proposals which such persons may have that w i l l effect a major change in its business or corporate structure; (c) The number of shares of such security w h i c h are beneficially owned, and the number of shares concerning w h i c h there is a right to acquire, directly or indirectly, by: (i) such person, a n d (ii) each associate of such person, giving the background, identity, residence, and citizenship of each such associate; and (d) Information as to any contracts, arrangements, or understanding w i t h any person w i t h respect to any securities of the issuer including but not limited to transfer, joint ventures, loan or option arrangements, puts or calls, guarantees or division of losses or profits, or proxies n a m i n g the persons w i t h w h o m such contracts, arrangements, or understanding have been entered into, and giving the details thereof. 18.2. If any change occurs in the facts set forth in the statements, an a m e n d ment shall be transmitted to the issuer, the Exchange and the Commission. 18.3. The Commission, m a y permit any person to file in lieu of the statement required by Subsection 17.1 hereof, a notice stating the name of such person, the shares of any equity securities subject to Subsection 17.1 w h i c h are owned by h i m , the date of their acquisition and such other information as the Commission may specify, if it appears to the Commission that such securities were acquired by such person in the ordinary course of his business and were not acquired for the purpose of and do not have the effect of changing or influencing the control of the issuer nor in connection w i t h any transaction having such purpose or effect.

CHAPTER VI

PROTECTION OF SHAREHOLDER INTERESTS SEC. 19. Tender Offers. — 19.1. (a) A n y person or group of persons acting in concert w h o intends to acquire at least fifteen percent (15%) of any class of any equity security of a listed corporation or of any class of any equity security of a corporation w i t h assets of at least Fifty million pesos (P50,000,000.00) and having t w o hundred (200) or more stockholders w i t h at least one h u n d r e d (100)

shares each or w h o intends to acquire at least thirty percent (30%) of such equity over a period of twelve (12) months shall m a k e a tender offer to stockholders by filing w i t h the Commission a declaration to that effect; and furnish the issuer, a statement containing such of the information required in Section 17 of this Code as the Commission m a y prescribe. Such person or group of persons shall publish all requests or invitations for tender, or materials makin g a tender offer or requesting or inviting letters of such a security. Copies of any additional material soliciting or requesting such tender offers subsequent to the initial solicitation or request shall contain such information as the Commission may prescribe, and shall be filed w i t h the Commission and sent to the issuer not later than the t i m e copies of such materials are first published or sent or given to security holders. (b) A n y solicitation or recommendation to the holders of such a security to accept or reject a tender offer or request or invitation for tenders shall be m a d e in accordance w i t h such rules and regulations as the Commission may prescribe. (c) Securities deposited pursuant to a tender offer or request or invitation for tenders m a y be w i t h d r a w n by or on behalf of the depositor at any time throughout the period that the tender offer remains open and if the securities deposited have not been previously accepted for payment, and at any time after sixty (60) days f r o m the date of the original tender offer or request or invitation, except as the Commission m a y otherwise prescribe. (d) W h e r e the securities offered exceed that which a person or group of persons is b o u n d or w i l l i n g to take up and pay for, the securities that are subject of the tender offer shall be taken up as nearly as m a y be pro rata, disregarding fractions, according to the number of securities deposited by each depositor. The provisions of this subsection shall also apply to securities deposited w i t h i n ten (10) days after notice of an increase in the consideration offered to security holders, as described in paragraph (e) of this subsection, is first published or sent or given to security holders. (e) Where any person varies the terms of a tender offer or request or invitation for tenders before the expiration thereof by increasing the consideration offered to holders of such securities, such person shall pay the increased consideration to each security holder whose securities are taken up and paid for whether or not such securities have been taken up by such person before the variation of the tender offer or request or invitation.'

'A tender offer is a publicly announced "offer by the acquiring person to stockholders of a public company for them to tender their shares therein on the terms specified in the offer" Tender offer is in place to protect the interests of minority stockholders of a target company against any scheme that dilutes the share value of their investments. It affords such minority shareholders the opportunity to withdraw or exit from the company under reasonable terms, a chance to sell their shares at the same price as those of the majority stockholders. The "right to match" under the Swiss Challenge procedure cannot be exercised, a tender offer being wholly inconsistent with public bidding. No bidding is involved in the process. (Osmena III vs. Social Security System, 532 SCRA 313 [2007].)


886

Sees. 20-21

19.2. It shall be unlawful for any person to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection w i t h any tender offer or request or invitation for tenders, or any solicitation of security holders in opposition to or in favor of any such offer, request, or invitation. The Commission shall, for the purposes of this subsection, define and prescribe means reasonably designed to prevent, such acts and practices as are fraudulent, deceptive, or manipulative. 10

SEC. 20. Proxy Solicitations. — 20.1. Proxies must be issued and proxy solicitation must be made in accordance w i t h rules and regulations to be issued by the Commission." 20.2. Proxies must be in writing, signed by the stockholder or his duly authorized representative and filed before the scheduled meeting w i t h the corporate secretary. 20.3. 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 one time. 20.4. No broker or dealer shall give any proxy, consent or authorization, in respect of any security carried for the account of a customer, to a person other than the customer, without the express writte n authorization of such customer. 20.5. A broker or dealer w h o holds or acquires the proxy for at least ten per centum (10%) or such percentage as the Commission m a y prescribe of the outstanding share of the issuer, shall submit a report identifying the beneficial owner w i t h i n ten (10) days after such acquisition, for its o w n account or customer, to the issuer of the security, to the Exchange where the security is traded and to the Commission. SEC. 2 1 . Fees for Tender Offers and Certain Proxy Solicitations. — At the time of filing w i t h the Commission of any statement required under Section 19 for any tender offer or Section 72.2 for issuer repurchases, or Section 20 for proxy or consent solicitation, the Commission m a y require that the person m a k i n g such filing pay a fee of not more than one-tenth (1 / 1 0 ) of one per centum (1%) of: 21.1. The proposed aggregate purchase price in the case of a transaction under Section 20 or Sec. 72.2; or 21.2. The proposed payment in cash, a n d the value of any securities or property to be transferred in the acquisition, merger or consolidation, or the cash and value of any securities proposed to be received u p o n the sale or disposition of such assets in the case of a solicitation under Section 20. The Commission shall prescribe by rule diminishing fees in inverse proportion to the value of the aggregate price of the offering.

See Cemco Holdings, Inc. vs. National Life Insurance Co. of the Philippines, Inc., 529 SCRA 355 (2007). "Proxy solicitation involves the securing and submission of proxies, while proxy validation concerns the validation of such secured and submitted proxies (GSIS vs Court of Appeals, 585 SCRA 679 [2009].) 10

Sees. 22-23


887

SEC. 22. Internal Record Keeping and Accounting Controls. — Every issuer w h i c h has a class of securities that satisfies the requirements of Subsection 17 2 shall: 22.1. M a k e and keep books, records, and accounts which, in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the issuer; 22.2. Devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (a) Transactions and access to assets are pursuant to management authorization; (b) Financial statements are prepared in conformity w i t h generally accepted accounting principles that are adopted by the Accounting Standards Council and the rules promulgated by the Commission w i t h regard to the preparation of financial statements; and (c) Recorded assets are compared w i t h existing assets at reasonable intervals and differences are reconciled.

SEC. 23. Transactions of Directors, Officers and Principal Stockholders." — 23.1. Every person w h o is directly or indirectly the beneficial owner of more than ten per centum (10%) of any class of any equity security w h i c h satisfies the requirements of Subsection 17.2, or w h o is a director or an officer of the issuer of such security, shall file, at the time either such requirement is first satisfied or w i t h i n ten days after he becomes such a beneficial owner, director, or officer, a statement w i t h the Commission and, if such security is listed for trading on an Exchange, also w i t h the Exchange, of the amount of all equity securities of such issuer of w h i c h he is the beneficial owner, and w i t h i n ten (10) days after the close of each calendar m o n t h thereafter, if there has been a change in such ownership during such m o n t h , shall file w i t h the Commission, and if such security is listed for trading on an Exchange, shall also file w i t h the Exchange, a statement indicating his ownership at the close of the calendar month and such changes in his ownership as have occurred durin g such calendar month. 23.2. For the purpose of preventing the unfair use of information which m a y have been obtained by such beneficial owner, director, or officer by reason of his relationship to the issuer, any profit realized by h i m from any purchase and sale, or any sale and purchase, of any equity security of such issuer within any period of less than six (6) months, unless such security was acquired in good faith in connection w i t h a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention of holding the security purchased or of not repurchasing the security sold for a period exceeding six (6) months. Suit to recover such profit may be instituted before the Regional Trial Court by the issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer if the issuer shall fail or refuse to bring such suit w i t h i n sixty (60) days after request or shall fail diligently to prosecute the same thereafter, but no such suit shall be brought more than two (2) years after the date such profit was realized. This subsection shall not be construed to cover any transaction where such beneficial owner was not such both at the time of

12

SEC vs. Interport Resources Corp., 567 SCRA 354 (2008).

888


Sec. 24

the purchase and sale, or the sale and purchase, of the security involved, or any transaction or transactions which the Commission by rules and regulations may exempt as not comprehended w i t h i n the purpose of this subsection. 23.3. It shall be unlawful for any such beneficial owner, director, or officer, directly or indirectly, to sell any equity security of such issuer if the person selling the security or his principal: (a) Does not o w n the security sold; or (b) If owning the security, does not deliver it against such sale w i t h i n twenty (20) days thereafter, or does not w i t h i n five (5) days after such sale deposit it in the mails or other usual channels of transportation; but no person shall be deemed to have violated this subsection if he proves that notwithstanding the exercise of good faith he was unable to make such delivery or deposit w i t h i n such time, or that to do so w o u l d cause undue inconvenience or expense. 23.4. The provisions of Subsection 23.2 shall not apply to any purchase and sale, or sale and purchase> and the provisions of Subsection 23.3 shall not apply to any sale, of an equity security not then or thereafter held by h i m in an investment account, by a dealer in the ordinary course of his business and incident to the establishment or maintenance by h i m of a p r i m a ry or secondary market, otherwise than on an Exchange, for such security. The Commission may, by such rules and regulations as it deems necessary or appropriate in the public interest, define and prescribe terms and conditions w i t h respect to securities held in an investment account and transactions m a d e in the ordinary course of business and incident to the establishment or maintenance of a p r i m a r y or secondary market.

CHAPTER VII PROHIBITIONS ON FRAUD, MANIPULATION AND INSIDER TRADING SEC. 24. Manipulation of Security Prices; Devices and Practices. — 24.1 It shall be unlawful for any person acting for himself or through a dealer or broker, directly or indirectly: (a) To create a false or misleading appearance of active trading in any listed security traded in an Exchange or any other trading market (hereafter referred to purposes of this Chapter as "Exchange"): (i) By effecting any transaction in such security w h i c h involves no change in the beneficial ownership thereof; (ii) By entering an order or orders for the purchase or sale of such security w i t h the knowledge that a simultaneous order or orders of substantially the same size, time and price, for the sale or purchase of any such security, has or w i l l be entered by or for the same or different parties; or (iii) By performing similar act where there is no change in beneficial ownership. (b) To effect, alone or w i t h others, a series of transactions in securities that, (i) Raises their price to induce the purchase of a security, whether of the

Sees. 25-26


889

same or a different class of the same issuer or of a controlling, controlled, or commonly controlled company by others; (ii) Depresses their price to induce the sale of a security, whether of the same or a different class, of the same issuer or of a controlling, controlled, or commonly controlled company by others; or (iii) Creates active trading to induce such a purchase or sale through manipulative devices such as m a r k i n g the close, painting the tape, squeezing the float, h y p e and d u m p , boiler room operations and such other similar devices. (c) To circulate or disseminate information that the price of any security listed in an Exchange w i l l or is likely to rise or fall because of manipulative market operations of any one or more persons conducted for the purpose of raising or depressing the price of the security for the purpose of inducing the purchase or sale of such security. (d) To m a k e false or misleading statement w i t h respect to any material fact, w h i c h he k n e w or h a d reasonable ground to believe was so false or misleading, for the purpose of inducing the purchase or sale of any security listed or traded in an Exchange. (e) To effect, either alone or others, any series of transactions for the purchase a n d / o r sale of any security traded in an Exchange for the purpose of pegging, fixing or stabilizing the price of such security, unless otherwise allowed by this Code or by rules of the Commission. 24.2. No person shall use or employ, in connection w i t h the purchase or sale of any security any manipulative or deceptive device or contrivance. Neither shall any short sale be effected nor any stop-loss order be executed in connection w i t h the purchase or sale of any security except in accordance w i t h such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. 24.3. The foregoing provisions notwithstanding, the Commission, having due regard to the public interest and the protection of investors, may, by rules and regulations, allow certain acts or transactions that may otherwise be prohibited under this Section. SEC. 25. Regulation of Option Trading. — No member of an Exchange shall, directly or indirectly endorse or guarantee the performance of any put, call, straddle, option or privilege in relation to any security registered on a securities exchange. The terms "put," "call," "straddle," "option," or "privilege" shall not include any registered warrant, right or convertible security. SEC. 26. Fraudulent Transactions." - It shall be unlawful for any person, directly or indirectly, in connection w i t h the purchase or sale of any securities to: 26.1. Employ any device, scheme, or artifice to defraud;

13

See SEC vs. Interport Resources Corp., 567 SCRA 354 (2008).


890

Sec. 27

26.2. Obtain money or property by means of any untrue statement of a material fact of any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or 26.3. Engage in any act, transaction, practice or course of business which operates or w o u l d operate as a fraud or deceit u p o n any person. SEC. 27. Insider's Duty to Disclose When Trading." — 27.1. It shall be unlawful for an insider to sell or buy a security of the issuer, while in possession of material information w i t h respect to the issuer or the security that is not generally available to the public, unless: (a) The insider proves that the information was not gained from such relationship; or (b) If the other party selling to or buying from the insider (or his agent) is identified, the insider proves: (i) that he disclosed the information to the other party, or (ii) that he had reason to believe that the other party otherwise is also in possession of the information. A purchase or sale of a security of the issuer made by an insider denned in Subsection 3.8, or such insider's spouse or relatives by affinity or consanguinity w i t h i n the second degree, legitimate or common-law, shall be presumed to have been effected while in possession of material non-public information if transacted after such information came into existence but prior to dissemination of such information to the public and the lapse of a reasonable time for the market to absorb such information: Provided, however, That this presumption shall be rebutted u p o n a showing by the purchaser or seller that he was not aware of the material non-public information at the time of the purchase or sale. 27.2. For purposes of this Section, information is "material non-public" if: (a) It has not been generally disclosed to the public and w o u l d likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb the information; or (b) w o u l d be considered by a reasonable person important under the circumstances in determining his course of action whether to buy, sell or hol d a security. 27.3. It shall be u n l a w f u l for any insider to communicate material nonpublic information about the issuer or the security to any person w h o , by virtue of the communication, becomes an insider as defined in Subsection 3.8, where the insider communicating the information k n o w s or has reason to believe that such person w i l l likely buy or sell a security of the issuer w h i l e in possession of such information. 27.4. a) It shall be u n l a w f u l where a tender offer has commenced or is about to commence for: (i) A n y person (other than the tender offeror) w h o is in possession of material non-public information relating to such tender offer, to b u y or sell the securities of the issuer that are sought or to be sought by such tender offer if such person knows or has reason to believe that the information is non-public and has been acquired directly or indirectly from the tender

u

Ibid.

Appendix A

offer, or those acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, or any insider of such issuer; and (ii) A n y tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, and any insider of such issuer to communicate material non-public information relating to the tender offer to any other person where such communication is likely to result in a violation of Subsection 27.4(a)(i). (b) For purposes of this subsection the term "securities of the issuer sought or to be sought by such tender offer" shall include any securities convertible or exchangeable into such securities or any options or rights in any of the foregoing securities.

CHAPTER VIII

REGULATION OF SECURITIES MARKET PROFESSIONALS SEC. 28. Registration of Brokers, Dealers, Salesmen and Associated Persons. — 28.1. No person shall engage in the business of b u y i n g or selling securities in the Philippines as a broker or dealer, or act as a salesman, or an associated person of any broker or dealer unless registered as such w i t h the Commission. 28.2. No registered broker or dealer shall employ any salesman or any associated person, and no issuer shall employ any salesman, w h o is not registered as such w i t h the Commission. 28.3. The Commission, by rule or order, m a y conditionally or unconditionally exempt from Subsections 28.1 and 28.2 any broker, dealer, salesman, associated person of any broker or dealer, or any class of the foregoing, as it deems consistent w i t h the public interest and the protection of investors. 28.4. The Commission shall promulgate rules and regulations prescribing the qualifications for registration of each category of applicant, which shall, among other things, require as a condition for registration that: (a) If a natural person, the applicant satisfactorily pass a written examination as to his proficiency and knowledge in the area of activity for which registration is sought; (b) In the case of a broker or dealer, the applicant satisfy a m i n i m u m net capital as prescribed by the Commission, and provide a bond or other security as the Commission may prescribe to secure compliance w i t h the provisions of this Code; and (c) If located outside of the Philippines, the applicant files a written consent to service of process upon the Commission pursuant to Section 65 hereof. 28.5. A broker or dealer may apply for registration by filing with the Commission a written application in such form and containing such information and documents concerning such broker or dealer as the Commission by rule shall prescribe.

892


Sec. 29

28.6. Registration of a salesman or of an associated person of a registered broker or dealer may be made upon written application filed w i t h the Commission by such salesman or associated person. The application shall be separately signed and certified by the registered broker or dealer to which such salesman or associated person is to become affiliated, or by the issuer in the case of a salesman employed, appointed or authorized solely by such issuer. The application shall be in such f o r m and contain such information and documents concerning the salesman or associated person as the Commission by rule shall prescribe. For purposes of this Section, a salesman shall not include any employee of an issuer whose compensation is not determined directly or indirectly on sales of securities of the issuer. 28.7. Applications filed pursuant to Subsections 28.5 and 28.6 shall be accompanied by a registration fee in such reasonable amount prescribed by the Commission. 28.8. Within thirty (30) days after the filing of any application under this Section, the Commission shall by order: (a) Grant registration if it determines that the requirements of this Section and the qualifications for registration set forth in its rules and regulations have been satisfied; or (b) D e n y said registration. 28.9. The names and addresses of all persons approved for registration as brokers, dealers, associated persons or salesmen and all orders of the Commission w i t h respect thereto shall be recorded in a Register of Securities Market Professionals kept in the office of the Commission w h i c h shall be open to public inspection. 28.10. Every person registered pursuant to this Section shall file w i t h the Commission, in such form as the Commission shall prescribe, information necessary to keep the application for registration current and accurate, including in the case of a broker or dealer changes in salesmen, associated persons and owners thereof. 28.11. Every person registered pursuant to this Section shall pay to the Commission an annual fee at such time and in such reasonable amount as the Commission shall prescribe. U p o n notice by the Commission that such annual fee has not been paid as required, the registration of such person shall be suspended until payment has been made. 28.12. The registration of a salesman or associated person shall be automatically terminated upo n the cessation of his affiliation w i t h said registered broker or dealer, or w i t h an issuer in the case of a salesman employed, appointed or authorized by such issuer. Promptly following any such cessation of affiliation, the registered broker or dealer, or issuer, as the case m a y be, shall file w i t h the Commission a notice of separation of such salesman or associated person.

SEC. 29. Revocation, Refusal or Suspension of Registration of Brokers, Dealers, Salesmen and Associated Persons. - 29.1. Registration under Section 28 of this Code may be refused, or any registration granted thereunder m a y be revoked, suspended, or limitations placed thereon, by the Commission if, after due notice and hearing, the Commission determines the applicant or registrant:

(a) H a s w i l l f u l ly violated any provision of this Code, any rule, regulation or order made hereunder, or any other la w administered by the Commission, or in the case of a registered broker, dealer or associated person has failed to supervise, w i t h a v i e w to preventing such violation, another person w h o commits such violation; (b) H a s w i l l f u l l y m a d e or caused to be m a d e a materially false or misleading statement in any application for registration or report filed w i t h the Commission or a self-regulatory organization, or has willfully omitted to state any material fact that is required to be stated therein; (c) H a s failed to satisfy the qualifications or requirements for registration prescribed under Section 28 and the rules and regulations of the Commission promulgated thereunder; (d) H a s been convicted, by a competent judicial or administrative b o d y of an offense involving moral turpitude, fraud, embezzlement, counterfeiting, theft, estafa, misappropriation, forgery, bribery, false oath, or perjury, or of a violation of securities, commodities, banking, real estate or insurance laws; (e) Is enjoined or restrained by a competent judicial or administrative b o d y f r o m engaging in securities, commodities, banking, real estate or insurance activities or from w i l l f u l l y violating laws governing such activities; (f) Is subject to an order of a competent judicial or administrative body refusing, revoking or suspending any registration, license or other permit under this Code, the rules and regulations promulgated thereunder, any other l a w administered by the Commission; (g) Is subject to an order of a self-regulatory organization suspending or expelling h i m f r o m membership or participation therein or from association w i t h a member or participant thereof; (h) H a s been found by a competent judicial or administrative body to have willfully violated any provisions of securities, commodities, banking, real estate or insurance laws, or has willfully aided, abetted, counseled, commanded, induced or procured such violation; or (i)

Has been judicially declared insolvent.

For purposes of this subsection, the term "competent judicial or administrative body" shall include a foreign court of competent jurisdiction and a foreign financial regulator. 29.2. (a) In cases of charges against a salesman or associated person, notice thereof shall also be given the broker, dealer or issuer employing such salesman or associated person. (b) Pending the hearing, the Commission shall have the power to order the suspension of such broker's, dealer's, associated person's or salesman's registration: Provided, That such order shall state the cause for such suspension.

894


Sees. 30-31

Until the entry of a final order, the suspension of such registration, though binding upon the persons notified thereof, shall be deemed confidential, and shall not be published, unless it shall appear that the order of suspension has been violated after notice. 29.3. The order of the Commission refusing, revoking, suspending or placing limitations on a registration as herein above provided, together w i t h its findings, shall be entered in the Register of Securities M a r k e t Professionals. The suspension or revocation of the registration of a dealer or broker shall also automatically suspend the registration of all salesmen and associated persons affiliated w i t h such broker or dealer. 29.4. It shall be sufficient cause for refusal, revocation or suspension of a broker's or dealer's registration, if any associated person thereof or any juridical entity controlled by such associated person has committed any act or omission or is subject to any disability enumerated in paragraphs (a) to (i) of Subsection 29.1 hereof.

SEC. 30. Transactions and Responsibility of Brokers and Dealers.™ — 30.1. No broker or dealer shall deal in or otherwise b u y or sell, for its o w n account or for the account of customers, securities listed on an Exchange issued by any corporation where any stockholder, director, associated person or salesman, or authorized clerk of said broker or dealer and all the relatives of the foregoing w i t h i n the fourth civil degree of consanguinity or affinity, is at the time holding office in said issuer corporation as a director, president, vice-president, manager, treasurer, comptroller, secretary or any office of trust and responsibility, or is a controlling person of the issuer. 30.2. No broker or dealer shall effect any transaction in securities or induce or attempt to induce the purchase or sale of any security except in compliance w i t h such rules and regulations as the Commission shall prescribe to ensure fair and honest dealings in securities and provide financial safeguards and other standards for the operation of brokers and dealers, including the establishment of m i n i m u m net capital requirements, the acceptance of custody and use of securities of customers, and the carrying a n d use of deposits and credit balances of customers. SEC. 31. Development of Securities Market Professionals. — T h e Commission, in joint undertaking w i t h self regulatory organizations, organizations and associations of finance professionals as w e l l as private educational and research institutions shall undertake or facilitate/organize continuing training, conferences/seminars, updating programs, research and development as w e l l as technology transfer at the latest and advanced trends in issuance and trading of securities, derivatives, commodity trades and other financial instruments, as w e l l as securities markets of other countries.

"Abacus Securities Corporation vs. Ampil, 483 SCRA 315 (2006).

Sees. 32-33


895

CHAPTER IX

EXCHANGES AND OTHER SECURITIES TRADING MARKETS SEC. 32. Prohibition on Use of Unregistered Exchange; Regulation of Overthe-Counter Markets. — 32.1. No broker, dealer, salesman, associated person of a broker or dealer, or Exchange, directly or indirectly, shall make use of any facility of an Exchange in the Philippines to effect any transaction in a security, or to report such transaction, unless such Exchange is registered as such under Section 33 of this Code. 32.2. (a) No broker, dealer, salesman or associated person of a broker or dealer, singly or in concert w i t h any other person, shall make, create or operate, or enable another to make, create or operate, any trading market, otherwise than on a registered Exchange, for the b u y i n g and selling of any security, except in accordance w i t h rules and regulations the Commission m a y prescribe. (b) The Commission m a y promulgate rules and regulations governing transactions by brokers, dealers, salesmen or associated persons of a broker or dealer, over any facilities of such trading market and m a y require such market to be administered by a self-regulatory organization determined by the Commission as capable of insuring the protection of investors comparable to that provided in the case of a registered Exchange. Such self-regulatory organization must provide a centralized marketplace for trading and must satisfy requirements comparable to those prescribed for registration of Exchanges in Section 33 of this Code. SEC. 33. Registration of Exchanges. — 33.1. A n y Exchange may be registered as such w i t h the Commission under the terms and conditions hereinafter provided in this Section and Section 40 hereof, by filing an application for registration in such f o r m and containing such information and supporting documents as the Commission by rule shall prescribe, including the following: (a) An undertaking to comply and enforce compliance by its members w i t h the provisions of this Code, its implementing rules or regulations and the rules of the Exchange; (b) The organizational charts of the Exchange, rules of procedure, and a list of its officers and members; (c)

Copies of the rules of the Exchange; and

(d) An undertaking that in the event a member firm becomes insolvent or w h e n the Exchange shall have found that the financial condition of its member firm has so deteriorated that it cannot readily meet the demands of its customers for the delivery of securities a n d / o r payment of sales proceeds, the Exchange shall, upo n order of the Commission, take over the operation of the insolvent member firm and immediately proceed to settle the member firm's liabilities to its customers. 33.2. Registration of an Exchange shall be granted upon compliance with the following provisions:

896


Sec. 33

(a) That the applicant is organized as a stock corporation: Provided, That any registered Exchange existing prior to the effectivity of this Code shall within one (1) year reorganize as a stock corporation pursuant to a demutualization plan approved by the Commission; (b) That the applicant is engaged solely in the business of operating an exchange: Provided, however, That the Commission m a y adopt rules, regulations or issue an order, u p o n application, exempting an Exchange organized as a stock corporation and o w n e d and controlled by another juridical person from this restriction; (c) Where the Exchange is organized as a stock corporation, that no person may beneficially o w n or control, direcdy or indirectly, more than five percent (5%) of the voting rights of the Exchange and no industry or business group may beneficially o w n or control, directly or indirectly, more than twenty percent (20%) of the voting rights of the Exchange: Provided, however, That the Commission m a y adopt rules, regulations or issue an order, upon application, exempting an applicant f r o m this prohibition where it finds that such ownership or control w i l l not negatively impact on the Exchange's ability to effectively operate in the public interest; (d) The expulsion, suspension, or disciplining of a member and persons associated w i t h a member for conduct or proceeding inconsistent w i t h just and equitable principles of fair trade, and for violations of provisions of this Code, or any other Act administered by the Commission, the rules, regulations and orders thereunder, or the rules of the Exchange; (e) A fair procedure for the disciplining of members and persons associated w i t h members, the denial of membership to any person seeking to be a member, the barring of any person f r o m association w i t h a member, and the prohibition or limitation of any person f r o m access to services offered by the Exchange; (f) That the brokers in the board of the Exchange shall comprise of not more than forty-nine percent (49%) of such board a n d shall proportionately represent the Exchange membership in terms of v o l u m e / value of trade and paid up capital, and that any natural person associated w i t h a juridical entity that is a member shall himself be deemed to be a member for this purpose: Provided, That any registered Exchange existing prior to the effectivity of this Code shall immediately comply w i t h this requirement; (g) For the board of the Exchange to include in its composition (i) the president of the Exchange, and (ii) no less than fifty-one percent (51%) of the remaining members of the board to be comprised of three (3) independent directors and persons w h o represent the interests of issuers, investors, and other market participants, w h o are not associated w i t h any broker or dealer or member of the Exchange for a period of t w o (2) years prior to h i s / h e r appointment. No officer or employee of a member, its subsidiaries or affiliates or related interests shall become an independent director: Provided, however, That the Commission m a y by rule,

Sees. 32-33


897

regulation, or order u p o n application, permit the exchange organized as a stock corporation to use a different governance structure: Provided, further, That the Commission is satisfied that the Exchange is acting in the public interest and is able to effectively operate as a self-regulatory organization under this Code: Provided, finally, That any registered exchange existing prior to the effectivity of this Code shall immediately comply w i t h this requirement; (h) The president and other management of the Exchange to consist only of persons w h o are not members and are not associated in any capacity, directly or indirectly w i t h any broker or dealer or member or listed company of the Exchange: Provided, That the Exchange m a y only appoint, and a person m a y only serve, as an offer of the exchange if such person has not been a member or affiliated w i t h any broker, dealer, or member of the Exchange for a period of at least t w o (2) years prior to such appointment; (i)

The transparency of transactions on the Exchange;

(j) The equitable allocation of reasonable dues, fees, and other charges among members and issuers and other persons using any facility or system w h i c h the Exchange operates or controls; (k) Prevention of fraudulent and manipulative acts and practices, promotion of just and equitable principles of trade, and, in general, protection of investors and the public interest; and (1) The transparent, p r o m pt and accurate clearance and statement of transactions effected on the Exchange. 33.3. If the Commission finds that the applicant Exchange is capable of complying and enforcing compliance by its members, and persons associated w i t h such members, w i t h the provisions of this Code, its rules and regulations, and the rules of the Exchange are fair, just and adequate, the Commission shall cause such Exchange to be registered. If, after notice due and hearing, the Commission finds otherwise, the application shall be denied. 33.4. W i t h i n ninety (90) days after the filing of the application the Commission m a y issue an order either granting or denying registration as an Exchange, unless the Exchange applying for registration shall withdraw its application or shall consent to the Commission's deferring action on its application for a stated longer period after the date of filing. The filing w i t h the Commission of an application for registration by an Exchange shall be deemed to have taken place upon the receipt thereof. Amendments to an application may be made u p on such terms as the Commission may prescribe. 33.5. U p o n the registration of an Exchange, it shall pay a fee in such amount and within such period as the Commission may fix. 33.6. U p o n appropriate application in accordance with the rules and regulations of the Commission and upon such terms as the Commission may deem necessary for the protection of investors, an Exchange may withdraw its registration or suspend its operations or resume the same.


898

Sees. 34-36

SEC. 34. Segregation and Limitation of Functions of Members, Brokers and Dealers. — 34.1. It shall be unlawful for any member-broker of an Exchange to effect any transaction on such Exchange for its o w n account, the account of an associated person, or an account w i t h respect to which it or an associated person thereof exercises investment discretion: Provided, however, That this section shall not make unlawful: (a) A n y transaction by a member-broker acting in the capacity of a market maker; (b) A n y transaction reasonably necessary to carry on an odd-lot transactions; (c)

A n y transaction to offset a transaction made in error; and

(d) A n y other transaction of a similar nature as m a y be defined by the Commission. 34.2. In all instances where the member-broker effects a transaction on an Exchange for its o w n account or the account of an associated person or an account w i t h respect to which it exercises investment discretion, it shall disclose to such customer at or before the completion of the transaction it is acting for its o w n account: Provided, further, That this fact shall be reflected in the order ticket and the confirmation slip. 34.3. A n y member-broker w h o violates the provisions of this Section shall be subject to the administrative sanctions provided in Section 54 of this Code. SEC. 35. Additional Fees of Exchanges. — In addition to the registration fee prescribed in Section 33 of this Code, every Exchange shall pay to the Commission, on a semestral basis on or before the tenth day of the end of every semester of the calendar year, a fee in such an amount as Commission shall prescribe, but not more than one-hundredth of one per centum (1%) of the aggregate amount of the sales of securities transacted on such Exchange during the preceding calendar year, for the privilege of doing business, d u r i n g the preceding calendar year or any part thereof. SEC. 36. Powers with Respect to Exchanges and Other Trading Market. — 36.1. The Commission is authorized, if in its opinion such action is necessary or appropriate for the protection of investors and the public interest so requires, summarily to suspend trading in any listed security on any Exchange or other trading market for a period not exceeding thirty (30) days or, w i t h the approval of the President of the Philippines, summarily to suspend all trading on any securities Exchange or other trading market for a period of more that thirty (30) but not exceeding ninety (90) days: Provided, however, That the Commission, promptly following the issuance of the order of suspension, shall notify the affected issuer of the reasons for such suspension and provide such issuer w i t h an opportunity for hearing to determine whether the suspension should be lifted. 36.2. Wherever t w o or more Exchange or other trading markets exist, the Commission may require and enforce uniformity of trading regulations in a n d / o r between or among said Exchanges or other trading markets.

Sees. 37-38


899

36.3. In addition to the existing Philippine Stock Exchange, the Commission shall have the authority to determine the number, size and location of stock Exchanges, other trading markets and commodity Exchanges a n d other similar organizations in the light of national or regional requirements for such activities w i t h the v i e w to promote, enhance, protect, conserve or rationalize investment. 36.4. The Commission, havin g due regard to the public interest, the protection of investors, the safeguarding of securities and funds, and maintenance of fair competition a m o n g brokers, dealers, clearing agencies, and transfer agents, shall promulgate rules and regulations for the promp t and accurate clearance and settlement of securities transactions. 36.5. (a) The Commission m a y establish or facilitate the establishment of trust funds w h i c h shall be contributed by Exchanges, brokers, dealers, underwriters, transfer agents, salesmen and other persons transacting in securities, as the Commission m a y require, for the purpose of compensating investors for the extraordinary losses or damage they m a y suffer due to business failure or fraud or mismanagement of the persons w i t h w h o m they transact, under such rules and regulations as the Commission m a y from time to time prescribed or approve in the public interest. (b) The Commission may, having due regard to the public interest or the protection of investors, regulate, supervise, examine, suspend or otherwise discontinue such other similar funds under such rules and regulations which the Commission m a y promulgate, and w h i c h m a y include taking custody and management of the f u n d itself as w e l l as investments in disbursements from the funds under such forms of control and supervision by the Commission as it m a y f r o m time to time require. The authority granted to the Commission under this subsection shall also apply to all funds established for the protection of investors, whether established by the Commission or otherwise.

SEC. 37. Registration of Innovative and Other Trading Markets. — The Commission, having due regard for national economic development, shall encourage competitiveness in the market by promulgating w i t h i n six (6) months u p o n the enactment of this Code, rules for the registration and licensing of innovative and other trading markets or Exchanges covering, but not limited to, the issuance and trading of innovative securities, securities of small, medium , growth and venture enterprises, and technology-based ventures pursuant to Section 33 of this Code. SEC. 38. Independent Directors. — A n y corporation w i t h a class of equity securities listed for trading on an Exchange or with assets in excess of Fifty million pesos (P50,000,000.00) and having two hundred (200) or more holders, at least two hundred (200) of which are holding at least one hundred (100) shares of a class of its equity securities or which has sold a class of equity securities to the public pursuant to an effective registration statement in compliance with Section 12 hereof shall have at least two (2) independent directors or such independent directors shall constitute at least twenty percent (20%) of the members of such board, whichever is lesser. For this purpose, an "independent director" shall mean a person other than an officer or employee

900


Sec. 39

of the corporation, its parent or subsidiaries, or any other individual having a relationship with the corporation, which w o u l d interfere w i t h the exercise of independent judgment in carrying out the responsibilities of a director.

CHAPTER X REGISTRATION, RESPONSIBILITIES AND OVERSIGHT OF SELF-REGULATORY ORGANIZATIONS SEC. 39. Associations of Securities Brokers, and Dealers, and Other Securities Related Organizations. — 39.1. The Commission shall have the power to register as a self-regulatory organization, or otherwise grant licenses, and to regulate, supervise, examine, suspend or otherwise discontinue, as a condition for the operation of organizations whose operations are related to or connected w i t h the securities market such as but not limited to associations of brokers and dealers, transfer agents, custodians, fiscal and paying agents, computer services, news disseminating services, proxy solicitors, statistical agencies, securities rating agencies, and securities information processors w h i c h are engaged in the business of: (a) Collecting, processing, or preparing for distribution or publication, or assisting, participating in, or coordinating the distribution or publication of, information w i t h respect to transactions in or quotations for any security; or (b) Distributing or publishing, whether by means of a ticker tape, a communications network, a terminal display device, or otherwise, on a current and continuing basis, information w i t h respect to such transactions or quotations. The Commission m a y prescribe rules and regulations w h i c h are necessary or appropriate in the public interest or for the protection of investors to govern self-regulatory organizations and other organizations licensed or regulated pursuant to the authority granted in Subsection 39.1 including the requirement of cooperation w i t h i n and among, a n d electronic integration of the records of, all participants in the securities market to ensure transparency and facilitate exchange of information. 39.2. An association of brokers and dealers m a y be registered as a securities association pursuant to Subsection 39.3 by filing w i t h the Commission an application for registration in such f o r m as the Commission, by rule, m a y prescribe containing the rules of the association and such other information and documents as the Commission, by rule, m a y prescribe as necessary or appropriate in the public interest or for the protection of investors. 39.3. An association of brokers and dealers shall not be registered as a securities association unless the Commission determines that: (a) The association is so organized and has the capacity to be able to carry out the purposes of this Code and to comply w i t h , and to enforce compliance by its members and persons associated w i t h its members, w i t h the provisions of this Code, the rules and regulations thereunder, and the rules of the association. (b) The rules of the association, notwithstanding anything in Corporation Code to the contrary, provide that:

Sec. 39


901

(i) A n y registered broker or dealer m a y become a member of the association; (ii) There exist a fair representation of its members to serve on the Board of Directors of the association a n d in the administration of its affairs, and that any natural person associated w i t h a juridical entity that is a member shall himself be deemed to be a member for this purpose; (iii) The Board of Directors of the association includes in its composition: (a) The president of the association and (b) Persons w h o represent the interests of issuers and public investors and are not associated w i t h any broker or dealer or member of the association; that the president and other management of the association not be a member or associated w i t h any broker, dealer or member of the association; (iv) For the equitable allocation of reasonable dues, fees, and other charges among members and issuers and other persons using any facility or system w h i c h the association operates or controls; (v) For the prevention of fraudulent and manipulative acts and practices, the promotion of just a n d equitable principles of trade, and, in general, the protection of investors and the public interest; (vi) That its members a n d persons associated w i t h its members shall be appropriately disciplined for violation of any provision of this Code, the rules or regulations thereunder, or the rules of the association; (vii) That a fair procedure for the disdplining of members and persons associated w i t h members, the denial of membership to any person seeking membership therein, the barring of any person from becoming associated w i t h a member thereof, and the prohibition or limitation by the association of any person w i t h respect to access to services offered by the association or a member thereof. 39.4. (a) A registered securities association shall deny membership to any person w h o is not a registered broker or dealer. (b) A registered securities association may deny membership to, or condition the membership of, a registered broker or dealer if such broker or dealer: (i) Does not meet the standards of financial responsibility, operational capability, training, experience, or competence that are prescribed by the rules of the association; or (ii) Has engaged, and there is a reasonable likelihood it will again engage, in acts or practices inconsistent w i t h just and equitable principles of fair trade. (c) A registered securities association may deny membership to a registered broker or dealer not engaged in a type of business in which the rules of the association require members to be engaged: Provided, however. That no

902


Sec. 40

registered securities association may deny membership to a registered broker or dealer by reason of the amount of business done by the broker or dealer. Aregistered securities association may examine and verify the qualifications of an applicant to become a member in accordance w i t h procedures established by the rules of the association. (d) A registered securities association may bar a salesman or person associated w i t h a broker or dealer from being employed by a member or set conditions for the employment of a salesman or associated if such person: (i) Does not meet the standards of training, experience, or competence that are prescribed by the rules of the association; or (ii) Has engaged, and there is a reasonable likelihood he w i l l again engage, in acts or practices inconsistent w i t h just and equitable principles of fair trade. A registered securities association m a y examine and verify the qualifications of an applicant to become a salesman or associated person employed by a member in accordance w i t h procedures established by the rules of the association. A registered association also m a y require a salesman or associated person employed by a member to be registered w i t h the association in accordance w i t h procedures prescribed in the rules of the association. 39.5. In any proceeding by a registered securities association to determine whether a person shall be denied membership, or barred f r o m association w i t h a member, the association shall provide notice to the person under review of the specific grounds being considered for denial, afford h i m an opportunity to defend against the allegations, a n d keep a record of the proceedings. A determination by the association to deny membership shall be supported by a statement setting forth the specific grounds on w h i c h the denial is based. SEC. 40. Powers with Respect to Self-Regulatory Organizations. — 40.1. U p o n the filing of an application for registration as an Exchange under Section 33, a registered securities association under Section 39, a registered clearing agency under Section 42, or other self-regulatory organization under this Section, the Commission shall have ninety (90) days w i t h i n w h i c h to either grant registration or institute a proceeding to determine whether registration should be denied. In the event proceedings are instituted, the Commission shall have two hundred seventy (270) days w i t h i n w h i c h to conclude such proceedings at which time it shall, by order, grant or deny such registration. 40.2. Every self-regulatory organization shall comply w i t h the provisions of this Code, the rules and regulations thereunder, and its o w n rules, and enforce compliance therewith, notwithstanding any provision of the Corporation Code to the contrary, by its members, persons associated w i t h its members or its participants. 40.3. (a) Each self-regulatory organization shall submit to the Commission for prior approval any proposed rule or amendment thereto, together w i t h a concise statement of the reason and effect of the proposed amendment.

Sec. 40


903

(b) W i t h i n sixty (60) days after submission of a proposed amendment, the Commission shall, by order, approve the proposed amendment. Otherwise, the same m a y be m a d e effective by the self-regulatory organization. (c) In the event of an emergency requiring action for the protection of investors, the maintenance of fair and orderly markets, or the safeguarding of securities and funds, a self-regulatory organization m a y p u t a proposed a m e n d m e n t into effect summarily: Provided, however, That a copy of the same shall be immediatel y submitted to the Commission. 40.4. The Commission is further authorized, if after makin g appropriate request in w r i t i n g to a self-regulatory organization that such organization effect on its o w n behalf specified changes in its rules and practices and, after due notice and hearing it determines that such changes have not been effected, and that such changes are necessary, by rule or regulation or by order, may alter, abrogate or supplement the rules of such self-regulatory organization in so far as necessary or appropriate to effect such changes in respect of such matters as: (a) Safeguards in respect of the financial responsibility of members and adequate provision against the evasion of financial responsibility through the use of corporate forms or special partnerships; (b)

The supervision of trading practices;

(c)

T h e listing or striking from listing of any security;

(d) H o u r s of trading; (e)

The manner, method, and place of soliciting business;

(f)

Fictitious accounts;

(g) The time and m e t h od of makin g settlements, payments, and deliveries, and of closing accounts; (h) The transparency of securities transactions and prices; (i) The fixing of reasonable rates of fees, interest, listing and other charges, but not rates of commission; (j)

M i n i m u m units of trading;

(k)

Odd-lot purchases and sales;

(1)

M i n i m u m deposits on margin accounts; and

(m) The supervision, auditing and disciplining of members or participants. 40.5. The Commission, after due notice and hearing, is authorized, in the public interest and to protect investors: (a) To suspend for a period not exceeding twelve (12) months or to revoke the registration of a self-regulatory organization, or to censure or impose limitations on the activities, functions, and operations of such self-regulatory organization, if the Commission finds that such a selfregulatory organization has willfully violated or is unable to comply with

904


Sec. 40

any provision of this Code or of the rules and regulations thereunder, or its o w n rules, or has failed to enforce compliance therewith by a member of, person associated w i t h a member, or a participant in such self-regulatory organization; (b) To expel from a self-regulatory organization any member thereof or any participant therein w h o is subject to an order of the Commission under Section 29 of this Code or is found to have willfully violated any provision of this Code or suspend for a period not exceeding twelve (12) months for violation of any provision of this Code or any other laws administered by the Commission, or the rules and regulations thereunder, or effected, directly or indirectly, any transaction for any person w h o , such member or participant had reason to believe, was violating in respect of such transaction any of such provisions; and (c) To remove from office or censure any officer or director of a self-regulatory organization if it finds that such officer or director has violated any provision of this Code, any other l a w administered by the Commission, the rules or regulations thereunder, or the rules of such self-regulatory organization, abused his authority, or without reasonable justification or excuse has failed to enforce compliance w i t h any of such provisions. 40.6. (a) A self-regulatory organization is authorized to discipline a member or participant in such self-regulatory organization, or any person associated w i t h a member, including the suspension or expulsion of such member or participant, and the suspension or bar f r o m being associated w i t h a member, if such person has engaged in acts or practices inconsistent w i t h just and equitable principles of fair trade or in w i l l f u l violation of any provision of the Code, any other la w administered by the Commission, the rules or regulations thereunder, or the rules of the self-regulatory organization. In any disciplinary proceeding by a self-regulatory organization (other than a summar y proceeding pursuant to paragraph [b] of this subsection) the self-regulatory organization shall bring specific charges, provide notice to the person charged, afford the person charged w i t h an opportunity to defend against the charges, a n d keep a record of the proceedings. A determination to impose a disciplinary sanction shall be supported by a written statement of the offense, a s u m m a r y of the evidence presented and a statement of the sanction imposed. (b) A self-regulatory organization m a y summarily: (i) Suspend a member, participant or person associated w i t h a member w h o has been or is expelled or suspended from any other self-regulatory organization; or (ii) Suspend a member w h o the self-regulatory organization finds to be in such financial or operating difficulty that the member or participant cannot be permitted to continue to do business as a member w i t h safety to investors, creditors, other members, participants or the self-regulatory organization: Provided, That the self-regulatory organization immediately notifies the Commission of the action taken. A n y person aggrieved by a summary action pursuant to this paragraph shall be promptly afforded an opportunity for a hearing by the association in accordance w i t h the provisions of paragraph (a) of this subsection. The

Sec. 41


905

Commission, by order, m a y stay a s u m m a r y action on its o w n morion or upon application by any person aggrieved thereby, if the Commission determines s u m m a r i l y or after due notice and hearing (which hearing m a y consist solely of the submission of affidavits or presentation of oral arguments) that a stay is consistent w i t h the public interest and the protection of investors. 40.7. A self-regulatory organization shall p r o m p t l y notify the Commission of any disciplinary sanction on any member thereof or participant therein, any denial of membership or participation in such organization, or the imposition of any disciplinary sanction on a person associated w i t h a member or a bar of such person f r o m becoming so associated. W i t h i n thirty (30) days after such notice, any aggrieved person m a y appeal to the Commission from, or the Commission on its o w n m o t i o n w i t h i n such period, m a y institute review of, the decision of the self-regulatory organization, at the conclusion of which, after due notice and hearing ( w h i c h m a y consist solely of review of the record before the self-regulatory organization), the Commission shall affirm, modify or set aside the sanction. In such proceeding the Commission shall determine whether the aggrieved person has engaged or omitted to engage in the acts and practices as found by the self-regulatory organization, whether such acts and practices constitute w i l l f u l violations of this Code, any other la w administered by the Commission, the rules or regulations thereunder, or the rules of the self-regulatory organization as specified by such organization, whether such provisions were applied in a manner consistent w i t h the purposes of this Code, and whether, w i t h due regard for the public interest and the protection of investors the sanction is excessive or oppressive. 40.8. The powers of the Commission under this section shall apply to organized exchanges and registered clearing agencies.

CHAPTER XI

ACQUISITION AND TRANSFER OF SECURITIES AND SETTLEMENT OF TRANSACTIONS IN SECURITIES SEC. 4 1 . Prohibition on Use of Unregistered Clearing Agency. — It shall be u n l a w f u l for any broker, dealer, salesman, associated person of a broker or dealer, or clearing agency, directly or indirectly, to make use of any facility of a clearing agency in the Philippines to make deliveries in connection with transactions in securities or to reduce the number of settlements of securities transactions or to allocate securities settlement responsibilities or to provide for the central handling of securities so that transfers, loans and pledges and similar transactions can be made by bookkeeping entry or otherwise to facilitate the settlement of securities transactions without physical delivery of securities certificates, unless such clearing agency is registered as such under Section 42 of this Code or is exempted from such registration upon application by the clearing agency because, in the opinion of the Commission, by reason of the limited volume of transactions which are settled using the clearing agency, it is not practicable and not necessary or appropriate in the public interest or for the protection of investors to require such registration.


906

Sec. 42

SEC. 42. Registration of Clearing Agencies. — 42.1. A n y clearing agency may be registered as such w i t h the Commission under the terms and conditions hereinafter provided in this Section, by filing an application for registration in such form and containing such information and supporting documents as the Commission by rule shall prescribe, including the following: (a) An undertaking to comply and enforce compliance by its participants w i t h the provisions of this Code, and any amendment thereto, and the implementing rules or regulations made or to be made thereunder, and the clearing agency's rules; (b) The organizational charts of the Exchange, its rules of procedure, and a list of its officers and participants; and (c)

Copies of the clearing agency's rules.

42.2. No registration of a clearing agency shall be granted unless the rules of the clearing agency include provision for: (a) The expulsion, suspension, or disciplining of a participant for violations of this Code, or any other Act administered by the Commission, the rules, regulations, and orders thereunder, or the clearing agency's rules; (b) A fair procedure for the disciplining of participants, the denial of participation rights to any person seeking to be a participant, and the prohibition or limitation of any person from access to services offered by the clearing agency; (c) The equitable allocation of reasonable dues, fees, and other charges among participants; (d) Prevention of fraudulent and manipulative acts and practices, promotion of just and equitable principles of trade, and, in general, protection of investors and the public interest; (e) The transparent, p r o m p t and accurate clearance and settlement of transactions in securities handled by the clearing agency; and (f) The establishment and oversight of a f u n d to guarantee the prompt and accurate clearance and settlement of transactions executed on an exchange, including a requirement that members each contribute an amount based on their v o l u me and a relevant percentage of the daily exposure of the four (4) largest trading brokers w h i c h adequately reflects trading risks undertaken or pursuant to another formula set forth in Commission rules or regulations or order, u p o n application: Provided, however, That a clearing agency engaged in the business of a securities depository shall be exempt f r o m this requirement. 42.3. In the case of an application filed pursuant to this Section, the Commission shall grant registration if it finds that the requirements of this Code and the rules and regulations thereunder w i t h respect to the applicant have been satisfied, and shall deny registration if it does not m a k e such finding. 42.4. U p o n appropriate application in accordance w i t h the rules and regulations of the Commission and u p o n such terms as the Commission m a y

* Sees. 43-44


907

d e e m necessary for the protection of investors, a clearing agency m a y w i t h d r a w its registration or suspend its operation or resume the same. 42.5. agency.

Section 32 of this Code shall apply to every registered clearing

SEC. 43. Uncertificated Securities. — N o t w i t h s t a n d i n g Section 63 of the Corporation Code of the Philippines: 43.1. A corporation whose securities are registered pursuant to this Code or listed on a Securities Exchange may: (a) If so resolved by its Board of Directors and agreed by a shareholder, investor or securities intermediary, issue shares to, or record the transfer of some or all of its shares into the name of said shareholders, investors or, securities intermediary in the f o r m of uncertificated securities. The use of uncertificated securities in these circumstances shall be without prejudice to the rights of the securities intermediary subsequently to require the corporation to issue a certificate in respect of any shares recorded in its name; and (b) If so provided in its articles of incorporation and by-laws, issue all of the shares of a particular class in the f o r m of uncertificated securities and subject to a condition that investors m a y not require the corporation to issue a certificate in respect of any shares recorded in their name. 43.2. The Commission by rule m a y allow other corporations to provide in their articles of incorporation and by-laws for the use of uncertificated securities. 43.3. Transfers of securities, including an uncertificated securities, may be validly m a d e and consummated by appropriate book entries in the securities accounts maintained by securities intermediaries, or in the stock and transfer book held by the corporation or the stock transfer agent and such bookkeeping entries shall be binding on the parties to the transfer. A transfer under this subsection has the effect of the delivery of a security in bearer form or duly indorsed in blank representing the quantity or amount of security or right transferred, including the unrestricted negotiability of that security by reason of such delivery. However, transfer of uncertificated shares shall only be valid, so far as the corporation is concerned, w h e n a transfer is recorded in the books of the corporation so as to show the names of the parties to the transfer and the number of shares transferred. However, nothing in this Code shall preclude compliance by banking and other institutions under the supervision of the Bangko Sentral ng Pilipinas and their stockholders w i t h the applicable ceilings on shareholdings prescribed under pertinent banking laws and regulations. SEC. 44. Evidentiary Value of Clearing Agency Record. — The official records and book entries of a clearing agency shall constitute the best evidence of such transactions between clearing agency and its participants and members, without prejudice to the right of participants' or members' clients to prove their rights, title and entitlement w i t h respect to the book-entry security holdings of the participants or members held on behalf of the clients. However, the corporation

908


Sees. 45-47'

shall not be bound by the foregoing transactions unless the corporate secretary is duly notified in such manner as the Commission may provide. SEC. 45. Pledging a Security or Interest Therein. — In addition to other methods recognized by law, a pledge of, or release of a pledge of, a security, including an uncertificated security, is properly constituted and the instrument proving the right pledged shall be considered delivered to the creditor under Articles 2093 and 2095 of the Civil Code if a securities intermediary indicates by book entry that such security has been credited to a specially designated pledge account in favor of the pledgee. A pledge under this subsection has the effect of the delivery of a security in bearer form or duly indorsed in blank representing the quantity or amount of such security or right pledged. In the case of a registered clearing agency, the procedures by which , and the exact time at which, such book entries are created shall be governed by the registered clearing agency's rules. However, the corporation shall not be b o u n d by the foregoing transactions unless the corporate secretary is d u l y notified in such manner as the Commission m a y provide.

SEC. 46. Issuer's Responsibility for Wrongful Transfer to Registered Clearing Agency. — The registration of a transfer of a security into the name of and by a registered clearing agency or its nominee shall be final and conclusive unless the clearing agency had notice of an adverse claim before the registration was made. The above provision shall be w i t h o u t prejudice to any rights w h i c h the claimant may have against the issuer for w r o n g f u l registration in such circumstances.

SEC. 47. Power of the Commission With Respect to Securities Ownership. — The Commission is authorized, having due regard to the public interest and the protection of investors, to promulgate rules and regulations which : 47.1. Validate the transfer of securities by book-entries rather than the delivery of physical certificates; 47.2. Establish w h e n a person acquires a security or an interest therein and w h e n delivery of a security to a purchaser occurs; 47.3. Establish which records constitute the best evidence of a person's interests in a security and the effect of any errors in electronic records of ownership; 47.4. Codify the rights of investors w h o choose to hold their securities indirectly through a registered clearing agency a n d / o r other securities intermediaries; 47.5. Codify the duties of securities intermediaries (including clearing agencies) w h o hold securities on behalf of investors; and 47.6. Give first priority to any claims of a registered clearing agency against a participant arising f r o m a failure by the participant to meet its obligations under the clearing agency's rules in respect of the clearing and settlement of transactions in securities, in a dissolution of the participant, and any such rules and regulations shall bin d the issuers of the securities, investors in the securities, any third parties w i t h interests in the securities, and the creditors of a participant of a registered clearing agency.

Sec. 48


909

CHAPTER XII MARGIN AND CREDIT SEC. 48. Margin Requirements. — 48.1. For the purpose of preventing the excessive use of credit for the purchase or carrying of securities, the Commission, in accordance w i t h the credit and monetary policies that may be promulgated f r o m time to time by the M o n e t a r y Board of the Bangko Sentral ng Pilipinas, shall prescribe rules and regulations w i t h respect to the amount of credit that m a y be extended on any security. For the extension of credit, such rules and regulations shall be based u p o n the following standard: 16

An amount not greater than whichever is the higher of — (a)

Sixty-five per centum (65%) of the current market price of the security,

or (b) O n e h u n d r e d per centum (100%) of the lowest market price of the security during the preceding thirty-six (36) calendar months, but not more than seventy-five per centum (75%) of the current market price. However, the M o n e t a r y Board m a y increase or decrease the above percentages, in order to achieve the objectives of the Government w i t h due regard for promotion of the economy and prevention of the use of excessive credit. Such rules and regulations m a y m a k e appropriate provision w i t h respect to the carrying of undermargined accounts for limited periods and under specified conditions; the w i t h d r a w a l of funds or securities; the transfer of accounts f r o m one lender to another; special or different margin requirements for delayed deliveries, short sales, arbitrage transactions, and securities to w h i c h letter (b) of the second paragraph of this subsection does not apply; the bases and the methods to be used in calculating loans, and margins and market prices; and similar administrative adjustments and details. 48.2. No member of an Exchange or broker or dealer shall, directly or indirectly, extend or maintain credit or arrange for the extension or maintenance of credit to or for any customer: (a) On any security unless such credit is extended and maintained in accordance w i t h the rules and regulations which the Commission shall prescribe under this Section including rules setting credit in relation to net capital of such member, broker or dealer; and (b) Without collateral or on any collateral other than securities, except (i) to maintain a credit initially extended in conformity w i t h the rules and regulations of the Commission and (ii) in cases where the extension or maintenance of credit is not for the purpose of purchasing or carrying securities or of evading or circumventing the provisions of paragraph (a) of this subsection.

16

See Abacus Securities Corporation vs. Ampil, 483 SCRA 315 (2006).

910


Sees. 49-50

48.3. A n y person not subject to Subsection 48.2 hereof shall extend or maintain credit or arrange for the extension or maintenance of credit for the purpose of purchasing or carrying any security, only in accordance w i t h such rules and regulations as the Commission shall prescribe to prevent the excessive use of credit for the purchasing or carrying of or trading in securities in circumvention of the other provisions of this Section. Such rules and regulations may impose upon all loans made for the purpose of purchasing or carrying securities limitations similar to those imposed u p on members, brokers, or dealers by Subsection 48.2 and the rules and regulations thereunder. This subsection and the rules and regulations thereunder shall not apply: (a) To a credit extension made by a person not in the ordinary course of business; (b) To a loan to a dealer to aid in the financing of the distribution of securities to customers not through the m e d i u m of an Exchange; or (c) To such other credit extension as the Commission shall exempt f r o m the operation of this subsection and the rules and regulations thereunder upo n specified terms and conditions or for stated period.

SEC. 49. Restrictions on Borrowings by Members, Brokers, and Dealers. — It shall be unlawful for any registered broker or dealer, or member of an Exchange, directly or indirectly: 49.1. To permit in the ordinary course of business as a broker or dealer his aggregate indebtedness including customers' credit balances, to exceed such percentage of the net capital (exclusive of fixed assets a n d value of Exchange membership) employed in the business, but not exceeding in any case t w o thousand per centum (2,000%), as the Commission m a y by rules and regulations prescribe as necessary or appropriate in the public interest or for the protection of investors. 49.2. To pledge, mortgage, or otherwise encumber or arrange for the pledge, mortgage or encumbrance of any security carried for the account of any customer under circumstances: (a) That w i l l permi t the cornmingling of his securities, without his written consent, w i t h the securities of any customer; (b) That w i l l permit such securities to be commingled w i t h the securities of any person other than a bona fide customer; or (c) That w i l l permit such securities to be pledged, mortgaged or encumbered, or subjected to any lien or claim of the pledgee, for a sum in excess of the aggregate indebtedness of such customers in respect of such securities. However, the Commission, having due regard to the protection of investors, may, by rules and regulations, allow certain transactions that may otherwise be prohibited under this subsection. 49.3. To lend or arrange for the lending of any security carried for the account of any customer without the written consent of such customer or in contravention of such rules and regulations as the Commission shall prescribe.

SEC. 50. Enforcement of Margin Requirements and Restrictions on Borrowing. — To prevent indirect violations of the margin requirements under Section 48, the broker or dealer shall require the customer in non-margin transactions to pay the price of the security purchased for his account w i t h i n such period as the Commission may prescribe, which shall in no case exceed the prescribed

settlement date. Otherwise, the broker shall sell the security purchased starting on the next trading day but not beyond ten (10) trading days following the last day for the customer to pay such purchase price, unless such sale cannot be effected w i t h i n said period for justifiable reasons. The sale shall be without prejudice to the right of the broker or dealer to recover any deficiency from the customer. To prevent indirect violation of the restrictions on borrowings under Section 49, the broker shall, unless otherwise directed by the customer, pay the net sales price of the securities sold for a customer w i t h i n the same period as above prescribed by the Commission: Provided, That the customer shall be required to deliver the instruments evidencing the securities as a condition for such payment u p o n d e m a n d by the broker.

CHAPTER XIII GENERAL PROVISIONS

SEC. 5 1 . Liabilities of Controlling Persons, Aider and Abettor and Other Secondary Liability. — 51.1. Every person w h o , by or through stock ownership, agency, or otherwise, or in connection w i t h an agreement or understanding w i t h one or more other persons, controls any person liable under this Code or the rules or regulations of the Commission thereunder, shall also be liable jointly and severally w i t h and to the same extent as such controlled persons to any person to w h o m such controlled person is liable, unless the controlling person proves that, despite the exercise of due diligence on his part, he has no knowledge of the existence of the facts by reason of w h i c h the liability of the controlled person is alleged to exist. 51.2. It shall be u n l a w f u l for any person, directly or indirectly, to do any act or thing w h i c h it w o u l d be u n l a w f u l for such person to do under the provisions of this Code or any rule or regulation thereunder. 51.3. It shall be u n l a w f u l for any director or officer of, or any owner of any securities issued by, any issuer required to file any document, report or other information under this Code or any rule or regulation of the Commission thereunder, without just cause, to hinder, delay or obstruct the making or filing of any such document, report, or information. 51.4. It shall be u n l a w f u l for any person to aid, abet, counsel, command, induce or procure any violation of this Code, or any rule, regulation or order of the Commission thereunder. 51.5. Every person w h o substantially assists the act or omission of any person primarily liable under Sections 57, 58, 59 and 60 of this Code, with knowledge or in reckless disregard that such act or omission is wrongful, shall be jointly and severally liable as an aider and abettor for damages resulting from the conduct of the person primarily liable: Provided, however, That an aider and abettor shall be liable only to the extent of his relative contribution in causing such damages in comparison to that of the person primarily liable, or the extent to which the aider and abettor was unjustly enriched thereby, whichever is greater.


912

Sees. 52-53

SEC. 52. Accounts and Records, Reports, Examination of Exchanges, Members, and Others. - 52.1. Every registered Exchange, broker or dealer, transfer agent, clearing agency, securities association, and other self-regulatory organization, and every other person required to register under this Code, shall make, keep and preserve for such periods, records, furnish such copies thereof, and make such reports, as the Commission by its rules and regulations m a y prescribe. Such accounts, correspondence, memoranda, papers, books, and other records shall be subject at any time to such reasonable periodic, special or other examinations by representatives of the Commission as the Commission may deem necessary or appropriate in the public interest or for the protection of investors. 52.2. A n y broker, dealer or other person extending credit, w h o is subject to the rules and regulations prescribed by the Commission pursuant to this Code, shall make such reports to the Commission as m a y be necessary or appropriate to enable it to perform the functions conferred u p on it by this Code. 52.3. For purposes of this Section, the term "records" refers to accounts, correspondence, memoranda, tapes, discs, papers, books and other documents or transcribed information of any type, whether written or electronic in character. SEC. 53. Investigations, Injunctions and Prosecution of Offenses. — 53.1. The Commission may, in its discretion, m a k e such investigations as it deems necessary to determine whether any person has violated or is about to violate any provision of this Code, any rule, regulation or order thereunder, or any rule of an Exchange, registered securities association, clearing agency, other self-regulatory organization, and m a y require or permit any person to file w i t h it a statement in writing, under oath or otherwise, as the Commission shall determine, as to all facts and circumstances concerning the matter to be investigated. The Commission m a y publish information concerning any such violations, and to investigate any fact, condition, practice or matter w h i c h it may deem necessary or proper to aid in the enforcement of the provisions of this Code, in the prescribing of rules and regulations thereunder, or in securing information to serve as a basis for recommending further legislation concerning the matters to w h i c h this Code relates: Provided, however, That any person requested or subpoenaed to produce documents or testify in any investigation shall simultaneously be notified in w r i t i n g of the purpose of such investigation: Provided, further, That all criminal complaints for violations of this Code, and the implementing rules and regulations enforced or administered by the Commission shall be referred to the Department of Justice for preliminary investigation and prosecution before the proper court: Provided, furthermore, That in instances where the la w allows independent civil or criminal proceedings of violations arising f r o m the same act, the Commission shall take appropriate action to implement the same: Provided, finally, That the investigation, prosecution, and trial of such cases shall be given priority. 17

18

See SEC vs. Interport Resources Corp., 567 SCRA 384 (2008). See GSIS vs. Court of Appeals, 585 SCRA 679 (2009); Baviera vs. Paelinawan, 515 SCRA 170 (2007). 17 le

5

Sec. 54


913

53.2. For the purpose of any such investigation, or any other proceeding under this Code, the Commission or any officer designated by it is empowered to administer oaths and affirmations, subpoena witnesses, compel attendance, take evidence, require the production of any book, paper, correspondence, m e m o r a n d u m , or other record w h i c h the Commission deems relevant or material to the inquiry, and to p e r f o r m such other acts necessary in the conduct of such investigation or proceedings. 53.3. Whenever it shall appear to the Commission that any person has engaged or is about to engage in any act or practice constituting a violation of any provision of this Code, any rule, regulation or order thereunder, or any rule of an Exchange, registered securities association, clearing agency or other self-regulatory organization, it m a y issue an order to such person to desist f r o m committing such act or practice: Provided, however, That the Commission shall not charge any person w i t h violation of the rules of an Exchange or other self-regulatory organization unless it appears to the Commission that such Exchange or other self-regulatory organization is unable or u n w i l l i n g to take action against such person. After finding that such person has engaged in any such act or practice a n d that there is a reasonable likelihood of continuing, further or future violations by such person, the Commission m a y issue ex-parte a cease and desist order for a m a x i m u m period of ten (10) days, enjoining the violation and compelling compliance w i t h such provision. The Commission m a y transmit such evidence as m a y be available concerning any violation of any provision of this Code, or any rule, regulation or order thereunder, to the Department of Justice, w h i c h m a y institute the appropriate criminal proceedings under this Code. 53.4. A n y person w h o , w i t h i n his power but without cause, fails or refuses to comply w i t h any l a w f u l order, decision or subpoena issued by the Commission under Subsection 53.2 or Subsection 53.3 or Section 64 of this Code, shall after due notice and hearing, be guilty of contempt of the Commission. Such person shall be fined in such reasonable amount as the Commission m a y determine, or w h e n such failure or refusal is a clear and open defiance of the Commission's order, decision or subpoena, shall be detained under an arrest order issued by the Commission, until such order, decision or subpoena is complied w i t h . SEC. 54. Administrative Sanctions: — 54.1. If, after due notice and hearing, the Commission finds that: (a) There is a violation of this Code, its rules, or its orders; (b) A n y registered broker or dealer, associated person thereof has failed reasonably to supervise, w i t h a v i e w to preventing violations, another person subject to supervision w h o commits any such violation; (c) A n y registrant or other person has, in a registration statement or in other reports, applications, accounts, records or documents required by law or rules to be filed with the Commission, made any untrue statement of a material fact, or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading; or in the case of an underwriter, has failed 9

"See Note 2.


914

Sees. 55-56

to conduct an inquiry with reasonable diligence to insure that a registration statement is accurate and complete in all material respects; or (d) A n y person has refused to permit any lawful examinations into its affairs, it shall, in its discretion, and subject only to the limitations hereinafter prescribed, impose any or all of the following sanctions as may be appropriate in light of the facts and circumstances: (i)

Suspension, or revocation of any registration for the offering of

securities; (ii) A fine of no less than Ten thousand pesos (P10,000.00) nor more than One million pesos (P1,000,000.00) plus not more than T w o thousand pesos (P2,000.00) for each day of continuing violation; (iii) In the case of a violation of Sections 19.2, 20, 24, 26 and 27, disqualification from being an officer, member of the Board of Directors, or person performing similar functions, of an issuer required to file reports under Section 17 of this Code or any other act, rule or regulation administered by the Commission; (iv) In the case of a violation of Section 34, a fine of no more than three (3) times the profit gained or loss avoided as a result of the purchase, sale or communication proscribed by such Section; and (v)

Other penalties w i t h i n the p o w e r of the Commission to impose.

54.2. The imposition of the foregoing administrative sanctions shall be without prejudice to the filing of criminal charges against the individuals responsible for the violation. 54.3. The Commission shall have the p o w e r to issue writs of execution to enforce the provisions of this Section and to enforce p a y m e n t of the fees and other dues collectible under this Code. SEC. 55. Settlement Offers. — 55.1. At any time, d u r i n g an investigation or proceeding under this Code, parties being investigated and / or charged m a y propose in writing an offer of settlement w i t h the Commission. 55.2. U p o n receipt of such offer of settlement, the Commission m a y consider the offer based on timing, the nature of the investigation or proceeding, a n d the public interest. 55.3. The Commission m a y only agree to a settlement offer based on its findings that such settlement is in the public interest. A n y agreement to settle shall have no legal effect until publicly disclosed. Such decision m a y be m a d e without a determination of guilt on the part of the person m a k i n g the offer. 55.4. The Commission shall adopt rules and procedures governing the filing, review, w i t h d r a w a l , form of rejection and acceptance of such offers.

SEC. 56. Civil Liabilities on Account of False Registration Statement. — 56.1. A n y person acquiring a security, the registration statement of w h i c h or any part thereof contains on its effectivity an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to m a k e such statements not misleading, and w h o suffers damage, m a y sue and recover

Sec. 57


915

damages f r o m the following enumerated persons, unless it is proved that at the time of such acquisition he k n e w of such untrue statement or omission: (a) The issuer statement;

and

every

person w h o

signed

the registration

(b) Every person w h o was a director of, or any other person performing similar functions, or a partner in, the issuer at the time of the filing of the registration statement or any part, supplement or amendment thereof w i t h respect to w h i c h his liability is asserted; (c) "Every person w h o is n a m e d in the registration statement as being or about to become a director of, or a person performing similar functions, or a partner in, the issuer and whose w r i t t e n consent thereto is filed w i t h the registration statement; (d) Every auditor or auditing f i r m n a m e d as having certified any financial statements used in connection w i t h the registration statement or prospectus; (e) Every person w h o , w i t h his w r i t t e n consent, which shall be filed w i t h the registration statement, has been n a m e d as having prepared or certified any part of the registration statement, or as having prepared or certified any report or valuation w h i c h is used in connection w i t h the registration statement, w i t h respect to the statement, report, or valuation, w h i c h purports to have been prepared or certified by h i m ; (f) Every selling shareholder w h o contributed to and certified as to the accuracy of a portion of the registration statement, w i t h respect to that portion of the registration statement which purports to have been contributed by h i m ; and (g)

Every underwriter w i t h respect to such security.

56.2. If the person w h o acquired the security d i d so after the issuer has made generally available to its security holders an income statement covering a period of at least twelve (12) months beginning from the effective date of the registration statement, then the right of recovery under this subsection shall be conditioned on proof that such person acquired the security relying upon such untrue statement in the registration statement or relying upon the registration statement and not k n o w i n g of such income statement, but such reliance may be established without proof of the reading of the registration statement by such person.

SEC. 57. Civil Liabilities Arising in Connection With Prospectus, Communications and Reports. — 57.1. A n y person w h o: (a)

Offers to sell or sells a security in violation of Chapter I I I , or

(b) Offers to sell or sells a security, whether or not exempted by the provisions of this Code, by the use of any means or instruments of transportation or communication, by means of a prospectus or other written or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the

916


Sees. 58-61

statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and w h o shall fail in the burden of proof that he d i d not know, and in the exercise of reasonable care could not have k n o w n , of such untruth or omission, shall be liable to the person purchasing such security from him, who may sue to recover the consideration paid for such security w i t h interest thereon, less the amount of any income received thereon, u p on the tender of such security, or for damages if he no longer owns the security. 57.2. A n y person w h o shall make or cause to be made any statement in any report, or document filed pursuant to this Code or any rule or regulation thereunder, which statement was at the time and in the light of the circumstances under which it was made false or misleading w i t h respect to any material fact, shall be liable to any person w h o , not k n o w i n g that such statement was false or misleading, and relying u p on such statements shall have purchased or sold a security at a price which was affected by such statement, for damages caused by such reliance, unless the person sued shall prove that he acted in good faith and had no knowledge that such statement was false or misleading. SEC. 58. Civil Liability for Fraud in Connection with Securities Transactions. — A n y person w h o engages in any act or transaction in violation of Sections 19.2, 20 or 26, or any rule or regulation of the Commission thereunder, shall be liable to any other person w h o purchases or sells any security, grants or refuses to grant any proxy, consent or authorization, or accepts or declines an invitation for tender of a security, as the case m a y be, for the damages sustained by such other person as a result of such act or transaction. SEC. 59. Civil Liability for Manipulation of Security Prices. — A n y person w h o willfully participates in any act or transaction in violation of Section 24 shall be liable to any person w h o shall purchase or sell any security at a price w h i c h was affected by such act or transaction, and the person so injured m a y sue to recover the damages sustained as a result of such act or transaction. SEC. 60. Civil Liability with Respect to Commodity Futures Contracts and Preneed Plans. — 60.1. A n y person w h o engages in any act or transaction in w i l l f u l violation of any rule or regulation promulgated by the Commission under Section 11 or 16, which the Commission denominates at the time of issuance as intended to prohibit fraud in the offer and sale of pre-need plans or to prohibit fraud, manipulation, fictitious transactions, undu e speculation, or other unfair or abusive practices w i t h respect to commodity future contracts, shall be liable to any other person sustaining damage as a result of such act or transaction. 60.2. As to each such rule or regulation so denominated, the Commission by rule shall prescribe the elements of proof required for recovery and any limitations on the amount of damages that m a y be imposed. SEC. 6 1 . Civil Liability on Account of Insider Trading. — 61.1. A n y insider w h o violates Subsection 27.1 and any person in the case of a tender offer w h o violates Subsection 27.4(a)(i), or any rule or regulation thereunder, by purchasing or selling a security while in possession of material information not generally available to the public, shall be liable in a suit brought by any

Sees. 62-63


917

investor w h o , contemporaneously w i t h the purchase or sale of securities that is the subject of the violation, purchased or sold securities of the same class unless such insider, or such person in the case of a tender offer, proves that such investor k n e w the information or w o u l d have purchased or sold at the same price regardless of disclosure of the information to h i m . 61.2. An insider w h o violates Subsection 27.3 or any person in the case of a tender offer w h o violates Subsection 27.4(a), or any rule or regulation thereunder, by communicating material non-public information, shall be jointly and severally liable under Subsection 61.1 w i t h , and to the same extent as, the insider, or person in the case of a tender offer, to w h o m the communication was directed and w h o is liable under Subsection 61.1 by reason of his purchase or sale of a security. SEC. 62. Limitation of Actions. — 62.1. No action shall be maintained to enforce any liability created under Section 56 or 57 of this Code unless brought w i t h i n t w o (2) years after the discovery of the untrue statement or the omission, or, if the action is to enforce a liability created under Subsection 57.1(a), unless brought w i t h i n t w o (2) years after the violation u p o n w h i c h it is based. In no event shall any such action be brought to enforce a liability created under Section 56 or Subsection 57.1(a) more than five (5) years after the security was bona fide offered to the public, or under Subsection 57.1(b) more than five (5) years after the sale. 62.2. No action shall be maintained to enforce any liability created under any other provision of this Code unless brought w i t h i n two (2) years after the discovery of the facts constituting the cause of action and w i t h i n five (5) years after such cause of action accrued. SEC. 63. Amount of Damages to be Awarded. — 63.1. A l l suits to recover damages pursuant to Sections 56, 57, 58, 59, 60 and 61 shall be brought before the Regional Trial Court, which shall have exclusive jurisdiction to hear and decide such suits. The Court is hereby authorized to award damages in an amount not exceeding triple the amount of the transaction plus actual damages. Exemplary damages may also be awarded in cases of bad faith, fraud, malevolence or wantonness in the violation of this Code or the rules and regulations promulgated thereunder. The Court is also authorized to award attorney's fees exceeding thirty per centum (30%) of the award. 63.2. The persons specified in Sections 56, 57, 58, 59, 60 and 61 hereof shall be jointly and severally liable for the payment of damages. However, any person w h o becomes liable for the payment of such damages may recover contribution from any other person w h o , if sued separately, w o u l d have been liable to make the same payment, unless the former was guilty of fraudulent representation and the latter was not. 63.3. Notwithstanding any provision of law to the contrary, all persons, including the issuer, held liable under the provisions of Sections 56, 57, 58, 59, 60 and 61 shall contribute equally to the total liability adjudged herein. In no


918

Sees. 64-66

case shall the principal stockholders, directors and other officers of the issuer or persons occupying similar positions therein, recover their contribution to the liability from the issuer. However, the right of the issuer to recover from the guilty parties the amount it has contributed under this Section shall not be prejudiced. SEC. 64. Cease and Desist Order. — 64.1. The Commission, after proper investigation or verification, motu proprio, or u p o n verified complaint by any aggrieved party, may issue a cease and desist order without the necessity of a prior hearing if in its judgment the act or practice, unless restrained, w i l l operate as a fraud on investors or is otherwise likely to cause grave or irreparable injury or prejudice to the investing public. 20

64.2. U n t il the Commission issues a cease and desist order, the fact that an investigation has been initiated or that a complaint has been filed, including the contents of the complaint, shall be confidential. U p o n issuance of a cease and desist order, the Commission shall make public such order and a copy thereof shall be immediately furnished to each person subject to the order. 64.3. A n y person against w h o m a cease and desist order was issued may, within five (5) days from receipt of the order, file a formal request for a lifting thereof. Said request shall be set for hearing by the Commission not later than fifteen (15) days from its filing and the resolution thereof shall be m a d e not later than ten (10) days from the termination of the hearing. If the Commission fails to resolve the request w i t h i n the time herein prescribed, the cease and desist order shall automatically be lifted. SEC. 65. Substituted Service Upon the Commission. — Service of summons or other process shall be made u p o n the Commission in actions or legal proceedings against an issuer or any person liable under this Code w h o is not domiciled in the Philippines. U p o n receipt by the Commission of such summons, the Commission shall w i t h i n ten (10) days thereafter, transmit by registered m a i l a copy of such summons and the complaint or other legal process to such issuer or person at his last k n o w n address or principal office. The sending thereof by the Commission, the expenses for w h i c h shall be advanced by the party at whose instance it is made, shall complete such service. SEC. 66. Revelation of Information Filed with the Commission. — 6 6 . 1 . A l l information filed w i t h the Commission in compliance w i t h the requirements of this Code shall be made available to any member of the general public, u p o n request, in the premises and during regular office hours of the Commission, except as set forth in this Section. 66.2. N o t h i ng in this Code shall be construed to require, or to authorize the Commission to require, the revealing of trade secrets or processes in any application, report, or document filed w i t h the Commission.

See Securities and Exchange Commission vs. Performance Foreign Exchange Corp., 495 SCRA 579 (2006); Phil. Assoc. of Stock Transfer and Registry Agencies, Inc. vs. Court of Appeals, 536 SCRA 61 (2007); Power Homes Unlimited Corp. vs. Securities f ™ ™ ' (2008); GSIS vs. Court o f Appeals, 585 SCRA 679 20

6 C

o

m

m

i

s

s

i

o

n

5 4 6

S

C

R

A 5 6 7

Sees. 67-68


919

66.3. A n y person filing any such application, report or document may m a k e w r i t t en objection to the public disclosure of information contained therein, stating the grounds for such objection, and the Commission may hear objections as it deems necessary. The Commission may, in such cases, make available to the public the information contained in any such application, report, or document only w h e n a disclosure of such information is required in the public interest or for the protection of investors; and copies of information so made available m a y be furnished to any person having a legitimate interest therein at such reasonable charge and under such reasonable limitations as the Commission m a y prescribe. 66.4. It shall be u n l a w f u l for any member, officer, or employee of the Commission to disclose to any person other than a member, officer or employee of the Commission or to use for personal benefit, any information contained in any application, report, or document filed w i t h the Commission which is not m a d e available to the public pursuant to Subsection 66.3. 66.5. N o t w i t h s t a n d i n g anything in Subsection 66.4 to the contrary, on request from a foreign enforcement authority of any country whose laws grant reciprocal assistance as herein provided, the Commission may provide assistance in accordance w i t h this subsection, including the disclosure of any information filed w i t h or transmitted to the Commission, if the requesting authority states that it is conducting an investigation w h i c h it deems necessary to determine whether any person has violated, is violating, or is about to violate any laws relating to securities or commodities matters that the requesting authority administers or enforces. Such assistance may be provided without regard to whether the facts stated in the request w o u l d also constitute a violation of law of the Philippines.

SEC. 67. Effect of Action of Commission and Unlawful Representations with Respect Thereto. — 67.1. No action or failure to act by the Commission in the administration of this Code shall be construed to mean that the Commission has in any w a y passed u p o n the merits of or given approval to any security or any transaction or transactions therein, nor shall such action or failure to act w i t h regard to any statement or report filed w i t h or examined by the Commission pursuant to this Code or the rules and regulations thereunder to be deemed a finding by the Commission that such statements or report is true and accurate on its face or that it is not false or misleading. It shall be unlawful to make, or cause to be made, to any prospective purchaser or seller of a security any representation that any such action or failure to act by the Commission is to be so construed or has such effect. 67.2. N o t h i n g contained in Subsection 67.1 shall, however, be construed as an exemption from liability of an employee or officer of the Commission for any nonfeasance, misfeasance or malfeasance in the discharge of his official duties. SEC. 68. Special Accounting Rules. — The Commission shall have the authority to make, amend, and rescind such accounting rules and regulations as may be necessary to carry out the provisions of this Code, including rules and regulations governing registration statements and prospectuses for various

920


Sees. 69-71

classes of securities and issuers, and defining accounting, technical and trade terms used in this Code. A m o n g other things, the Commission may prescribe the form or forms in which required information shall be set forth, the items or details to be shown in the balance sheet and income statement, and the methods to be followed in the preparation of accounts, appraisal or valuation of assets and liabilities, determination of depreciation and depletion, differentiation of recurring and non-recurring income, differentiation of investment and operating income, and in the preparation, where the Commission deems it necessary or desirable, of consolidated balance sheets or income accounts of any person directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect common control w i t h , the issuer. SEC. 69. Effect on Existing Law. — The rights and remedies provided by this Code shall be in addition to any and all other rights and remedies that may n o w exist. However, except as provided in Sections 56 and 63 hereof, no person permitted to maintain a suit for damages under the provisions of this Code shall recover, through satisfaction of judgment in one or more actions, a total amount in excess of his actual damages on account of the act complained of: Provided, That exemplary damages m a y be awarded in cases of bad faith, fraud, malevolence or wantonness in the violation of this Code or the rules and regulations promulgated thereunder. SEC. 70. Judicial Review of Commission Orders. — A n y person aggrieved by an order of the Commission m a y appeal the order to the Court of Appeals by petition for review in accordance w i t h the pertinent provisions of the Rules of Court. SEC. 71. Validity of Contracts. — 71.1. A n y condition, stipulation, provision binding any person to w a i v e compliance w i t h any provision of this Code or of any rule or regulation thereunder, or of any rule of an Exchange required thereby, as well as the waiver itself, shall be v o i d . 71.2. Every contract made in violation of any provision of this Code or of any rule or regulation thereunder, a n d every contract, including any contract for listing a security on an Exchange heretofore or hereafter made, the performance of which involves the violation of, or the continuance of any relationship or practice in violation of, any provision of this Code, or any rule or regulation thereunder, shall be void: (a) As regards the rights of any person w h o , in violation of any such provision, rule or regulation, shall have m a d e or engaged in the performance of any such contract; and (b) As regards the rights of any person w h o , not being a party to such contract, shall have acquired any right thereunder w i t h actual knowledge of the facts by reason of which the m a k i n g or performance of such contract was in violation of any such provision, rule or regulation. 71.3. N o t h i ng in this Code shall be construed: (a) To affect the validity of any loan or extension of credit m a d e or of any lien created prior or subsequent to the effectivity of this Code, unless at the time of the making of such loan or extension of credit or the creating of

Sec. 72


921

such lien, the person m a k i n g such loan or extension of credit or acquiring such lien shall have actual k n o w l e d ge of the facts by reason of which the m a k i n g of such loan or extension of credit or the acquisition of such lien is a violation of the provisions of this Code or any rules or regulations thereunder; or (b) To afford a defense to the collection of any debt, obligation or the enforcement of any lien by any person w h o shall have acquired such debt, obligation or lien in good faith, for value and without actual knowledge of the violation of any provision of this Code or any rule or regulation thereunder affecting the legality of such debt, obligation or lien. SEC. 72. Rules and Regulations; Effectivity. — 72.1. This Code shall be selfexecutory. To effect the provisions and purposes of this Code, the Commission m a y issue, amend, and rescind such rules and regulations and orders necessary or appropriate, including rules a n d regulations defining accounting, technical, and trade terms used in this Code, a n d prescribing the f o r m or forms in which information required in registration statements, applications, and reports to the Commission shall be set forth. For purposes of its rules or regulations, the Commission m a y classify persons, securities, and other matters w i t h i n its jurisdiction, prescribe different requirements for different classes of persons, securities, or matters, and by rule or order, conditionally or unconditionally exempt any person, security, or transaction, or class or classes of persons, securities or transactions, f r o m any or all provisions of this Code. Failure on the part of the Commission to issue rules and regulations shall not in any manner affect the self-executory nature of this Code. 72.2. The Commission shall promulgate rules and regulations providing for reporting, disclosure and the prevention of fraudulent, deceptive or manipulative practices in connection w i t h the purchase by an issuer, by tender offer or otherwise, of and equity security of a class issued by it that satisfies the requirements of Subsection 17.2. Such rules and regulations may require such issuer to provide holders of equity securities of such dates w i t h such information relating to the reasons for such purchase, the source of funds, the number of shares to be purchased, the price to be paid for such securities, the method of purchase and such additional information as the Commission deems necessary or appropriate in the public interest or for the protection of investors, or which the Commission deems to be material to a determination by holders whether such security should be sold. 72.3. For the purpose of Subsection 72.2, a purchase by or for the issuer or any person controlling, controlled by, or under common control with the issuer, or a purchase subject to the control of the issuer or any such person, shall be deemed to be a purchase by the issuer. The Commission shall have the power to make rules and regulations implementing this subsection, including exemptive rules and regulations covering situations in which the Commission deems it unnecessary or inappropriate that a purchase of the type described in this subsection shall be deemed to be a purchase by the issuer for the purpose of some or all of the provisions of Subsection 72.2.

922


Sees. 73-75

72.4. The rules and regulations promulgated by the Commission shall be published in two (2) newspapers of general circulation in the Philippines, and unless otherwise prescribed by the Commission, the same shall be effective fifteen (15) days after the date of the last publication. SEC. 73. Penalties. — A n y person w h o violates any of the provisions of this Code, or the rules and regulations promulgated by the Commission under authority thereof, or any person w h o , in a registration statement filed under this Code, makes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, shall, u p o n conviction, suffer a fine of not less than Fifty thousand pesos (P50,000.00) nor more than Five million pesos (P5,000,000.00) or imprisonment of not less than seven (7) years nor more than twenty-one (21) years, or both in the discretion of the court. If the offender is a corporation, partnership or association or other juridical entity, the penalty m a y in the discretion of the court be imposed u p o n such juridical entity and u p o n the officer or officers of the corporation, partnership, association or entity responsible for the violation, and if such officer is an alien, he shall in addition to the penalties prescribed, be deported without further proceedings after service of sentence. SEC. 74. Transitory Provisions. — T h e Commission, as organized under existing laws, shall continue to exist and exercise its powers, functions and duties under such laws and this Code: Provided, That until otherwise mandated by a subsequent law, the Commission shall continue to regulate and supervise commodity futures contracts as provided in Section 11 and pre-need plans and the pre-need industry as provided in Section 16 of this Code. A l l further requirements herein shall be complied w i t h u p o n approval of this Code: Provided, however, That compliance m a y be deferred for such reasonable time as the Commission m a y determine but not to exceed one (1) year from approval of this Code: Provided, further, That securities w h i c h are being offered at the time of effectivity of this Code pursuant to an effective registration and permit, m a y continue to be offered and sold in accordance w i t h the provisions of the Revised Securities Act in effect immediately prior to approval of this Code. A l l unexpended funds for the calendar year, properties, equipment and records of the Securities and Exchange Commission are hereby retained by the Commission as reorganized under this Code and the amount of T w o h u n d r e d million pesos (P200,000,000.00) or such amount necessary to carry out the reorganization provided in this Code is hereby appropriated. A l l employees of the Commission w h o voluntarily retire or are separated from the service w i t h the Commission and whose retirement or separation has been approved by the Commission, shall be paid retirement or separation benefits and other entitlements granted under existing laws. SEC. 75. Partial Use of Income. — To carry out the purposes of this Code, the Commission is hereby authorized, in addition to its annual budget, to retain and utilize an amount equal to O n e h u n d r e d million pesos (PI00,000,000.00) from its income.


Sees. 76-78

923

The use of such additional amount shall be subject to the auditing requirements, standards and procedures under existing laws. SEC. 76. Repealing Clause. — The Revised Securities Act (Batas Pambansa Big. 178.), as amended, in its entirety, and Sections 2, 4 and 8 of Presidential Decree 902-A, as amended, are hereby repealed. A l l other laws, orders, rules and regulations, or parts thereof, inconsistent w i t h any provision of this Code are hereby repealed or modified accordingly. SEC. 77. Separability Clause. — If any portion or provision of this Code is declared unconstitutional or invalid, the other portions or provisions hereof, w h i c h are not affected thereby shall continue in full force and effect. SEC. 78. Effectivity. - This Code shall take effect fifteen (15) days after its publication in the Official Gazette or in t w o (2) newspapers of general circulation. 21

— oOo —

21

It became effective on August 8, 2000. (Gochan vs. Young, 354 SCRA 207 [2001].)

Appendix B EN BANC Agenda for December 2, 2008 Item No. 76 EN BANC

A.M. NO. 00-8-10-SC

RULES OF PROCEDURE ON CORPORATE REHABILITATION* RULE 1 COVERAGE S E C T I O N 1. Scope. — These Rules shall apply to petitions for rehabilitation of corporations, partnerships and associations pursuant to Presidential Decree N o . 902-A, as amended. SEC. 2. Applicability to Rehabilitation Cases Transferred from the Securities and Exchange Commission. — Cases for rehabilitation transferred f r o m the Securities and Exchange Commission to the Regional Trial Courts pursuant to Republic Act N o . 8799, otherwise k n o w n as The Securities Regulation Code, shall likewise be governed by these Rules. RULE 2 DEFINITION OF TERMS AND CONSTRUCTION SEC. 1. Definition of Terms. — For purposes of these Rules: "Administrative Expenses" shall refer to (a) reasonable and necessary expenses that are incurred in connection w i t h the filing of the petition; (b)

'Acting on the recommendation of The Subcommittee on Special Rules for Special Commercial Courts, submitting for the consideration and approval of the Court the proposed "Rules of Procedure on Corporate Rehabilitation (2008)," the Court Resolved to APPROVE the same. The Rule shall take effect on January 16, 2009 following its publication in two (2) newspapers of general circulation. December 2, 2008. 924

Rule 2

RULES OF PROCEDURE ON CORPORATE REHABILITATION Appendix B

925

expenses incurred in the ordinary course of business after the issuance of the stay order, excluding interest payable to the creditors for loans and credit accommodations existing at the time of the issuance of the stay order; and (c) other expenses that are authorized under these Rules. "Affidavit of General Financial Condition" shall refer to a verified statement on the general financial condition of the debtor required in Section 2, Rule 4 of these Rules. "Affiliate" is a corporation that directly or indirectly, through one or more intermediaries, is controlled by, or is under the common control of another corporation, w h i c h thereby becomes its parent corporation. "Asset" is anything of value that can be in the f o r m of money, such as cash at the bank or amounts o w e d ; fixed assets such as property or equipment; or intangibles including intellectual property, the book value of w h i c h is s h o w n in the last three audited financial statements immediately preceding the filing of the petition. In case the debtor is less than three years in operation, it is sufficient that the book value is based on the audited financial statement/s for the t w o years or year immediately preceding the filing of the petition, as the case m a y be. "Board of Directors" shall include the executive committee or the management of a partnership or association. "Claim" shall include all claims or demands of whatever nature or character against a debtor or its property, whether for money or otherwise. "Control" is the p o w e r of a parent corporation to direct or govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. Control is presumed to exist w h e n the parent owns, directly or indirectly through subsidiaries, more than one-half ( 1 / 2 ) of the voting power of an enterprise unless, in exceptional circumstances, it can clearly be demonstrated that such ownership does not constitute control. Control also exists even w h e n the parent owns one-half (112) or less of the voting power of an enterprise w h e n there is power: (a) Over more than one-half ( 1 / 2 ) of the voting rights by virtue of an agreement w i t h investors; (b) To direct or govern the financial and operating policies of the enterprise under a statute or an agreement; (c) To appoint or remove the majority of the members of the board of directors or equivalent governing body; or (d) To cast the majority votes at meetings of the board of directors or equivalent governing body. "Creditof shall mean any holder of a Claim. "Court" shall refer to the proper Regional Trial Court designated to hear and decide the cases contemplated under these Rules. "Days" shall refer to calendar days unless otherwise provided in these Rules.

926


Rule 2

"Debtor" shall mean any corporation, partnership or association or a group of companies, whether supervised or regulated by the Securities and Exchange Commission or other government agencies, on whose behalf a petition for rehabilitation has been filed under these Rules. "Foreign court" means a judicial or other authority competent to control or supervise a foreign proceeding. "Foreign proceeding" means a collective judicial or administrative proceeding in a foreign State, including an interim proceeding, pursuant to a l aw relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of rehabilitation or re-organization. "Foreign representative" means a person or entity, including one appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or rehabilitation of the debtor or to act as a representative of the foreign proceeding. "Group of companies" refers to, and can cover only, corporations that are financially related to one another as parent corporations, subsidiaries and affiliates. W h e n the petition covers a group of companies, all reference under these Rules to "debtor" shall include and apply to the group of companies. "Liabilities " shall refer to monetary claims against the debtor, including stockholder's advances that have been recorded in the debtor's audited financial statements as advances for future subscriptions. "Parent" is a corporation w h i c h has control over another corporation directly or indirectly through one or more intermediaries. "Rehabilitation" shall m e a n the restoration of the debtor to a position of successful operation and solvency, if it is s h o w n that its continuance of operation is economically feasible and its creditors can recover by w a y of the present value of payments projected in the plan, more if the corporation continues as a going concern than if it is immediatel y liquidated. "Secured claim" shall refer to any claim whose payment or fulfillment is secured by contract or by law, including any claim or credit enumerated under Articles 2241 and 2242 of the Civil Code and Article 110, as amended, of the Labor Code of the Philippines. "Subsidiary" means a corporation more than fifty percent (50%) of the voting stock of w h i c h is o w n e d or controlled directly or indirectly through one or more intermediaries by another corporation, w h i c h thereby becomes its parent corporation. "Unsecured claim" shall m e a n any claim other than a secured claim. SEC. 2. Construction. — These Rules shall be liberally construed to carry out the objectives of Sections 5(d), 6(c) and 6(d) of Presidential Decree N o . 902A, as amended, and to assist the parties in obtaining a just, expeditious and

Rule 3


92

7

inexpensive determination of cases. W h e r e applicable, the Rules of Court shall a p p l y suppletorily to proceedings under these Rules.

RULE 3 GENERAL PROVISIONS SEC. 1. Nature of Proceedings. — A n y proceeding initiated under these Rules shall be considered in rem. Jurisdiction over all persons affected by the proceedings shall be considered as acquired u p o n publication of the notice of the commencement of the proceedings in any newspaper of general circulation in the Philippines in the manner prescribed by these Rules. The proceedings shall also be s u m m a r y and non-adversarial in nature. The following pleadings are prohibited: (a)

M o t i o n to dismiss;

(b)

M o t i o n for a bill of particulars;

(c)

Petition for relief;

(d) M o t i o n for extension; (e)

M o t i o n for postponement;

(f)

Third-party complaint;

(g)

Intervention;

(h) M o t i o n to hear affirmative defenses; and (i) A n y pleading or motion which is similar to or of like effect as any of the foregoing. A n y pleading, morion, opposition, defense or claim filed by any interested party shall be supported by verified statements that the affiant has read the same and that the factual allegations therein are true and correct of his personal knowledge or based on authentic records, and shall contain as annexes such documents as m a y be deemed by the party submitting the same as supportive of the allegations in the affidavits. The court may decide matters on the basis of affidavits and other documentary evidence. Where necessary, the court shall conduct clarificatory hearings before resolving any matter submitted to it for resolution. SEC. 2. Venue. — Petitions for rehabilitation pursuant to these Rules shall be filed in the regional trial court which has jurisdiction over the principal office of the debtor as specified in its articles of incorporation or partnership. Where the principal office of the corporation, partnership or association is registered in the Securities and Exchange Commission as Metro Manila, the action must be filed in the regional trial court of the city or municipality where the head office is located. A joint petition by a group of companies shall be filed in the Regional Trial Court which has jurisdiction over the principal office of the parent company, as specified in its Articles of Incorporation.

928


Rule 3

SEC. 3. Service of Pleadings and Documents. — W h e n so authorized by the court, any pleading and / o r document required by these Rules may be filed with the court a n d / o r served upon the other parties by facsimile transmission (fax) or electronic mail (e-mail). In such cases, the date of transmission shall be deemed to be the date of service. Where the pleading or document is voluminous, the court may, upon motion, w a i v e the requirement of service; provided that a copy thereof together w i t h all its attachments is duly filed w i t h the court and is made available for examination and reproduction by any party, and provided, further, that a notice of such filing and availability is d u l y served on the parties. SEC. 4. Trade Secrets and Other Confidential Information. — U p o n motion, the court may issue an order to protect trade secrets or other confidential research, development or commercial information belonging to the debtor. SEC. 5. Executory Nature of Orders. — A n y order issued by the court under these Rules is immediately executory. A petition to review the order shall not stay the execution of the order unless restrained or enjoined by the appellate court. Unless otherwise provided in these Rules, the review of any order or decision of the court or an appeal therefrom shall be in accordance w i t h the Rules of Court; provided, however, that the reliefs ordered by the trial or appellate courts shall take into account the need for resolution of proceedings in a just, equitable and speedy manner. SEC. 6. Nullification of Illegal Transfers and Preferences. — U p o n motion the court may nullify any transfer of property or any other conveyance, sale, payment or agreement made in violation of its stay order or in violation of these Rules. SEC. 7. Stay Order. — If the court finds the petition to be sufficient in f o r m and substance, it shall, not later than five (5) w o r k i n g days f r o m the filing of the petition, issue an order: (a) appointing a rehabilitation receiver a n d fixing his bond; (b) staying enforcement of all claims, whether for m o n ey or otherwise and whether such enforcement is by court action or otherwise, against the debtor, its guarantors and persons not solidarily liable w i t h the debtor; provided, that the stay order shall not cover claims against letters of credit and similar security arrangements issued by a third party to secure the p a y m e n t of the debtor's obligations; provided, further, that the stay order shall not cover foreclosure by a creditor of property not belonging to a debtor under corporate rehabilitation; provided, however, that where the o w n e r of such property sought to be foreclosed is also a guarantor or one w h o is not solidarily liable, said owner shall be entitled to the benefit of excussion as such guarantor; (c) prohibiting the debtor from selling, encumbering, transferring, or disposing in any manner any of its properties except in the ordinary course of business; (d) prohibiting the debtor from m a k i n g any payment of its liabilities except as provided in items (e), (f) and (g) of this Section or w h e n ordered by the court pursuant to Section 10 of Rule 3; (e) prohibiting the debtor's suppliers of goods or services from withholding supply of goods and services in the ordinary course of business for as long as the debtor makes payments for the services and goods supplied after the issuance of the stay order; (f) directing the payment in full

Rule 3


929

of all administrative expenses incurred after the issuance of the stay order; (g) directing the payment of n e w loans or other forms of credit accommodations obtained for the rehabilitation of the debtor w i t h prior court approval; (h) fixing the dates of the initial hearing on the petition not earlier than forty-five (45) days but not later than sixty (60) days f r o m the filing thereof; (i) directing the petitioner to publish the O r d e r in a newspaper of general circulation in the Philippines once a w e e k for t w o (2) consecutive weeks; (j) directing the petitioner to furnish a copy of the petition and its annexes, as well as the stay order, to the creditors n a m e d in the petition and the appropriate regulatory agencies such as, but not limited to, the Securities and Exchange Commission, the Bangko Sentral ng Pilipinas, the Insurance Commission, the National Telecommunications Commission, the Housin g and Land Use Regulatory Board and the Energy Regulatory Commission; (k) directing the petitioner that foreign creditors w i t h no k n o w n addresses in the Philippines be individually given a copy of the stay order at their foreign addresses; (1) directing all creditors and all interested parties (including the regulatory agencies concerned) to file and serve on the debtor a verified comment on or opposition to the petition, w i t h supporting affidavits and documents, not later than fifteen (15) days before the date of the first initial hearing and putting them on notice that their failure to do so w i l l bar t h e m f r o m participating in the proceedings; and (m) directing the creditors and interested parties to secure from the court copies of the petition and its annexes w i t h i n such time as to enable themselves to file their comment on or opposition to the petition and to prepare for the initial hearing of the petition. The issuance of a stay order does not affect the right to commence actions or proceedings insofar as it is necessary to preserve a claim against the debtor. SEC. 8. Service of Stay Order on Rehabilitation Receiver. — The petitioner shall immediately serve a copy of the stay order on the rehabilitation receiver appointed by the court, w h o shall manifest his acceptance or non-acceptance of his appointment not later than ten (10) days from receipt of the order. SEC. 9. Period of Stay Order. — The stay order shall be effective from the date of its issuance until the approval of the rehabilitation plan or the dismissal of the petition.

SEC. 10. Relief from, Modification, or Termination of Stay Order. — (a) The court may, u p o n motion, terminate, modify, or set conditions for the continuance of the stay order, or relieve a claim from the coverage thereof u p o n showing that (1) any of the allegations in the petition, or any of the contents of any attachment, or the verification thereof has ceased to be true; (2) a creditor does not have adequate protection over property securing its claim; (3) the debtor's secured obligation is more than the fair market value of the property subject of the stay and such property is not necessary for the rehabilitation of the debtor; or (4) the property covered by the stay order is not essential or necessary to the rehabilitation and the creditor's failure to enforce its claim w i l l cause more damage to the creditor than to the debtor. (b) For purposes of this Section, the creditor lacks adequate protection if it can be shown that:


930

Rule 3

(1) The debtor fails or refuses to honor a pre-existing agreement w i t h the creditor to keep the property insured; (2) The debtor fails or refuses to take commercially reasonable steps to maintain the property; or (3) The property has depreciated to an extent that the creditor is undersecured. (c) U p o n showing of the creditor's lack of adequate protection, the court shall order the rehabilitation receiver to (1) make arrangements to provide for the insurance or maintenance of the property, or (2) to make payments or otherwise provide additional or replacement security such that the obligation is fully secured. If such arrangements are not feasible, the court shall modify the stay order to allow the secured creditor lacking adequate protection to enforce its claim against the debtor; provided, however, that the court m a y deny the creditor the remedies in this paragraph if such remedies w o u l d prevent the continuation of the debtor as a going concern or otherwise prevent the approval and implementation of a rehabilitation plan.

SEC. 11. Qualifications of Rehabilitation Receiver. — (a) In the appointment of the rehabilitation receiver, the following qualifications shall be taken into consideration by the court: (1) Expertise and acumen to manage and operate a business similar in size and complexity to that of the debtor; (2) Knowledge in distressed companies;

management,

finance

and

rehabilitation

of

(3) General familiarity w i t h the rights of creditors in suspension of payments or rehabilitation, and general understanding of the duties and obligations of a rehabilitation receiver; (4)

Good moral character, independence a n d integrity;

(5)

Lack of conflict of interest as defined in this Section; and

(6) Willingness and ability to file a bond in such amount as m a y be determined by the court. (b) Without limiting the generality of the following, a rehabilitation receiver may be deemed to have a conflict of interest if: (1) (2) debtor;

He is a creditor or stockholder of the debtor; He is engaged in a line of business w h i c h competes w i t h the

(3) He is, or was w i t h i n t w o (2) years f r o m the filing of the petition, a director, officer, or employee of the debtor or any of its present creditors, or the auditor or accountant of the debtor; (4) He is or was w i t h i n two (2) years from the filing of the petition, an underwriter of the outstanding securities of the debtor; (5) He is related by consanguinity or affinity w i t h i n the fourth civil degree to any creditor, stockholder, director, officer, employee, or underwriter of the debtor; or

Rule 3


93!

(6) He has any other direct or indirect material interest in the debtor or any creditor. SEC. 12. Powers and Functions of Rehabilitation Receiver. — The rehabilitation receiver shall not take over the management and control of the debtor but shall closely oversee and monitor the operations of the debtor during the pendency of the proceedings. For this purpose, the rehabilitation receiver shall have the powers, duties and functions of a receiver under Presidential Decree N o . 902-A, as amended, and the Rules of Court. The rehabilitation receiver shall be considered as an officer of the court. He shall be primarily tasked to study the best w a y to rehabilitate the debtor and to ensure that the value of the debtor's property is reasonably maintained pending the determination of whether or not the debtor should be rehabilitated, as well as implement the rehabilitation plan after its approval. Accordingly, he shall have the following powers and functions: (a) To verify the accuracy of the petition, including its annexes such as the Schedule of Debts and Liabilities a n d the Inventory of Assets submitted in support of the petition; (b) To accept and incorporate, w h e n justified, amendments to the Schedule

of Debts and Liabilities; (c) To recommend to the court the disallowance of claims and rejection of amendments to the Schedule of Debts and Liabilities that lack sufficient proof and justification; (d) To submit to the court and m a k e available for review by the creditors, a revised Schedule of Debts and Liabilities; (e) To investigate the acts, conduct, properties, liabilities and financial condition of the debtor, the operation of its business and the desirability of the continuance thereof; and, any other matter relevant to the proceeding or to the formulation of a rehabilitation plan; (f) To examine under oath the directors and officers of the debtor and any other witnesses that he may deem appropriate; (g) To make available to the creditors documents and notices necessary for them to follow and participate in the proceedings; (h) To report to the court any fact ascertained by h i m pertaining to the causes of the debtor's problems, fraud, preferences, dispositions, encumbrances, misconduct, mismanagement and irregularities committed by the stockholders, directors, management, or any other person against the debtor; (i) To employ such person or persons such as lawyers, accountants, appraisers and staff as are necessary in performing his functions and duties as rehabilitation receiver; (j) To monitor the operations of the debtor and to immediately report to the court any material adverse change in the debtor's business; (k) To evaluate the existing assets and liabilities, earnings and operations of the debtor;


932

Rule 3

(1) To determine and recommend to the court the best w a y to salvage and protect the interests of the creditors, stockholders and the general public; (m) To study the rehabilitation plan proposed by the debtor or any rehabilitation plan submitted during the proceedings, together w i t h any comments made thereon; (n) To prohibit and report to the court any encumbrance, transfer or disposition of the debtor's property outside of the ordinary course of business or what is allowed by the court; (o)

To prohibit and report to the court any payments outside of the

ordinary course of business; (p) To have unlimited access to the debtor's employees, premises, books, records and financial documents during business hours; (q) To inspect, copy, photocopy or photograph any document, paper, book, account or letter, whether in the possession of the debtor or other persons; (r) To gain entry into any property for the purpose of inspecting, measuring, surveying or photographing it or any designated relevant object or operation thereon; (s)

To take possession, control and custody of the debtor's assets;

(t) To notify counterparties and the court as to contracts that the debtor has decided to continue to perform or breach; (u) To be notified of and to attend all meetings of the board of directors and stockholders of the debtor; (v) To recommend any modification of an approved rehabilitation p l an as he m a y deem appropriate; ( w ) To bring to the attention of the court any material change affecting the debtor's ability to meet the obligations under the rehabilitation plan; (x) To recommend the appointment of a management committee in the cases provided for under Presidential Decree N o . 902-A, as amended; (y) To recommend the termination of the proceedings and the dissolution of the debtor if he determines that the continuance in business of such entity is no longer feasible or profitable or no longer works to the best interest of the stockholders, parties-litigants, creditors or the general public; (z) To apply to the court for any order or directive that he m a y d e e m necessary or desirable to aid h i m in the exercise of his powers and performance of his duties and functions; and (aa) To exercise such other powers as m a y f r o m time to time be conferred upon h i m by the court. SEC. 13. Oath and Bond. — Before entering u p o n his powers, duties and functions, the rehabilitation receiver must be sworn in to p e r f o r m them faithfully, and must post a bond executed in favor of the debtor in such sum as the court may direct, to guarantee that he w i l l faithfully discharge his duties and obey the orders of the court. If necessary, he shall also declare under

Rule 3


933

oath that he w i l l perform the duties of a trustee of the assets of the debtor, will act honestly and in good faith, and deal w i t h the assets of the debtor in a commercially reasonable manner. SEC. 14. Fees and Expenses. — The rehabilitation receiver and the persons hired by h i m shall be entitled to reasonable professional fees and reimbursement of expenses w h i c h shall be considered as administrative expenses. SEC. 15. Immunity from Suit. — T h e rehabilitation receiver shall not be subject to any action, claim or d e m a n d in connection w i t h any act done or omitted by h i m in good faith in the exercise of his functions and powers herein conferred. SEC. 16. Reports. — The rehabilitation receiver shall file a written report every three (3) months to the court or as often as the court m a y require on the general condition of the debtor. The report shall include, at the m i n i m u m , interim financial statements of the debtor. SEC. 17. Dismissal of Rehabilitation Receiver. — A rehabilitation receiver may, u p o n motion, be dismissed by the court on the following grounds: (a) if he fails, without just cause, to p e r f o r m any of his powers and functions under these Rules; or (b) on any of the grounds for removing a trustee under the general principles of trusts. SEC. 18. Rehabilitation Plan. — T h e rehabilitation p l a n shall include (a) the desired business targets or goals and the duration and coverage of the rehabilitation; (b) the terms and conditions of such rehabilitation which shall include the manner of its implementation, giving due regard to the interests of secured creditors such as, but not limited, to the nonimpairment of their security liens or interests; (c) the material financial commitments to support the rehabilitation plan; (d) the means for the execution of the rehabilitation plan, which m a y include debt to equity conversion, restructuring of the debts, dacion en pago or sale or exchange or any disposition of assets or of the interest of shareholders, partners or members; (e) a liquidation analysis setting out for each creditor that the present value of payments it w o u l d receive under the plan is more than that w h i c h it w o u l d receive if the assets of the debtor were sold by a liquidator w i t h i n a six-month period from the estimated date of filing of the petition; and (f) such other relevant information to enable a reasonable investor to make an informed decision on the feasibility of the rehabilitation plan. SEC. 19. Repayment Period. — If the rehabilitation plan extends the period for the debtor to pay its contractual obligations, the new period should not extend beyond fifteen (15) years from the expiration of the stipulated term existing at the time of filing of the petition. SEC. 20. Effects of Rehabilitation Plan. — The approval of the rehabilitation plan by the court shall result in the following: (a) The plan and its provisions shall be binding upon the debtor and all persons w h o may be affected thereby, including the creditors, whether or not such persons have participated in the proceedings or opposed the plan or whether or not their claims have been scheduled;


934

Rule 4

(b) The debtor shall comply w i t h the provisions of the plan and shall take all actions necessary to carry out the plan; (c)

Payments shall be made to the creditors in accordance w i t h the

provisions of the plan; (d) Contracts and other arrangements between the debtor and its creditors shall be interpreted as continuing to apply to the extent that they do not conflict w i t h the provisions of the plan; and (e) A n y compromises on amounts or rescheduling of timing of payments by the debtor shall be binding on creditors regardless of whether or not the plan is successfully implemented. SEC. 2 1 . Revocation of Rehabilitation Plan on Grounds of Fraud. — U p o n motion, w i t h i n ninety (90) days from the approval of the rehabilitation plan, and after notice and hearing, the court m a y revoke the approval thereof on the ground that the same was secured through fraud. SEC. 22. Alteration or Modification of Rehabilitation Plan. — An approved rehabilitation plan may, upon motion, be altered or modified if, in the judgment of the court, such alteration or modification is necessary to achieve the desired targets or goals set forth therein. SEC. 23. Termination of Proceedings. — The court shall, u p o n motion or u p o n recommendation of the rehabilitation receiver, terminate the proceeding in any of the following cases: (a)

Dismissal of the petition;

(b) Failure of the debtor to submit the rehabilitation plan; (c)

Disapproval of the rehabilitation p l an by the court;

(d) Failure to achieve the desired targets or goals as set forth in the rehabilitation plan; (e)

Failure of the debtor to perform its obligations under the plan;

(f) Determination that the rehabilitation p l an m a y no longer be implemented in accordance w i t h its terms, conditions, restrictions or assumptions; or (g) Successful implementation of the rehabilitation plan. SEC. 24. Discharge of Rehabilitation Receiver. — U p o n termination of the rehabilitation proceedings, the rehabilitation receiver shall submit his final report and accounting w i t h i n such period of time as the court w i l l allow h i m . U p o n approval of his report and accounting, the court shall order his discharge. RULE 4 DEBTOR-INITIATED REHABILITATION SEC. 1. Who May Petition. — A n y debtor w h o foresees the impossibility of meeting its debts w h e n they respectively fall due, m a y petition the proper regional trial court for rehabilitation. A group of companies m a y jointly file a

CORPORATE REHABILITATION Appendix B petition for rehabilitation under these Rules w h e n one or more of its constituent corporations foresee the impossibility of meeting debts w h e n they respectively fall due, and the financial distress w o u l d likely adversely affect the financial condition and / or operations of the other member companies of the group and / or the participation of the other member companies of the group is essential 1 under the terms and conditions of the proposed rehabilitation plan. SEC. 2. Contents of Petition. — (a) The petition filed by the debtor must be verified and must w i t h sufficient particularity all the following material facts: (1)

the name and business of the debtor;

(2)

the nature of the business of the debtor;

(3)

the history of the debtor;

(4)

the cause of its inability to pay its debts;

set forth

(5) all the p e n d i n g actions or proceedings k n o w n to the debtor and the courts or tribunals where they are pending; (6)

threats or demands to enforce claims or liens against the debtor;

and (7) the manner by w h i c h the debtor m a y be rehabilitated and h o w such rehabilitation m a y benefit the general body of creditors, employees and stockholders. (b)

The petition shall be accompanied by the following documents:

(1) An audited financial statement of the debtor at the end of its last fiscal year; (2) I n t e r i m financial statements as of the end of the month prior to the filing of the petition; (3) A Schedule of Debts and Liabilities w h i c h lists all the creditors of the debtor, indicating the name and last address of record of each creditor; the amount of each claim as to principal, interest, or penalties due as of the date of filing; the nature of the claim; and any pledge, lien, mortgage judgment or other security given for the payment thereof;

'Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency. (New Frontier Sugar Corp. vs. Regional Trial Court, 513 SCRA 601 [2007].) The purpose of rehabilitation proceedings is to enable the company to gain new lease on the life and thereby allows credits to be paid their claims fro its earnings the approval of the rehabilitation plan and the appointment of a rehabilitation receiver merely suspends the actions for claims against the corporation the preferred status of secured creditors over unsecured creditors relative to their liens is retained but the enforcement of such preference is suspended. (Metropolitan Bank and Trust Co. vs. ASB Holdings, Inc., 517 SCRA 1 [2007]; China Banking Corp. vs. ASB Holdings, Inc., 575 SCRA 247 [2008]; Phil. Airlines, Inc. vs. Court of Appeals, 576 SCRA 547 [2008]; Garcia vs. Phil. Airlines, Inc., 576 SCRA 479 [2009]; Phil. National Bank vs. Court of Appeals, 576 SCRA 537 [2009].)

Rule 4


936

(4) An Inventory of Assets which must list w i t h reasonable specificity all the assets of the debtor, stating the nature of each asset, the location and condition thereof, the book value or market value of the asset, and attaching the corresponding certificate of title therefor in case of real property, or the evidence of title or ownership in case of movable property, the encumbrances, liens or claims thereon, if any, and the identities and addresses of the lienholders and claimants. The Inventory shall include a Schedule of Accounts Receivable which must indicate the amount of each, the persons from w h o m due, the date of maturity and the degree of collectibility categorizing them as highly collectible to remotely collectible; (5) A rehabilitation plan which conforms requirements set out in Section 18 of Rule 3;

with

the

minimal

(6) A Schedule of Payments and Disposition of Assets w h i c h the debtor may have effected w i t h i n three (3) months immediately preceding the filing of the petition; (7) A Schedule of Cash Flow of the debtor for three (3) months immediately preceding the filing of the petition, and a detailed schedule of the projected cash flow for the succeeding three (3) months; (8) A Statement of Possible Claims by or against the debtor w h i c h must contain a brief statement of the facts w h i c h might give rise to the claim and an estimate of the probable amount thereof; (9) An Affidavit of General Financial Condition w h i c h shall contain answers to the questions or matters prescribed in A n n e x " A " hereof; (10) At least three (3) nominees for the position of rehabilitation receiver as well as their qualifications and addresses, including but not limited to their telephone numbers, fax numbers and e-mail address; and (11) A certificate attesting under oath that (i) the filing of the petition has been duly authorized; and (ii) the directors and stockholders of the debtor have irrevocably approved and / or consented to, in accordance w i t h existing laws, all actions or matters necessary and desirable to rehabilitate the debtor including, but not limited to, amendments to the articles of incorporation and by-laws or articles of partnership; increase or decrease in the authorized capital stock; issuance of bonded indebtedness; alienation, transfer, or encumbrance of assets of the debtor; and modification of shareholders' rights. 2

(c)

Five (5) copies of the petition shall be filed w i t h the court.

SEC. 3. Verification by Debtor. — The petition filed by the debtor must be verified by an affidavit of a responsible officer of the debtor and shall be in a form substantially as follows: "1/ , (position) of (name of petitioner), do solemnly swear that the petitioner has been d u l y authorized to file the petition and that the stockholders and board of directors (or governing body)

*See Chas Realty and Development Corporation vs. Talavera, 397 SCRA 84 (2003).

Rule 4


9 3 7

have approved a n d / o r consented to, in accordance w i t h law, all actions or matters necessary or desirable to rehabilitate the debtor. The petition is being filed to protect the interests of the debtor, the stockholders, the investors and the creditors of the debtor, w h i c h warran t the appointment of a rehabilitation receiver. There is no petition for insolvency filed w i t h any other body, court or tribunal affecting the petitioner. The Inventory of Assets an d the Schedule of Debts and Liabilities contains a full, correct and true description of all debts a n d liabilities and of all goods, effects, estate and property of whatever k i n d or class belonging to petitioner. The Inventory also contains a full, correct a n d true statement of all debts o w i n g or due to petitioner, or to any person or persons in trust for petitioner and of all securities and contracts whereby any money m a y hereafter become due or payable to petitioner or by or through w h i c h any benefit or advantage m a y accrue to petitioner. The petition contains a concise statement of the facts giving rise, or w h i c h m i g h t give rise, to any cause of action in favor of petitioner. Petitioner has no land, money, stock, expectancy, or property of any k i n d , except those set forth in the Inventory of Assets. Petitioner has, in no instance, created or acknowledged a debt for a greater sum than the true a n d correct amount. Petitioner, its officers, directors and stockholders have not, directly or indirectly, concealed, fraudulently sold or otherwise fraudulently disposed of, any part of petitioner's real or personal property, estate, effects or rights of action, and petitioner, its officers, directors and stockholders have not in any w a y compounded w i t h any of its creditors in order to give preference to such creditors, or to receive or to accept any profit or advantage therefrom, or to defraud or deceive in any manner any creditor to w h o m petitioner is indebted. Petitioner, its officers, directors, and stockholders have been acting in good faith and w i t h due diligence. SEC. 4. Opposition to or Comment on Petition. — Every creditor of the debtor or any interested party shall file his verified opposition to or comment on the petition not later than fifteen (15) days before the date of the initial hearing fixed in the stay order. After such time, no creditor or interested party shall be allowed to file any comment thereon or opposition thereto without leave of court. If the Schedule of Debts and Liabilities omits a claim or liability, the creditor concerned shall attach to its comment or opposition a verified statement of the obligations allegedly due it.

SEC. 5. Initial Hearing. — (a) On or before the initial hearing set in the order mentioned in Section 7 of Rule 3, the petitioner shall file a publisher's affidavit showing that the publication requirements and a petitioner's affidavit showing that the notification requirement for foreign creditors had been complied with, as required in the stay order. (b) Before proceeding w i t h the initial hearing, the court shall determine whether the jurisdictional requirements set forth above had been complied w i t h . After finding that such requirements are met, the court shall ensure that the parties consider in detail all of the following:


938

Rule 4

(1)

Amendments to the rehabilitation plan proposed by the debtor;

(2)

Simplification of the issues;

(3) The possibility of obtaining stipulations and admission of facts and documents, including resort to request for admission under Rule 26 of the Rules of Court; (4) The possibility of amicably agreeing on any issue brought up in the comments on, or opposition to, the petition; (5)

Referral of any accounting, financial and other technical issues to

an expert; (6) The possibility of submitting the petition for decision on the basis of the comments, opposition, affidavits and other documents on record; (7) The possibility of a n ew rehabilitation p l a n voluntarily agreed upon by the debtor and its creditors; and (8) Such other matters as m a y aid in the speedy and summary disposition of the case. SEC. 6. Additional Hearings. — The court m a y hold additional hearings as part of the initial hearing contemplated in these Rules but the initial hearing must be concluded not later than ninety (90) days f r o m the initial date of the initial hearing fixed in the stay order.

SEC. 7. Order After Initial Hearing. — (a) W i t h in twenty (20) days after the last hearing, the court shall issue an order which shall: (1) Give due course to the petition a n d immediately refer the petition and its annexes to the rehabilitation receiver w h o shall evaluate the rehabilitation p l a n and submit his recommendations to the court not later than ninety (90) days f r o m the date of the last initial hearing, if the court is satisfied that there is merit to the petition, otherwise the court shall immediately dismiss the petition; and (2) Recite in detail the matters taken up in the initial hearing and the actions taken thereon, including a substitute rehabilitation p l a n contemplated in Sections 5(b)(7) and (8) of this Rule; (b) If the debtor and creditors agree on a n ew rehabilitation p l a n pursuant to Section 5(b)(7) of this Rule, the order shall so state the fact and require the rehabilitation receiver to supply the details of the p l a n and submit it for the approval of the court not later than sixty (60) days f r o m the date of the last initial hearing. The court shall approve the n e w rehabilitation p l a n not later than ninety (90) days from the date of the last initial hearing u p o n concurrence of the following: (1) A p p r o v a l or endorsement of creditors holding at least twothirds ( 2 / 3 ) of the total liabilities of the debtor including secured creditors holding more than fifty percent (50%) of the total secured claims of the debtor and unsecured creditors holding more than fifty percent (50%) of the total unsecured claims of the debtor;

Rule 4


939

(2) The rehabilitation plan complies w i t h the requirements specified in Section 18 of Rule 3; (3) The rehabilitation pla n w o u l d provide the objecting class of creditors w i t h payments whose present value projected in the plan w o u l d be greater than that w h i c h they w o u l d have received if the assets of the debtor were sold by a liquidator w i t h i n a six (6)-month period from the date of filing of the petition; and (4) plan.

The rehabilitation receiver has recommended approval of the

The approval by the court of the n e w rehabilitation plan shall have the same effect as approval of a rehabilitation plan under Section 20 of Rule 3. SEC. 8. Creditors' Meetings. — If no n e w rehabilitation plan is agreed u p o n by the debtor and the creditors, the rehabilitation receiver, at any time before he submits his evaluation on the debtor-proposed rehabilitation plan to the court as prescribed in Section 7(a)(1) of this Rule, shall, either alone or w i t h the debtor, meet w i t h the creditors or any interested party to discuss the plan w i t h a v i e w to clarifying or resolving any matter connected therewith. SEC. 9. Comments on or Opposition to Rehabilitation Plan. — A n y creditor or interested party of record m a y file comments on or opposition to the proposed rehabilitation plan, w i t h a copy given to the rehabilitation receiver, not later than sixty (60) days f r o m the date of the last initial hearing. The court shall conduct summary a n d non-adversarial proceedings to receive evidence, if necessary, in hearing the comments on and opposition to the plan. SEC. 10. Modification of Proposed Rehabilitation Plan. — The debtor may modify its rehabilitation plan in the light of the comments of the rehabilitation receiver and creditors or any interested party and submit a revised or substitute rehabilitation plan for the final approval of the court. Such rehabilitation plan must be submitted to the court not later than ten (10) months from the date of the date of filing of the petition. SEC. 11. Approval of Rehabilitation Plan. — The court may approve a rehabilitation plan even over the opposition of creditors of the debtor if, in its judgment, the rehabilitation of the debtor is feasible and the opposition of the creditors is manifestly unreasonable. The opposition of the creditors is manifestly unreasonable if the following are present: (a) The rehabilitation plan complies w i t h the requirements specified in Section 18 of Rule 3; (b) The rehabilitation plan w o u l d provide the objecting class of creditors w i t h payments whose present value projected in the plan w o u l d be greater than that which they w o u l d have received if the assets of the debtor were sold by a liquidator within a six (6)-month period from the date of filing of the petition; and (c)

The rehabilitation receiver has recommended approval of the plan.

In approving the rehabilitation plan, the court shall ensure that the rights of the secured creditors are not impaired. The court shall also issue the necessary

940


Rules 5-6

orders or processes for its immediate and successful implementation. It may impose such terms, conditions, or restrictions as the effective implementation and monitoring thereof may reasonably require, or for the protection and preservation of the interests of the creditors should the plan fail. SEC. 12. Period to Decide Petition. — The court shall decide the petition within one (1) year from the date of filing of the petition, unless the court, for good cause shown, is able to secure an extension of the period from the Supreme Court.

RULE 5 CREDITOR-INITIATED REHABILITATION SEC. 1. Who May Petition. — A n y creditor or creditors holding at least twenty percent (20%) of the debtor's total liabilities m a y file a petition w i t h the proper regional trial court for rehabilitation of a debtor that cannot meet its debts as they respectively fall due. SEC. 2. Requirements for Creditor-Initiated Petitions. — W h e r e the petition is filed by a creditor or creditors under this Rule, it is sufficient that the petition is accompanied by a rehabilitation plan and a list of at least three (3) nominees to the position of rehabilitation receiver and verified by a sworn statement that the affiant has read the petition and that its contents are true and correct of his personal knowledge or based on authentic records and that the petition is being filed to protect the interests of the debtor, the stockholders, the investors and the creditors of the debtor. SEC. 3. Applicability of Provisions Relating to Debtor-Initiated Rehabilitation. — The provisions of Sections 5 to 12 of Rule 4 shall apply to rehabilitation under this Rule.

RULE 6 PRE-NEGOTIATED REHABILITATION SEC. 1. Pre-negotiated Rehabilitation Plan. — A debtor that foresees the impossibility of meeting its debts as they fall due may, by itself or jointly w i t h any of its creditors, file a verified petition for the approval of a pre-negotiated rehabilitation plan. The petition shall comply w i t h Section 2 of Rule 4 and be supported by an affidavit showing the w r i t t e n approval or endorsement of creditors holding at least two-thirds ( 2 / 3 ) of the total liabilities of the debtor, including secured creditors holding more than fifty percent (50%) of the total secured claims of the debtor and unsecured creditors holding more than fifty percent (50%) of the total unsecured claims of the debtor. SEC. 2. Issuance of Order. — If the court finds the petition sufficient in form and substance, it shall, not later than five (5) w o r k i n g days from the filing of the petition, issue an order which shall: (a) Identify the debtor, its principal business or activity/ies and its principal place of business;

Rule 6


941

(b) Direct the publication of the order in a newspaper of general circulation once a w e e k for at least t w o (2) consecutive weeks, w i t h the first publication to be m a d e w i t h i n seven (7) days f r o m the time of its issuance; (c) Direct the service by personal delivery of a copy of the petition on each creditor w h o is not a petitioner holdin g at least five percent (5%) of the total liabilities of the debtor, as determined in the schedule attached to the petition, w i t h i n three (3) days; (d) Direct the petitioner to furnish a copy of the petition and its annexes, as w e l l as the stay order, to the relevant regulatory agency; (e) State that copies of the petition and the rehabilitation plan are available for examination and copying by any interested party; (f) Direct creditors and other parties interested (including the Securities and Exchange Commission and the relevant regulatory agencies such as, but not limited to, the Bangko Sentral ng Pilipinas, the Insurance Commission, the National Telecommunications Commission, the Housing and Land Use Regulatory Board and the Energy Regulatory Commission) in opposing the petition or rehabilitation p l an to file their verified objections thereto or comments thereon w i t h i n a period of not later than twenty (20) days from the second publication of the order, w i t h a w a r n i n g that failure to do so w i l l bar them from participating in the proceedings; (g) A p p o i n t the rehabilitation receiver n a m e d in the plan, unless the court finds that he is not qualified under these Rules in which case it may appoint a qualified rehabilitation receiver of its choice; (h) Stay enforcement of all claims, whether for money or otherwise and whether such enforcement is by court action or otherwise, against the debtor, its guarantors and persons not solidarily liable w i t h the debtor; provided, that the stay order shall not cover claims against letters of credit and similar security arrangements issued by a third party to secure the payment of the debtor's obligations; provided further, that the stay order shall not cover foreclosure by a creditor of property not belonging to a debtor under corporate rehabilitation; provided, however, that where the owner of such property sought to be foreclosed is also a guarantor or one w h o is not solidarily liable, said owner shall be entitled to the benefit of excussion as such guarantor; (i) Prohibit the debtor from selling, encumbering, transferring, or disposing in any manner any of its properties except in the ordinary course of business; (j) Prohibit the debtor from making any payment of its liabilities outstanding as of the date of filing of the petition; (k) Prohibit the debtor's suppliers of goods or services from withholding supply of goods and services in the ordinary course of business for as long as the debtor makes payments for the services and goods supplied after the issuance of the stay order; (1) Direct the payment in full of all administrative expenses incurred after the issuance of the stay order; and

942


Rule 6

(m) Direct the payment of new loans or other forms of credit accommodations obtained for the rehabilitation of the debtor w i t h prior court approval. 3

SEC. 3. Approval of Plan. — Within ten (10) days from the date of the second publication of the order referred to in Section 2 of this Rule, the court shall approve the rehabilitation plan unless a creditor or other interested party submits a verified objection to it in accordance w i t h the next succeeding section. SEC. 4. Objection to Petition or Rehabilitation Plan. — A n y creditor or other interested party may submit to the court a verified objection to the petition or the rehabilitation plan. The objections shall be limited to the following: (a) The petition or the rehabilitation p l a n or their attachments contain material omissions or are materially false or misleading; (b) The terms of rehabilitation are unattainable; or (c) The approval or endorsement of creditors required under Section 1 of this Rule has not been obtained Copies of any objection to the petition or the rehabilitation plan shall be served on the petitioning debtor a n d / o r creditors. SEC. 5. Hearing on Objections. — The court shall set the case for hearing not earlier than ten (10) days and no later than twenty (20) days from the date of the second publication of the order mentioned in Section 2 of this Rule on the objections to the petition or rehabilitation plan. If the court finds that the objection is in accordance w i t h the immediately preceding section, it shall direct the petitioner to cure the defect w i t h i n a period fifteen (15) days f r o m receipt of the order. SEC. 6. Period for Approval of Rehabilitation Plan. — T h e court shall decide the petition not later than one h u n d r e d twenty (120) days f r o m the date of the filing of the petition. If the court fails to do so w i t h i n said period, the rehabilitation plan shall be deemed approved. SEC. 7. Effects of Approval of Rehabilitation Plan. — A p p r o v a l of the rehabilitation plan under this Rule shall have the same legal effect as approval of a rehabilitation plan under Section 20 of Rule 3. SEC. 8. Revocation of Approved Rehabilitation Plan. — N o t later than thirty (30) days from the approval of a rehabilitation p l a n under this Rule, the plan may, upon motion and after notice and hearing, be revoked on the ground that the approval was secured by fraud or that the petitioner has failed to cure the defect ordered by the court pursuant to Section 5 of this Rule. SEC. 9. Effect of Rule on Pending Petitions. — A n y p e n d i n g petition for rehabilitation that has not undergone the initial hearing prescribed under the Interim Rules of Procedure for Corporate Rehabilitation at the time of the effectivity of these Rules may be converted into a rehabilitation proceeding under this Rule.

'See Pryce Corporation vs. Court of Appeals, 543 SCRA 657 (2005); Banco de OroEPCI, Inc. vs. JAPRL Dev. Corp., 551 SCRA 342 (2008).

Rule 7


943

RULE 7 RECOGNITION OF FOREIGN PROCEEDINGS SEC. 1. Scope of Application. — This Rule applies where (a) assistance is sought in a Philippine court by a foreign court or a foreign representative in connection w i t h a foreign proceeding; (b) assistance is sought in a foreign State in connection w i t h a domestic proceeding governed by these Rules; or (c) a foreign proceeding and a domestic proceeding are concurrently taking place. The sole fact that a petition is filed pursuant to this Rule does not subject the foreign representative or the foreign assets and affairs of the debtor to the jurisdiction of the local courts for any purpose other than the petition. SEC. 2. Non-Recognition of Foreign Proceeding. — N o t h i n g in this Rule prevents the court f r o m refusing to take an action governed by this Rule if (a) the action w o u l d be manifestly contrary to the public policy of the Philippines; and (b) if the court finds that the country of w h i c h the petitioner is a national does not grant recognition to a Philippine rehabilitation proceeding in a manner substantially in accordance w i t h this Rule. SEC. 3. Petition for Recognition of Foreign Proceeding. — A foreign representative m a y apply w i t h the Regional Trial Court where the debtor resides for recognition of the foreign proceeding in w h i c h the foreign representative has been appointed. A petition for recognition shall be accompanied by: (a) A certified copy of the decision commencing the foreign proceeding and appointing the foreign representative; or (b) A certificate f r o m the foreign court affirming the existence of the foreign proceeding and of the appointment of the foreign representative; or (c) In the absence of evidence referred to in subparagraphs (a) and (b), any other evidence acceptable to the court of the existence of the foreign proceeding and of the appointment of the foreign representative. SEC. 4. Recognition of Foreign Proceeding. — A foreign proceeding shall be recognized if: (a)

The proceeding is a foreign proceeding as defined herein;

(b) The person or body applying for recognition is a foreign representa rive as defined herein; and (c)

The petition meets the requirements of Section 3 of this Rule;

SEC. 5. Period to Recognize Foreign Proceeding. — A petition for recognition of a foreign proceeding shall be decided w i t h i n thirty (30) days from the filing thereof. SEC. 6. Notification to Court. — From the time of filing the petition for recognition of the foreign proceeding, the foreign representative shall inform the court promptly of: (a) A n y substantial change in the status of the foreign proceeding or the status of the foreign representative's appointment; and


944

Rule 7

(b) A n y other foreign proceeding regarding the same debtor that becomes known to the foreign representative. SEC. 7. Provisional Relief that May be Granted upon Application for Recognition of Foreign Proceeding. — From the time of filing a petition for recognition until the same is decided upon, the court may, upon motion of the foreign representative where relief is urgently needed to protect the assets of the debtor or the interests of the creditors, grant relief of a provisional nature, including: (a)

Staying execution against the debtor's assets;

(b) Entrusting the administration or realization of all or part of the debtor's assets located in the Philippines to the foreign representative or another person designated by the court in order to protect and preserve the value of assets that, by their nature or because of other circumstances, are perishable, susceptible to devaluation or otherwise in jeopardy; (c)

A n y relief mentioned in Sections 9(a)(1), (2) and (7) of this Rule.

SEC. 8. Effects of Recognition of Foreign Proceeding. — U p o n recognition of a foreign proceeding: (a) Commencement or continuation of individua l actions or i n d i v i d u a l proceedings concerning the debtor's assets, rights, obligations or liabilities is stayed; provided, that such stay does not affect the right to commence individual actions or proceedings to the extent necessary to preserve a claim against the debtor. (b) Execution against the debtor's assets is stayed; and (c) The right to transfer, encumber or otherwise dispose of any assets of the debtor is suspended. SEC. 9. Relief That May be Granted After Recognition of Foreign Proceeding. — (a) U p o n recognition of a foreign proceeding, where necessary to protect the assets of the debtor or the interests of the creditors, the court may, u p o n motion of the foreign representative, grant any appropriate relief including: (1) Staying the commencement or continuation of i n d i v i d u a l actions or individual proceedings concerning the debtor's assets, rights, obligations or liabilities to the extent they have not been stayed under Section 8(a) of this Rule; (2) Staying execution against the debtor's assets to the extent it has not been stayed under Section 8(b) of this Rule; (3) Suspending the right to transfer, encumber or otherwise dispose of any assets of the debtor to the extent this right has not been suspended under Section 8(c) of this Rule; (4) Providing for the examination of witnesses, the taking of evidence or the delivery of information concerning the debtor's assets, affairs, rights, obligations or liabilities; (5) Entrusting the administration or realization of all or part of the debtor's assets located in the Philippines to the foreign representative or another person designated by the court;

Rule 7

RULES OF PROCEDURE ON CORPORATE REHABILITATION Appendix B (6)

945

Extending the relief granted under Section 7 of this Rule;

(7) Granting any additional relief that m a y be available to the rehabilitation receiver under these laws. (b) U p o n recognition of a foreign proceeding, the court may, at the request of the foreign representative, entrust the distribution of all or part of the debtor's assets located in the Philippines to the foreign representative or another person designated by the court; provided that the court is satisfied that the interests of local creditors are adequately protected. SEC. 10. Protection of Creditors and Other Interested Persons. — (a) In granting or denying relief under this Rule or in modifying or terminating the relief under paragraph (c) of this Section, the court must be satisfied that the interests of the creditors and other interested persons, including the debtor, are adequately protected. (b) The court m a y subject the relief granted under Section 7 or Section 9 of this Rule to conditions it considers appropriate. (c) The court may, u p o n motion of the foreign representative or a person affected by the relief granted under Section 7 or Section 9 of this Rule, or on its o w n motion, m o d i f y or terminate such relief. SEC. 11. Actions to Avoid Acts Detrimental to Creditors. — U p o n recognition of a foreign proceeding, the foreign representative acquires the standing to initiate actions to avoid or otherwise render ineffective acts detrimental to creditors that are available under these Rules. SEC. 12. Intervention by Foreign Representative in Philippine Proceedings. — U p o n recognition of a foreign proceeding, the foreign representative may intervene in any action or proceeding in the Philippines in which the debtor is a party. SEC. 13. Cooperation and Direct Communication with Foreign Courts and Foreign Representatives. — In matters covered by this Rule, the court shall cooperate to the m a x i m u m extent possible w i t h foreign courts or foreign representatives. The court is entitled to communicate directly w i t h , or request information or assistance directly from, foreign courts or foreign representatives. SEC. 14. Forms of Cooperation. — Cooperation m a y be implemented by any appropriate means, including but not limited to the following: (a)

Appointment of a person or body to act at the discretion of the court;

(b) Communication of information by any means considered appropriate by the court; (c) Coordination of the administration and supervision of the debtor's assets and affairs; (d) Approval or implementation by courts of agreements concerning the coordination of proceedings; (e)

Coordination of concurrent proceedings regarding the same debtor;

(f)

Suspension of proceedings against the debtor;


946

Rules 8-9

(g) Limiting the relief to assets that should be administered in a foreign proceeding pending in a jurisdiction other than the place where the debtor has its principal place of business (foreign non-main proceeding) or information required in that proceeding; and (h) Implementation of rehabilitation or re-organization plan for the debtor. Nothing in this Rule limits the power of the court to provide additional assistance to the foreign representative under other applicable laws. SEC. 15. Commencement of Local Proceeding after Recognition of Foreign Proceeding. — After the recognition of a foreign proceeding, a local proceeding u n der these Rules may be commenced only if the debtor is doing business in the Philippines, the effects of the proceedings shall be restricted to the assets of the debtor located in the country and, to the extent necessary to implement cooperation and coordination under Sections 13 and 14 of this Rule, to the other assets of the debtor that, under local laws, must be administered in that proceeding. SEC. 16. Local and Foreign Proceedings. — W h e re a foreign proceeding and a local proceeding are taking place concurrently regarding the same debtor, the court shall seek cooperation and coordination under Sections 13 and 14 of this Rule. A n y relief granted to the foreign proceeding must be m a d e consistent with the relief granted in the local proceeding. RULE 8 PROCEDURAL REMEDIES SEC. 1. Motion for Reconsideration. — A party m a y file a m o t i o n for reconsideration of any order issued by the court prior to the approval of the rehabilitation plan. No relief can be extended to the party aggrieved by the court's order on the motion through a special civil action for certiorari under Rule 65 of the Rules of Court. Such order can only be elevated to the Court of Appeals as an assigned error in the petition for review of the decision or order approving or disapproving the rehabilitation plan. An order issued after the approval of the rehabilitation pla n can be reviewed only through a special civil action for certiorari under Rule 65 of the Rules of Court. SEC. 2. Review of Decision or Order on Rehabilitation Plan. — An order approving or disapproving a rehabilitation pla n can only be reviewed through a petition for review to the Court of Appeals under Rule 43 of the Rules of Court w i t h i n fifteen (15) days from notice of the decision or order.

RULE 9 FINAL PROVISIONS SEC. 1. Severability. — If any provision or section of these Rules is held invalid, the other provisions or sections shall not be affected thereby.

Annex "A"


947

SEC. 2. Transitory Provision. — Unless the court orders otherwise to prevent manifest injustice, any pending petition for rehabilitation that has not undergone the initial hearing prescribed under the I n t e r im Rules of Procedure for Corporate Rehabilitation at the time of the effectivity of these Rules shall be governed by these Rules. SEC. 3. Effectivity. — These Rules shall take effect on 16 January 2009 following its publication in t w o (2) newspapers of general circulation in the Philippines. ANNEX "A" AFFIDAVIT OF GENERAL FINANCIAL C O N D I T I O N (1)

A r e y o u an officer of the debtor referred to in these proceedings?

(2)

W h a t is your full n a m e and w h a t position do y o u hold in the debtor?

(3) office?

W h a t is the full name of the debtor and w h a t is the address of its head

(4)

W h e n was it formed or incorporated?

(5)

W h e n d i d the debtor commence business?

(6) W h a t is the nature of its business? W h a t is the market share of the debtor in the industry in w h i c h it is engaged? (7)

W h o are the parties, members, or stockholders? H o w many employees?

(8)

W h a t is the capital of the debtor?

(9) W h a t is the capital contribution and w h a t is the amount of the capital, paid and unpaid, of each of the partners or shareholders? (10) Do any of these people hold the shares in trust for others? (11)

W h o are the directors and officers of the debtors?

(12)

H a s the debtor any subsidiary corporation? If so, give particulars?

(13)

Has the debtor properly maintained its books and are they updated?

(14) Were the books audited annually? (15) If so, w h a t is the name of the auditor and w h e n was the last audited statement d r a w n up? (16) H a v e all proper returns been made to the various government agencies requiring same? (17) W h e n did the debtor first become aware of its problems? (18) Has the debtor w i t h i n the twelve months preceding the filing of the petition: (a) made any payments, returned any goods or delivered any property to any of its creditors, except in the normal course of business? (b) executed any mortgage, pledge, or security over any of its properties in favor of any creditor?


948

(c)

Annex "A'

transferred or disposed of any of its properties in payment of any

debt? (d) sold, disposed of, or removed any of its property except in the ordinary course of business? (e) sold any merchandise at less than fair market value or purchased merchandise or services at more than fair market value? (f)

made or been a party to any settlement of property in favor of any

person? If, so, give particulars. (19) Has the debtor recorded all sales or dispositions of assets? (20) W h a t were the sales for the last three years and w h a t percentage of the sales represented the profit or mark-up? (21) W h a t were the profits or losses for the debtor for the last three years? (22) W h a t are the causes of the problems of the debtor? Please provide particulars? (23) W h e n did you first notice these problems and w h a t actions d i d the debtor take to rectify them? (24) H o w much do y o u estimate is needed to rehabilitate the debtor? (25) Has any person expressed interest in investing n e w money into the debtor? (26) Are there any pending and threatened legal actions against the debtor? If so, please provide particulars. (27) Has the debtor discussed any restructuring or repayment p l an w i t h any of the creditors? Please provide status and details. (28) Has any creditor expressed interest in restructuring the debts of the debtor? If so, please give particulars. (29) H a v e employees' wages and salaries been kept current? If not, h o w much are in arrears and w h a t time period do the arrears represent? (30) H a v e obligation to the government and its agencies been kept current? If not, h o w much are in arrears and w h a t time period do the arrears represent?

Appendix C INTERIM RULES OF PROCEDURE GOVERNING INTRA-CORPORATE CONTROVERSIES UNDER R.A. NO. 8799 RESOLUTION "Acting on the M e m o r a n d u m of the Committee on SEC Cases submitting for this Court's consideration and approval the Proposed Interim Rules of Procedure for Intra-Corporate Controversies, the Court Resolved to A P P R O V E the same. The Interi m Rules shall take effect on A p r i l 1,2001 following its publication in t w o (2) newspapers of general circulation. M a r c h 13, 2001, M a n i l a . "

INTERIM RULES OF PROCEDURE FOR INTRA-CORPORATE CONTROVERSIES RULE 1 GENERAL PROVISIONS S E C T I O N 1. (a) Cases covered. — These Rules shall govern the procedure to be observed in civil cases involving the following: (1) Devices or schemes employed by, or any act of, the board of directors, business associates, officers or partners, amounting to fraud or misrepresentation w h i c h m a y be detrimental to the interest of the public a n d / o r of the stockholders, partners, or members of any corporation, partnership, or association; (2) Controversies arising out of intra-corporate, partnership, or association relations, between and among stockholders, members, or associates, and between, any or all of them and the corporation, partnership, or association of which they are stockholders, members, or associates, respectively; (3) Controversies in the election or appointment of directors, trustees, officers, or managers of corporations, partnerships, or associations; (4)

Derivative suits; and

(5)

Inspection of corporate books. 949


950

Rulel

(b) Prohibition against nuisance and harassment suits. — Nuisance and harassment suits are prohibited. In determining whether a suit is a nuisance or harassment suit, the court shall consider, among others, the following: (1)

The extent of the shareholding or interest of the initiating

stockholder or member; (2)

Subject matter of the suit;

(3)

Legal and factual basis of the complaint;

(4)

Availability of appraisal rights for the act or acts complained of;

(5)

Prejudice or damage to the corporation, partnership, or association

and in relation to the relief sought. In case of nuisance or harassment suits, the court may, motu proprio or u p o n motion, forthwith dismiss the case. SEC. 2. Suppletory Application of the Rules of Court. — The Rules of Court, in so far as they may be applicable and are not inconsistent w i t h these Rules, are hereby adopted to form an integral part of these Rules. SEC. 3. Construction. — These Rules shall be liberally construed in order to promote their objective of securing a just, summary, speedy and inexpensive determination of every action or proceeding. SEC. 4. Executory nature of decisions and orders. — A l l decisions a nd orders issued under these Rules shall immediately be executory, except the awards for moral damages, exemplary damages and attorney's fees, if any, no appeal or petition taken therefrom shall stay the enforcement or implementation of the decision or order, unless restrained by an appellate court. Interlocutory orders shall not be subject to appeal, (as amended by A . M . N o . 01-2-04-SC.) SEC. 5. Venue. — A l l actions covered by these Rules shall be commenced and tried in the Regional Trial Court w h i c h has jurisdiction over the principal office of the corporation, partnership, or association concerned. W h e r e the principal office of the corporation, partnership or association is registered in the Securities and Exchange Commission as M e t r o M a n i l a , the action must be filed in the city or municipality where the head office is located. SEC. 6. Service of pleadings. — W h e n so authorized by the court, any pleading a n d / o r document required by these Rules m a y be filed w i t h the court a n d / o r served upon the other parties by facsimile transmission (fax) or electronic m a i l (e-mail). In such cases, the date of transmission shall be deemed to be prima facie the date of service. SEC. 7. Signing of pleadings, motions and other papers. — Every pleading, motion, and other paper of a party represented by an attorney shall be signed by at least one attorney of record in the attorney's i n d i v i d u al name, whose address shall be stated. A party w h o is not represented by an attorney shall sign the pleading, motion, or other paper and state his address. The signature of an attorney or party constitutes a certification by the signer that the has read the pleading, motion, or other paper; that to the best

Rule 2

INTERIM RULES OF PROCEDURE GOVERNING INTRA-CORPORATE CONTROVERSIES UNDER R.A. NO. 8799 Appendix C

of his knowledge, information, and belief formed after reasonable inquiry, it is w e l l grounded in fact and is warranted by existing l aw or a good faith argument for the extension, modification, or reversal of existing jurisprudence; and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation. If a pleading, motion, or other paper is not signed, it shall be stricken off the record unless it is p r o m p t ly signed by the pleader or movant, after he is notified of the omission. SEC. 8. Prohibited pleadings. — The following pleadings are prohibited: (1)

M o t i o n to dismiss;

(2)

M o t i o n for a bill of particulars;

(3) M o t i o n for n e w trial, or for reconsideration of judgment or order, or for re-opening of trial; 1

(4) M o t i o n for extension of time to file pleadings, affidavits or any other paper, except those filed due to clearly compelling reasons. Such motion must be verified and under oath; and (5) M o t i o n for postponement and other motions of similar intent, except those filed due to clearly compelling reasons. Such motion must be verified and under oath. SEC. 9. Assignment of cases. — A l l cases filed under these Rules shall be tried by judges designated by the Supreme Court to hear and decide cases transferred f r o m the Securities a n d Exchange Commission to the Regional Trial Courts and filed directly w i t h said courts pursuant to Republic Act N o . 8799, otherwise k n o w n as the Securities and Regulation Code. RULE 2 C O M M E N C E M E N T OF A C T I O N A N D PLEADINGS S E C T I O N 1. Commencement of action. — An action under these Rules is commenced by the filing of a verified complaint w i t h the proper Regional Trial Court. SEC. 2. Pleadings allowed. — The only pleadings allowed to be filed under these Rules are the complaint, answer, compulsory counterclaims or crossclaims pleaded in the answer, and the answer to the counterclaims or crossclaims. SEC. 3. Verification. — The complaint and the answer shall be verified by an affidavit stating that the affiant has read the pleading and the allegations therein are true and correct based on his o w n personal knowledge or on authentic records.

êe Sand Bank of the Phils, vs. Ascot Holdings and Equities, Inc., 537 SCRA 396 (2007).


952

Rule 2

SEC. 4. Complaint. — The complaint shall state or contain: (1)

the names, addresses, and other relevant personal or juridical circum-

stances of the parties; (2) all facts material and relevant to the plaintiff's cause or causes of action, which shall be supported by affidavits of the plaintiff or his witnesses and copies of documentary and other evidence supportive of such cause or causes of action; (3)

the law, rule, or regulation relied upon, violated, or sought to be

enforced; (4) a certification that: (a) the plaintiff has not theretofore commenced any action or filed any claim involving the same issues in any court, tribunal or quasi-judicial agency, and, to the best of his knowledge, no such other action or claim is pending therein; (b) if there is such other action or claim, a complete statement of the present status thereof; and (c) if he should thereafter l e a m that the same or similar action or claim has been filed or is pending, he shall report that fact w i t h i n five (5) days therefrom to the court; and (5)

the relief sought.

SEC. 5. Summons. — The summons and the complaint shall be served together not later than five (5) days from the date of filing of the complaint. (a) Service upon domestic private juridical entities. — If the defendant is a domestic corporation, service shall be deemed adequate if m a d e u p o n any of the statutory or corporate officers as fixed by the by-laws or their respective secretaries. If the defendant is a partnership, service shall be deemed adequate if made upon any of the managing or general partners or u p o n their respective secretaries. If the defendant is an association, service shall be deemed adequate if made upon any of its officers or their respective secretaries. (b) Service upon foreign private juridical entity. — W h e n the defendant is a foreign private juridical entity w h i c h is transacting or has transacted business in the Philippines, service may be made on its resident agent designated in accordance w i t h la w for that purpose, or, if there be no such agent, on the government official designated by la w to that effect, or on any of its officers or agents w i t h i n the Philippines. SEC. 6. Answer. — The defendant shall file his answer to -the complaint, serving a copy thereof on the plaintiff, w i t h i n fifteen (15) days f r o m service of summons. In the answer, the defendant shall: (1)

Specify each material allegation of fact the truth of w h i c h he admits;

(2) Specify each material allegation of fact the truth of w h i c h he does not admit. Where the defendant desires to deny only a part of an aver meet, he shall specify so much of it as true and material and shall deny only the remainder; (3) Specify each material allegation of fact as to w h i c h truth he has no knowledge or information sufficient to f o r m a belief, and this shall have the effect of a denial;

Rule 3


953

(4) State the defenses, including grounds for a motion to dismiss under the Rules of Court; (5)

State the law, rule, or regulation relied u p o n ;

(6)

Address each of the causes of action stated in the complaint;

(7) State the facts u p o n w h i c h he relies for his defense, including affidavits of witnesses and copies of documentary and other evidence supportive of such cause or causes of action; (8)

State any compulsory counterclaim / s and cross-claim / s; and

(9)

State the relief sought.

The answer to counterclaims or cross-claims shall be filed w i t h i n ten (10) days f r o m service of the answer in w h i c h they are pleaded. SEC. 7. Effect of failure to answer. — If the defendant fails to answer w i t h i n the period above provided, he shall be considered in default. U p o n motion or motu proprio, court shall render judgmen t either dismissing the complaint or granting the relief prayed for as the records m a y warrant. In no case shall the court a w a r d a relief beyond or different f r o m that prayed for. SEC. 8. Affidavits, documentary and other evidence. — Affidavits shall be based on personal knowledge, shall set forth such facts as w o u l d be admissible in evidence, and shall show affirmatively that the affiant is competent to testify on the matters stated therein. The affidavits shall be in question and answer form, and shall comply w i t h the rules on admissibility of evidence. Affidavits of witnesses as w e l l as documentary and other evidence shall be attached to the appropriate pleading; Provided, however, That affidavits, documentary and other evidence not so submitted m a y be attached to the pretrial brief required under these Rules. Affidavits and other evidence not so submitted shall not be admitted in evidence, except in the following cases: (1) Testimony of unwilling , hostile, or adverse party witnesses. A witness is presumed prima facie hostile if he fails or refuses to execute an affidavit after a written request therefor; (2) If the failure to submit the evidence is for meritorious and compelling reasons; and (3)

N e w l y discovered evidence.

In case of (2) and (3) above, the affidavit and evidence must be submitted not later than five (5) days prior to its introduction in evidence.

RULE 3 MODES OF DISCOVERY S E C T I O N 1. In general. — A party can only avail of any of the modes of discovery not later than fifteen (15) days from the joinder of issues. SEC. 2. Objections. — A n y mode of discovery such as interrogatories, request or admission, production or inspection of documents or things, may be


954

Rule 4

objected to within ten (10) days from receipt of the discovery device and only on the ground that the matter requested is patently incompetent, immaterial, irrelevant or privileged in nature. The court shall rule on the objections not later than fifteen (15) days from the filing thereof. SEC. 3. Compliance. — Compliance w i t h any mode of discovery shall be made within ten (10) days from receipt of the discovery device, or if there are objections, from receipt of the ruling of the court. SEC. 4. Sanctions. — The sanctions prescribed in the Rules of Court for failure to avail of, or refusal to comply w i t h , the modes of discovery shall apply. In addition, the court may, upo n motion, declare a party non-suited or as in default, as the case may be, if the refusal to comply w i t h a mode of discovery is patently unjustified.

RULE 4 PRE-TRIAL S E C T I O N 1. Pre-trial conference; mandatory nature. — W i t h i n five (5) days after the period for availment of, and compliance w i t h , the modes of discovery prescribed in Rule hereof, whichever comes later, the court shall issue and serve an order immediately setting the case for pre-trial conference and directing the parties to submit their respective pre-trial briefs. The parties shall file w i t h the court and furnish each other copies of their respective pre-trial brief in such manner as to ensure its receipt by the court a n d the other party at least five (5) days before the date set for the pre-trial. The parties shall set forth in their pre-trial briefs, among other matters, the following: (1) Brief statement of the nature of the case, w h i c h shall summarize the theory or theories of the party in clear and concise language; (2)

Allegations expressly admitted by either or both parties;

(3)

Allegations deemed admitted by either or both parties;

(4) Documents not specifically denied under oath by either or both parties; (5)

Amendments to the pleadings;

(6) Statement of the issues, w h i c h shall separately summarize the factual and legal issues involved in the case; (7) Names of witnesses to be presented and the summary of their testimony as contained in their affidavits supporting their positions on each of the issues; (8) A l l other pieces of evidence, whether documentary or otherwise and their respective purposes; (9)

Specific proposals for an amicable settlement;

Rule 4


955

(10) Possibility of referral to mediation or other alternative modes of dispute resolution; (11) Proposed schedule of hearings; and (12) Such other matters as m a y aid in the just and speedy disposition of the case. SEC. 2. Nature and purpose of pre-trial conference. — D u r i n g the pre-trial conference, the court shall, w i t h its active participation, ensure that the parties consider in detail the following: (1)

The possibility of an amicable settlement;

(2) Referral of the dispute to mediation or other forms of dispute resolution; (3) Facts that need not be proven, either because they are matters of judicial notice or expressly or deemed admitted; (4)

A m e n d m e n t s to the pleadings;

(5) The possibility of obtaining stipulations and admissions of facts and documents; (6) Objections to the admissibility of testimonial, documentary and other evidence; (7)

Objections to the f o r m or substance of any affidavit, or part thereof;

(8)

Simplification of the issues;

(9) The possibility of submitting the case for decision on the basis of position papers, affidavits, documentary and real evidence; (10) A complete schedule of hearing dates; and ( 1 1 ) Such other makers as m a y aid in the speedy and makers as m a y aid in the speedy and summary disposition of the case. SEC. 3. Termination. — The preliminary conference shall be terminated not later than ten (10) days after its commencement, whether or not the parties have agreed to settle amicably. SEC. 4. Judgment before pre-trial. — If, after submission of the pre-trial briefs, the court determines that, u p o n consideration of the pleadings, the affidavits and other evidence submitted by the parties, a judgment may be rendered, the court may order the parties to file simultaneously their respective memoranda w i t h i n a non-extendible period of twenty (20) days from receipt of the order. Thereafter, the court shall render judgment, either full or otherwise, not later than ninety (90) days from the expiration of the period to file the memoranda. SEC. 5. Pre-trial order, judgment after pre-trial. — The proceedings in the pretrial shall be recorded. Within ten (10) days after the termination of the pre-trial, the court shall issue an order which shall recite in detail the makers taken up in the conference, the actions taken thereon, the amendments allowed in the pleadings, and the agreements or admissions made by the parries as to any of the makers considered. The court shall rule on all objections to or comments on

956


Rule 5

the admissibility of any documentary or other evidence, including any affidavit or any part thereof. Should the action proceed to trial, the order shall explicitly define and limit the issues to be tried and shall strictly follow the form set forth in Annex " A" of these Rules. The contents of the order shall control the subsequent course of the action, unless modified before trial to prevent manifest injustice. After the pre-trial, the court may render judgment, either full or partial, as the evidence presented during the pre-trial m a y warrant. RULE 5 TRIAL S E C T I O N 1. Witnesses. — If the court deems necessary to hold hearings to determine specific factual makers before rendering judgment, it shall, in the pre-trial order, set the case for trial on the dates agreed u p o n by the parties. Only persons whose affidavits were submitted m a y be presented as witnesses, except in cases specified in Section 8, Rule 2 of these Rules. The affidavits of the witnesses shall serve as their direct testimonies, subject to cross-examination in accordance w i t h existing rules on evidence. SEC. 2. Trial schedule. — Unless judgment is rendered pursuant to Rule 4 of these Rules, the initial hearing shall be held not later than thirty (30) days from the date of the pre-trial order. The hearings shall be completed not later than sixty (60) days from the date of the initial hearing, thirty (30) days of w h i c h shall be allotted to the plaintiffs and thirty (30) days to the defendants in the manner prescribed in the pre-trial order. The failure of a party to present a witness on a scheduled hearing date shall be deemed a w a i v e r of such hearing date. However, a party m a y present such witness or witnesses w i t h i n his remaining allotted hearing dates. SEC. 3. Written offer of evidence. — Evidence not otherwise admitte d by the parties or ruled u p o n by the court during the pre-trial conference shall be offered in writing not later than five (5) days f r o m the completion of the presentation of evidence of the party concerned. The opposing party shall have five (5) days from receipt of the offer to file his comments or objections. The court shall make its ruling on the offer w i t h i n five (5) days f r o m the expiration of the period to file comments or objections. SEC. 4. Memoranda. — Immediately after ruling on the last offer of evidence, the court shall order the parties to simultaneously file, w i t h i n thirty (30) days from receipt of the order, their respective memoranda. The m e m o r a n d a shall contain the following: (1) A "Statement of the Case," w h i c h is a clear and concise statement of the nature of the action and a summary of the proceedings; (2) A "Statement of the Facts," w h i c h is a clear and concise statement in narrative form of the established facts, w i t h reference to the testimonial, documentary or other evidence in support thereof;

Rule 6


957

(3) A "Statement of the Issues," w h i c h is a clear and concise statement of the issues presented to the court for resolution; (4) The "Arguments," w h i c h is a clear and concise presentation of the argument in support, of each issue; and (5) The "Relief" w h i c h is a specification of the order or judgment which the party seeks to obtain. No reply m e m o r a n d u m shall be allowed. SEC. 5. Decision after trial. — T h e court shall render a decision not later than ninety (90) days f r o m the lapse of the period to file the memoranda, w i t h or without said pleading h a v i n g been filed.

RULE 6 ELECTION CONTESTS S E C T I O N 1. Cases covered. — The provisions of this rule shall apply to election contests in stock and non-stock corporations. SEC. 2. Definition. — An election contest refers to any controversy or dispute involving title or claim to any elective office in a stock or non-stock corporation, the validation of proxies, the manner and validity of elections, and the qualifications of candidates, including the proclamation of winners, to the office of director, trustee or other officer directly elected by the stockholders in a close corporation or by members of a non-stock corporation where the articles of incorporation or by-laws so provide. SEC. 3. Complaint. — In addition to the requirements in section 4, Rule 2 of these, Rules, the complaint in an election contest must state the following: (1) The case was filed w i t h i n fifteen (15) days from the date of the election if the by-laws of the corporation do not provide for a procedure for resolution of the controversy, or w i t h i n fifteen (15) days from the resolution of the controversy by the corporation as provided in its by-laws; and (2) The plaintiff has exhausted all intra-corporate remedies in election cases as provided for in the by-laws of the corporation. SEC. 4. Duty of the court upon the filing of the complaint. — Within two (2) days from the filing of the complaint, the court, upon a consideration of the allegations thereof, m a y dismiss the complaint outright if it is not sufficient in form and substance, or, if it is sufficient, order the issuance of summons which shall be served, together with a copy of the complaint, on the defendant within two (2) days from its issuance. SEC. 5. Answer. — The defendant shall file his answer to the complaint, serving a copy thereof on the plaintiff, w i t h i n ten (10) days from service of summons and the complaint. The answer shall contain the matters required in Section 6, Rule 2 of these Rules. SEC. 6. Affidavits, documentary and other evidence. - The parties shall attach to the complaint and answer the affidavits of witnesses, documentary and other evidence in support thereof, if any.

958


Rule 7

SEC. 7. Effect of failure to answer. — If the defendant fails to file an answer within the period above provided, the court shall, w i t h i n ten (10) days from the lapse of said period motu proprio or on motion, render judgment as may be warranted by the allegations of the complaint, as well as the affidavits, documentary and other evidence on record. In no case shall the court award a relief beyond or different from that prayed for. SEC. 8. Trial. — If the court deems it necessary to hold a hearing to clarify specific factual makers before rendering judgment, it shall, w i t h i n ten (10) days from the filing of last pleading, issue an order setting the case for hearing for the purpose. The order shall, in clear and concise terms, specify the factual makers the court desires to be clarified and the witnesses, whose affidavits have been submitted, w h o w i l l give the necessary clarification. The hearing shall be set on a date not later than ten (10) days from the date of the order, and shall be completed not later than fifteen (15) days from the date of the first hearing. The affidavit of a witness w h o fails to appear for clarificatory questions of the court shall be ordered stricken off the record. SEC. 9. Decision. — The Court shall render a decision w i t h i n fifteen (15) days from receipt of the last pleading, or f r o m the date of the last hearing as the case may be. The decision shall be based on the pleadings, affidavits, documentary and other evidence attached thereto and the answers of the witnesses to the clarificatory questions of the court given during the hearings. RULE 7 INSPECTION OF CORPORATE BOOKS A N D RECORDS S E C T I O N 1. Cases covered. — The provisions of this Rule shall apply to disputes exclusively involving the rights of stockholders or members to inspect the books and records and / o r to be furnished w i t h the financial statements of a corporation, under Sections 74 and 75 of Batas Pambansa Big. 68, otherwise k n o w n as the Corporation Code of the Philippines. SEC. 2. Complaint. — In addition to the requirements in Section 4, Rule 2 of these Rules, the complaint must state the following: (1) The case is for the enforcement of plaintiff's right of inspection of corporate orders or records and / o r to be furnished w i t h financial statements under Sections 74 and 75 of the Corporation Code of the Philippines; (2) A demand for inspection and copying of books and records and / or to be furnished w i t h financial statements made by the plaintiff u p o n defendant; (3) The refusal of defendant to grant the demands of the plaintiff and the reasons given for such refusal, if any; and (4) The reasons w h y the refusal of defendant to grant the demands of the plaintiff is unjustified and illegal, stating the l a w and jurisprudence in support SEC. 3. Duty of the court upon the filing of the complaint. - W i t h i n t w o (2) days from the filing of the complaint, the court, u p o n a consideration of the

Rule 8

INTERIM RULES OF PROCEDURE GOVERNING FNTRA-CORPORATE CONTROVERSIES UNDER R.A. NO. 8799 Appendix C

959

allegations thereof, m a y dismiss the complaint outright if it is not sufficient in f o r m and substance, or, if it is sufficient, order the issuance of summons which shall be served, together w i t h a copy of the complaint, on the defendant w i t h i n t w o (2) days from its issuance. SEC. 4. Answer. — The defendant shall file his answer to the complaint, serving a copy thereof on the plaintiff, w i t h i n ten (10) days from service of summons and the complaint. In addition to the requirements in Section 6, Rule 2 of these Rules, the answer must state the following: (1) The grounds for the refusal of defendant to grant the demands of the plaintiff, stating the la w and jurisprudence in support thereof; (2) The conditions or limitations on the exercise of the right to inspect w h i c h should be imposed by the court; and (3) The cost of inspection, including m a n p o w e r and photocopying expenses, if the right to inspect is granted. SEC. 5. Affidavits, documentary and other evidence. — The parties shall attach to the complaint and answer the affidavits of witnesses, documentary and other evidence in support thereof, if any. SEC. 6. Effect of failure to answer. — If the defendant fails to file an answer w i t h i n the period above provided, the court, w i t h i n ten (10) days from the lapse of the said period, motu vrovrio or u p o n motion, shall render judgment as warranted by the allegations of the complaint, as w e l l as the affidavits, documentary and other evidence on record. In no case shall the court award a relief beyond or different from that prayed for. SEC. 7. Decision. — The court shall render a decision based on the pleadings, affidavits and documentary and other evidence attached thereto w i t h i n fifteen (15) days from receipt of the last pleading. A decision ordering defendants to allow tihe inspection of, books and records and / o r to furnish copies thereof shall also order the plaintiff to deposit the estimated cost of the manpower necessary to produce the books and records and the cost of copying, and state, in clear and categorical terms, the limitations and conditions to the exercise of the right allowed or enforced. RULE 8 DERIVATIVE SUITS S E C T I O N 1. Derivative action. — 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 rime the acts or transactions subject of the action occurred and at 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;


960

Rule 9

(3)

No appraisal rights are available for the act or acts complained of; and

(4)

The suit is not a nuisance or harassment suit.

In case of nuisance or harassment suit, the court shall forthwith dismiss the case. SEC. 2. Discontinuance. — A derivative action shall not be discontinued, compromised or settled without approval of the court. D u r i n g the pendency of the action, any sale of shares of the complaining stockholder shall be approved by the court. If the court determines that the interest of the stockholders or members w i l l be substantially affected by the discontinuance, compromise or settlement, the court may direct that notice, by publication or otherwise, be given to the stockholders or members whose interests it determines w i l l be so affected.

RULE 9 MANAGEMENT COMMITTEE S E C T I O N 1. Creation of a management committee. — As an incident to any of the cases filed under these Rules or the Interi m Rules on Corporate Rehabilitation, a party may apply for the appointment of a management committee for the corporation, partnership or association w h e n there is i m m i n e n t danger of: (1)

Dissipation, loss, wastage or destruction of assets or other properties;

and (2) Paralyzation of its business operations w h i c h m a y be prejudicial to the interest of the minority stockholders, parties-litigants or the general public. SEC. 2. Receiver. — In the event the court finds the application to be sufficient in f o r m and substance, the court shall issue an order: (a) appointing a receiver of k n o w n probity, integrity and competence and w i t h o u t any conflict of interest as hereunder defined to immediately take over the corporation, partnership or association, specifying such powers as it m a y d e e m appropriate under the circumstances, including any of the powers specified in section 5 of this Rule; (b) fixing the bond of the receiver; (c) directing the receiver to m a k e a report as to the affairs of the entity under receivership a n d on other relevant makers w i t h i n sixty (60) days from the time he assumes office; (d) prohibiting the incumbent management of the company, partnership or association from selling, encumbering, transferring or disposing in any manner any of its properties except in the ordinary course of business; a n d (e) directing the payment in full of all administrative expenses incurred after the issuance of the order.

SEC. 3. Receiver and management committee as officers of the court. — The receiver and the members of the management committee in the exercise of their powers and performance of their duties are considered officers of the court and shall be under its control and supervision. SEC. 4. Composition of the management committee. — After d u e notice and hearing, the court may appoint a management committee composed of

Rule 9


961

three (3) members chosen by the court. In the appointment of the members of the management committee, the following qualifications shall be taken into consideration by the court: (1) Expertise and acumen to manage and operate a business similar in size and complexity as that of the corporation, association or partnership sought to be p u t under management committee; (2)

Knowledg e in management and finance;

(3)

G o o d m o r a l character, independence and integrity;

(4)

A lack of a conflict of interest as defined in these Rules; and

(5) Willingness and ability to file a bond in such amount as may be determined by the court. W i t h o u t limiting the generality of the following, a member of a management committee m a y be deemed to have a conflict of interest if: (1) He is engaged in a line of business w h i c h competes w i t h the corporation, association or partnership sought to be placed under management; (2) He is a director, officer or stockholder charged w i t h mismanagement, dissipation or wastage of the properties of the entity under management; or (3) He is related by consanguinity or affinity w i t h i n the fourth civil degree to any director, officer or stockholder charged w i t h mismanagement, dissipation or wastage of the properties of the entity under management. SEC. 5. Powers and functions of the management committee. — U p o n assumption to office of the management committee, the receiver shall immediately render a report and t u r n over the management and control of the entity under his receivership to the management committee. The management committee shall have the power to take custody of and control assets and properties o w n e d or possessed by the entity under management. It shall take the place of the management and board of directors of the entity under management, assume their rights and responsibilities, and preserve the entity's assets and properties in possession. Without limiting the generality of the foregoing, the management committee shall exercise the following powers and functions: (1) To investigate the acts, conduct, properties, liabilities, and financial condition of the corporation, association or partnership under management; (2) To examine under oath the directors and officers of the entity and any other witnesses that it may deem appropriate; (3) To report to the court any fact ascertained by it pertaining to the causes of the problems, fraud, misconduct, mismanagement and irregularities committed by the stockholders, directors, management or any other person; (4) To employ such person or persons such as lawyers, accountants, auditors, appraisers and staff as are necessary in performing its functions and duties as management committee;

962


Rule 9

(5) To report to the court any material adverse change in the business of the corporation, association or partnership under management; (6) To evaluate the existing assets and liabilities, earnings and operations of the corporation, association or partnership under management; (7) To determine and recommend to the court the best w a y to salvage and protect the interest of the creditors, stockholders and the general public, including the rehabilitation of the corporation, association or partnership under management; (8) To prohibit and report to the court any encumbrance, transfer, or disposition of the debtor's property outside of the ordinary course of business or what is allowed by the court; (9) To prohibit and report to the court any payments made outside of the ordinary course of business; (10) To have unlimited access to the employees, premises, books, records and financial documents during business hours; (11) To inspect, copy, photocopy or photograph any document, paper, book, account or letter, whether in the possession of the corporation, association or partnership or other persons; (12) To gain entry into any property for the purposes of inspecting, measuring, surveying, or photographing it or any designated relevant object or operation thereon; (13) To bring to the attention of the court any material change affecting the entity's ability to meet its obligations; (14) To revoke resolutions passed by the Executive Committee or Board of Directors/Trustees or any governing body of the entity under management and pass resolution in substitution of the same to enable it to more effectively exercise its powers and functions; (15) To modify, nullify or revoke transactions coming to its knowledge which it deems detrimental or prejudicial to the interest of the entity under management; (16) To recommend the termination of the proceedings and the dissolution of the entity if it determines that the continuance in business of such entity is no longer feasible or profitable or no longer works to the best interest of the stockholders, parties-litigants, creditors or the general public; (17) To apply to the court for any order or directive that it m a y d e e m necessary or desirable to aid it in the exercise of its powers and performance of its duties and functions; and (18) To exercise such other powers as may, from time to time, be conferred upon it by the court. SEC. 6. Action by management committee. — A majority of its members shall be necessary for the management committee to act or m a k e a decision. The chairman of the management committee shall be chosen by the members from among themselves. The committee may delegate its management functions as

Rule 10


963

m a y be necessary to operate the business of the entity under management and preserve its assets. SEC. 7. Transactions deemed to be in bad faith. — A l l transactions made by the previous management and directors shall be deemed fraudulent and are rescissible if m a d e w i t h i n thirty (30) days prior to the appointment of the receiver or management committee or d u r i n g their incumbency as receiver or management committee. SEC. 8. Fees and expenses. — The receiver or the management committee and the persons hired by it shall be entitled to reasonable professional fees and reimbursement of expenses w h i c h shall be considered as administrative expenses. SEC. 9. Immunity from suit. — The receiver and members of the management committee and the persons employe d by them shall not be subject to any action, claim or d e m a n d in connection w i t h any act done or omitted by them in good faith in the exercise of their functions and powers. A l l official acts and transactions of the receiver or management committee d u l y approved or ratified by the court shall render them i m m u n e f r o m any suit in connection w i t h such act or transaction. SEC. 10. Reports. — W i t h i n a period of sixty (60) days from the appointment of its members, the management committee shall make a report to the court on the state of the corporation, partnership or association under management. Thereafter, the management committee shall report every three (3) months to the court or as often as the court m a y require on the general condition of the entity under management. SEC. 11. Removal and replacement of a member of the management committee. — A member of the management committee is deemed removed upon appointment by the court of his replacement chosen in accordance w i t h Section 4 of this Rule. SEC. 12. Discharge of the management committee. — The management committee shall be discharged and dissolved under the following circumstances: (1) Whenever the court, on motion or motu proprio, has determined that the necessity for the management committee no longer exists; (2)

By agreement of the parties; and

(3)

U p o n termination of the proceedings.

U p o n its discharge and dissolution, the management committee shall submit its final report and render an accounting of its management within such reasonable time as the court may allow. RULE 10 PROVISIONAL REMEDIES S E C T I O N 1. Provisional remedies. — A party may apply for any of the provisional remedies provided in the Rules of Court as may be available for the


964

Rules 11-12

purposes. However, no temporary restraining order or status quo ordeT shall be issued save in exceptional cases and only after hearing the parties and the posting of a bond. R U L E 11 SANCTIONS S E C T I O N 1. Sanctions on the parties or counsel. — In any of the following cases, the court may, upon motion or motu propria, impose appropriate sanctions: (1) In case the court determines in the course of the proceeding that the action is a nuisance or harassment suit; (2)

In case a pleading, motion or other paper is filed in violation of Section

7, Rule 1 of these Rules; (3) In case a party omits or violates the certification required under Section 4, Rule 2 of these Rules; (4)

In case of unwarranted denials in the answer to the complaint;

(5) In case of willful concealment or non-disclosure of material facts or evidence; The sanctions may include an order to pay the other party or parties the amount of the reasonable expenses incurred because of the act complained of, including reasonable attorney's fees. SEC. 2. Disciplinary sanctions on the judge. — T h e presiding judge may, u p o n a verified complaint filed w i t h the Office of the Court Administrator, be subject to disciplinary action under any of the f o l l o w i ng cases: ( 1 ) Failure to observe the special s u m m a r y procedures prescribed in these Rules; or (2)

Failure to issue a pre-trial order in the f o r m prescribed in these Rules. R U L E 12 FINAL PROVISIONS

S E C T I O N 1. Severability. — If any provision or section of these Rules is held invalid, the remaining provisions or sections shall not be affected thereby. SEC. 2. Effectivity. - These Rules shall take effect on 1 A p r i l 2001 following its publication in two (2) newspapers of general circulation in the Philippines.

Annex "A"


965

Annex "A" Republic of the Philippines Judicial Region Regional Trial Court Branch NAME(s) OF PLAINTIFF /S, Plaintiff/s, — versus —

Case N o .

NAME(s) OF D E F E N D A N T / S , Defendant/s. x

x

PRE-TRIAL ORDER I.

S u m m a r y of the Case

II.

Preliminary Matters A.

A m e n d m e n t s allowed in the pleadings

B.

Rulings on all objections to or comments on admissibility of any documentary or other evidence

C.

Other matters taken up in conference not covered by the subsequent items and actions taken thereon

I I I . Statement of the Facts

IV.

V.

A.

Admitted

B.

Disputed 1.

Version of the Plaintiff

2.

Version of the Defendant

Issues to be Resolved A.

Factual

B.

Legal

Applicable Laws

V I . Evidence for the Parties A l l evidence to be adduced and presented by both parties shall be limited to those identified below. A l l documentary evidence have already been pre-marked and copies thereof, after comparison with the original, have been given the other party or such party has been given an opportunity to examine the same in cases w h e n generating copies proves impractical. The testimonies of the witnesses have all been reduced to affidavit form in accordance w i t h these Rules and copies thereof given to the other party.


966

Annex"A"

No other evidence shall be allowed other than those indicated below except in accordance with Section 8, Rule 2 of the Interim Rules of Procedure for Intra-Corporate Controversies. A.

Evidence of the Plaintiff 1.

Documentary Evidence a)

b)

Document N o . 1 (Exh. (1)

Name/Type

(2)

Pre-Marking N u m b e r

(3)

Summary

(4)

Purpose


Name/Type

(2)


(3)

Summary

)

)

(4) Purpose (Additional documentary evidence shall be similarly presented) 2.

Testimonial Evidence a)

b)

N a m e of First Witness (1)

Purpose of the testimony

(2)

Estimated length of testimony

N a m e of Second Witness (1)


(2)

Estimated length of testimony (Additional witnesses shall be similarly presented)

3. B.

Other Evidence

Evidence of the Defendant 1.

Documentary Evidence a)

b)


Name/Type

(2)


(3)

Summary

(4)

Purpose


Name/Type

(2)


)

)

Annex "A"

INTERIM RULES OF PROCEDURE GOVERNING INTRA-CORPORATE CONTROVERSIES UNDER R.A. NO. 8799 Appendix C (3)

Summary

(4)

Purpose

967

( A d d i t i o n a l documentary evidence shall be similarly presented) 2.

Testimonial Evidence a)

b)

N a m e of First Witness (1)


(2)

Estimated length of testimony

N a m e of Second Witness (1)


(2)

Estimated length of testimony ( A d d i t i o n a l witnesses shall be similarly presented)

3.

Other Evidence

VTI. H e a r i n g Dates (These hearing dates, w h i c h should be scheduled not later than thirty (30) days f r o m the completion at the pre-trial, shall be strictly followed and all postponements by either party shall be deducted from such party's allotted time to present evidence.) A.

Schedule Plaintiff's Presentation of Evidence

B.

Schedule of Defendant's Presentation of Evidence

— oOo —

Appendix D GUIDELINES IN THE FORMATION AND ORGANIZATION OF A PRIVATE STOCK CORPORATION Under the Corporation Code of the Philippines, five (5) or more persons not exceeding fifteen (15), all of legal age, a majority of w h o m are residents of the Philippines, may form a private stock corporation by filing w i t h this Commission, articles of incorporation in any of the official languages (Filipino or English) in triplicate, duly signed and acknowledged by all the incorporators before a notary public. The articles of incorporation must contain, substantially the following matters: (1) The name of the corporation, w h i c h must contain the w o r d "Incorporated," "Inc." or "Corporation." Such name must not be identical or deceptively or confusingly similar to the f i r m name, business name, trade name or style of another person, f i r m or entity. Likewise, it must not be contrary to existing laws. In this connection, the Commission, as a matter of policy, requires the submission, together w i t h the articles of incorporation, of a statement signed by at least a majority of the incorporators, to the effect that they are willing to change the corporate name in the event that another person, f i r m or entity has a prior right to the use of an identical or a confusingly similar name; (2) The purpose or purposes for w h i c h the corporation is to be formed must be grouped into Primary and Secondary Purposes. The Primary Purpose must be only one, but the Secondary Purposes m a y be several; (3) The place where the principal office is to be established w h i c h must be w i t h i n the Philippines, provided that for purposes of stockholders' or members' meeting, Metro M a n i l a shall be considered a City or Municipality ; (4) The term of existence w h i c h must not exceed fifty (50) years f r o m and after the date of incorporation; (5) The names, citizenship, and residences of the incorporators. The incorporators must be natural persons and must not be less than five (5) nor more than fifteen (15), a majority of w h o m must be residents of the Philippines. Each of the incorporators of a stock corporation must o w n or a subscriber to at least one (1) share of the capital stock of the corporation. If there are alien incorporators, a certificate of the M u n i c i p a l Treasurer of the place of residence of such aliens showing that he has verified their alien certificates of registration and the number and dates of issue and renewal of each certificate, together 968

GUIDELINES IN THE FORMATION AND ORGANIZATION OF A PRIVATE STOCK CORPORATION Appendix D

969

w i t h the i m m i g r a n t certificate of residence of said alien incorporators and subscribers must be submitted. (6) The names and addresses of the incorporating directors which must not be less than five (5) nor more t h a n fifteen (15) and at least majority are residents of the Philippines. (7) The authorized capital stock, the number of shares into which it is divided, the par value of such shares, in l a w f u l m o n ey of the Philippines, if the shares have par value; otherwise, only the number of shares need be stated. W i t h respect to capital stock, the shares m a y be divided into classes or series of shares or both, any of w h i c h classes or series of shares m a y have such rights, privileges or restrictions, as m a y be provided for in the articles of incorporation: Provided, That no share m a y be deprived of voting rights except preferred or redeemable shares: And provided further, That there shall always be a class or series of shares w h i c h have complete voting rights. A n y or all of the shares m a y have a par value or have no par value, as provided in the articles of incorporation. Shares of stock w i t h o u t par value m a y not be issued for a consideration less than P5.00 per share. (8) The amount subscribed by the subscribers, w h i c h must be at least 25% of the authorized capital stock. The names, addresses, and the respective amounts subscribed and paid by them must be also stated. The total amount p a i d on account of subscriptions except where the capital stock consists of no par value shares, in w h i c h case, the subscriptions must be fully paid. (9) The name of the Treasurer elected by the subscribers authorized to receive for and in the name and for the benefit of the corporation all subscriptions paid or given by the subscribers. (10) For corporations which w i l l engage in any business reserved for Filipino citizens, the following provision shall be included: " N o transfer of interest w h i c h w i l l reduce the ownership of Filipino citizens to less than the required percentage of the capital shall be allowed or permitted to be recorded in the proper books. This restriction shall be printed in all the stock certificates of the corporation." (11) An affidavit of the treasurer of the corporation must be attached to the articles of incorporation showing that at least 25% of the authorized capital stock has been subscribed and at least 25% of the subscription has been paid in cash a n d / o r property, the fair valuation of which is equal to or at least 25% of the said subscription. As regards the paid-up capital which must not be less than five thousand pesos (P5,000.00), if the same is in cash, the sum must be deposited with a bank in the name of the proposed corporation, or in the name of the Treasurer in trust for the corporation, and a bank certificate, in accordance with the prescribed form, executed under oath by a responsible officer of the bank must be submitted to the Commission. A letter of authority, also in accordance with the prescribed form, executed by the treasurer of the corporation authorizing this Commission to examine not only the bank deposit, but also its books of

970


accounts and supporting records to determine the existence and utilization of the paid-up capital must likewise be submitted. This letter of authority shall be binding upon the corporation even if there is a change of corporate officers. If the paid-up capital consists of property, verification of its ownership, physical existence, and reasonableness of the valuation at w h i c h it is being transferred to the corporation is made by the Commission. Documents to support ownership such as original /transfer Certificate of Title, and Tax Declaration with respect to land, certificate of registration w i t h respect to motor vehicles and motor vessels, and other documents to support the ownership of the properties are required to be submitted. If any of the properties used as paid-up capital is mortgaged or otherwise encumbered, written consent of the mortgagee is necessary. If the transfer value of the property is higher than cost or assessed value, an appraisal report prepared by a licensed appraiser is required. If a going concern like a single proprietorship or partnership is being converted into a corporation, financial statements d u l y certified by an independent Certified Public Accountant, as w e l l as the long f o r m audit report of the certifying CPA is required. Likewise, writte n consent of creditors must be submitted. A deed of assignment executed by the owner, proprietor, or partners in case of partnership, transferring the properties, as w e l l as other assets and liabilities in favor of the corporation is required. The D e e d of Assignment covering real estate properties must be presented for p r i m a r y entry to the Register of Deeds where the property is located. A Statement of Assets and Liabilities, in accordance w i t h the prescribed form, executed under oath by the Treasurer of the corporation is required to be attached to the incorporation papers. The Securities and Exchange Commission shall immediately after the filing of the articles of incorporation publish at the expense of said Corporation, the assets and liabilities of the same once in a newspaper of general circulation in the locality where the corporation is domiciled, if any or, in default thereof, in a newspaper of general circulation in M e t r o M a n i l a . The Commission m a y require such other documents to support the ownership and valuation of the properties being used as paid-up capital. (SEC Quarterly Bulletin, N o . 3, Sept. 1982, pp. 72-75.) Note: To expedite the registration of the corporation, the services of the new "express lane" project of the Commission m a y be availed of. Printed forms of articles of incorporation and by-laws of stock and non-stock corporations are available at the Commission at a nominal cost only. U n d e r this project, applications for registration are processed and approved w i t h i n a period of one day.

— oOo —

Appendix E GUIDELINES FOR NON-STOCK CORPORATIONS I. INFORMATION AND ORGANIZATION (1) Verification Slip. — As in stock corporations, the Securities and Exchange Commission likewise requires that verification slip regarding the proposed corporate n a m e should be submitted, (see note 3 to Sec. 10.) (2) Articles of Incorporation. — A non-stock, non-profit corporation may be formed by filing w i t h the Commission articles of incorporation executed by five or more persons not exceeding 15, majority of w h o m are residents of the Philippines, attested by t w o witnesses and acknowledged before a notary public. Said articles must contain the following: (a) Name of Corporation. — A w r i t t e n undertaking to change the corporate name in the event that another person, f i r m, or entity has acquired a prior right to the use of said name or one similar to it, must be submitted by the corporation, through its authorized representative. (b) Purpose. — 1) Non-stock corporations m a y be formed or organized for charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof pursuant to Section 88 of the Corporation Code. 2)

Non-stock corporations have no secondary purposes.

3) A non-stock corporation may not include a purpose which changes or contradicts its nature as such, pursuant to Section 14 of the Corporation Code. (c) Place of Principal Office. — The principal office of the corporation must be stated in the articles of incorporation pursuant to Section 14 of the Corporation Code. (d) Term of Existence. — The term of existence shall be for 50 years from the date of incorporation in accordance w i t h Section 11 of the Corporation Code. (e) The names, citizenships, and residences of incorporators. — The incorporators must be natural persons and must not be less than five nor 971


972

more than 15, all of legal age and majority of w h o m are residents of the Philippines. (f) Board of Directors or Trustees. — The number of directors or trustees, which shall not be less than five nor more than 15. The names, nationalities, and residences of the persons w h o shall act as directors or trustees until the first regular directors or trustees are elected and qualified in accordance w i t h the Corporation Code should likewise be stated. (g) The amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each. (h) The statement that "the present members are those whose names appear in the attached list and that the SEC shall be furnished w i t h the names of additional members as may be admitted f r o m time to time." (i) The name of the treasurer elected by the members of the association w h o is authorized to receive for and in the name of the association all dues and fees from the members.

(3) Attachments to the Articles of Incorporation of Non-stock Corporations: (a) List of members w i t h their respective n o r m a l signatures as certified by the Secretary. (b) Modus operandi w h i c h is the statement d u l y signed by the members explaining in specific details the w a y s and means of achieving its objectives or purposes. (c)

Written undertaking to change the corporate name.

(d) Resolution of the Board of Directors that the corporation shall comply w i t h the SEC requirements for non-stock corporation dated M a y 24,1963. (e) Registration D a t a Sheet signed by an authorized representative of the corporation summarizing in statistical data f o r m the important data of the corporation such as name, principal office, incorporators, contributions

and T A N . (SEC Bulletin, Oct. 1982, p. 7.) 1

II. OPERATION In connection w i t h the operation of the association, the following must be complied w i t h : (1) The corporation must have a book of membership w h i c h shall indicate the names, addresses, and signatures of the members. The by-laws shall provide the procedure for acquiring membership therein. In substance, it should require every person desirous of joining the association to file an application for membership w h i c h must be approved by the board of directors. Every application for membership d u l y approved must be properly kept on file.

'Taxpayer Account Number, now TIN (Taxpayer Identification Number).

GUIDELINES FOR NON-STOCK CORPORATIONS Appendix E

973

(2) It must have the proper books of accounts and other necessary records, such as: (a) Cash book. — w h i c h must show all receipts and disbursements, specifying each item, nature, and in the case of disbursements, the purpose thereof. (b) General journal. transactions.

— w h i c h must contain a record of non-cash

(c) Ledger book. — w h i c h must contain a summary of transactions recorded in the cash book and general journal. (d) Minute book. — w h i c h must e m b o d y a complete record of the proceedings of all meetings of the board of directors and of the members of the association. A l l such books w h i c h the association w i l l use must first be submitted to the Commission for certification and stamping, and the same shall be the only ones utilized by the corporation. (3) A n y resolution requiring contribution or fees from the members must indicate the purpose for w h i c h the funds are used, the necessity therefor, and the manner in w h i c h the same shall be spent. (4)

As regards its funds, the corporation shall comply w i t h the following: (a)

It shall issue official receipts for all funds received by it.

(b) A n y amount received in excess of P100.00 shall be deposited in behalf of the corporation w i t h a reputable banking institution. (c) The treasurer of the corporation shall post a bond in such sum and w i t h surety as m a y be approved by the board of directors. (d) A l l disbursements must be duly evidenced by appropriate vouchers which must specify the purpose and nature thereof. (5) The corporation shall prepare an annual report of its activities showing, among others, the funds received during the preceding year, the purposes for w h i c h the same were spent, and the cash position of the company as of the date of the report. T w o signed copies of such report shall be furnished this Commission, and the same or at least the substance thereof, particularly the financial aspects must be sent out or made k n o w n to the members. (6) In no instance shall the corporation open any branch office in the suburbs or in the provinces without the consent of the Commission first had and secured. (7) Within fifteen (15) days after the annual meeting electing the new officers and members of the board of directors of the corporation, the Secretary or any officer shall submit to the Commission, the names and addresses of the new officers and members of the board of directors. Should an officer or director die, resign or in any manner cease to hold office, the Secretary or any officer of the corporation shall report immediately such fact to the Commission. A n y officer or director w h o has resigned or has ceased to hold office, shall be

974


deemed to continue holding his position until the Commission shall have received information or notice of his resignation or withdrawal. It shall be understood that for the purpose of carrying out all of the foregoing requirements, representatives of the Commission m a y at any time look into the affairs and inspect the books of accounts and other records of the association. It shall also be understood that the Commission may require the corporation to submit appropriate reports to show the progress of its operations and its actual status. Finally, it shall be understood that the violation of, or non-compliance w i t h , any of the aforesaid requirements shall subject the offender to such penalties as the Commission may impose under Republic Act N o . 1143, the pertinent provisions of which read as follows: "(b) To penalize any violation of or non-compliance w i t h any terms or conditions of any certificate, license, or permit issued by the Commission or of any order, decision, ruling or regulation thereof, by a fine of not exceeding two hundred pesos per day for everyday d u r i n g w h i c h such violation or default continues; and the Commission is hereby authorized and empowered to impose and collect such fine after due notice and hearing." (8) The following supporting papers shall be submitted w i t h the articles of incorporation of a non-stock corporation: (a) Letter of undertaking addressed to the Commission signed by at least a majority of the incorporators or by a d u l y authorized representative, to the effect that the association w i l l change its corporate n a m e in the event another person, firm or entity has acquired a prior right to use the same name or one similar to it (3 copies); (b) Modus operandi or a detailed explanation as to h o w the association shall carry out its objectives signed by at least a majority of the incorporators or by a duly authorized representative (3 copies); (c) Resolution of the Board signed by at least a majority of the Directors or certified under oath by the Secretary in the following tenor (3 copies) to wit: "RESOLVED, that the corporation or association w i l l comply w i t h the S.E.C. R E Q U I R E M E N T S F O R N O N - S T O C K C O R P O R A T I O N dated M a y 24,1963, in the course of its operation." (d) List of members of the association containing their m a n u a l signatures and attested by the Acting Secretary. If the incorporators are the present members so far, state such fact in w r i t i n g and further state that the list of additional members w h o w i l l be admitted in accordance w i t h the by-laws of the association shall be submitted to the Commission f r o m time to time (3 copies). (SEC Quarterly Bulletin, No. 3, Sept. 1982, pp. 77-79.)

(e) Registration Data Sheet; and

GUIDELINES FOR NON-STOCK CORPORATIONS Appendix E

975

(f) List of contributions and amounts they respectively contributed duly certified under oath by the Treasurer. (SEC Opinion, Aug. 22,1989.) (9) The following amounts must be paid to the Commission as registration fees: 2

(a) Articles of Incorporation — P100.00; (b) By-laws, if filed simultaneously with the articles — P100; (c) Legal Research fee — P20.00. (Ibid.) — 0O0 —

Appendix F

GUIDELINES FOR QUASI-REORGANIZATION A.

Guidelines or conditions for approval of quasi-reorganization:

(1) That only companies which are financially in distress, m a y be allowed to undergo quasi-reorganization. (2) That the company has substantial increment in the market value of its fixed assets as appraised by a reputable licensed appraiser w h i c h is adequate to absorb its accumulated past losses. (3) That the appraisal increment to be considered in the p l a n shall be limited to real properties, permanently installed fixed assets, and other machineries and equipment directly needed and actually used in the operations of the company. (4) That the appraisal increment of fixed assets undergoing repair or w i l l require before either same can be put into productive use shall not be included in the appraisal of assets for purposes of quasi-reorganization. (5) That the company shall present a project study on its future operations to support its quasi-reorganization. (6) That the remaining appraisal surplus set up in the books of the company after the deficit shall have been offset w i l l not be used to w i p e out losses that may be incurred in the future w i t h o u t prior approval of the Commission. (7) For purposes of dividend declaration, the retained earnings of the company shall be restricted to the extent of the deficit w i p e d out (and not recovered by accumulated depreciation on appraisal increment by the appraisal surplus). (8) That after the quasi-reorganization of the company has been effected and approved by the Commission, the company shall disclose in all its financial statements for a m i n i m u m period of three (3) years the mechanics, purpose and effect of such quasi-reorganization on the financial condition of the company.

B.

Documents

(1) A corporation which proposes to reorganize and meets the above conditions must submit the following:

976

GUIDELINES FOR QUASI-REORGANIZATION Appendix F

977

(a) An appraisal report rendered by a d u l y licensed appraiser covering the corporate assets specified in Item A N o . 3 of the above G U I D E L I N E S , together w i t h supporting schedules showing the details of such properties and their costs, book values, appraised values, sound values and appraisal increment as w e l l as the estimated remaining useful life of each of the depreciable properties appraised. (b) A project study on the company's future operations showing the yearly projected balance sheets, income statements and cash flow statements for a m i n i m u m period of five (5) years starting from the year immediately following the application for quasi-reorganization. (c) The latest audited financial statements of the corporation prior to the write-off of the existing deficit, together w i t h the longform audit report of the certifying a u d i t o r / s . (d) A list of directors a n d officers of the corporation as of the present date, d u l y certified by the corporate Secretary. (SEC Quarterly Bulletin, No.

3, Sept. 1982, pp. 6-7; SEC Opinion, May 15,1982.)

— oOo —

Appendix G

CONSOLIDATED SCHEDULE OF FEES AND CHARGES ( S E C M E M O . C I R . N O . 9 , M A Y 20, 2004) As approved by the Commission en banc, hereunder is the list of all the fees and charges to be imposed and collected by the Securities and Exchange Commission. In addition to the Registration Fee, there shall be a Legal Research Fee equivalent to one percent (1%) of the Filing Fee but not les than Ten pesos (P10.00).

C o m p a n y Registration a n d M o n i t o r i n g D e p a r t m e n t

Filing Fee

Application 1. Articles of Partnership

1 / 5 of 1% of the Partnership's capital but not less than P1,000.00

2. Increase of capital of partnership

1 / 5 of 1% of the increase in capital but not less than P1,000.00

3. A m e n d e d Articles of Partnership

P1,000.00

4. Deed of Assignment of Partnership Interest

P500.00

5. Articles of Dissolution of Partnership

P500.00

6. Affidavit Partner

P500.00

of

Withdrawal

of

7. Articles of Incorporation a.

Stock corporation w i t h par value

1 / 5 of 1% of the authorized capital stock or the subscription price of the subscribed capital stock whichever is higher but not less than P1,000.00

978

CONSOLIDATED SCHEDULE OF FEES AND CHARGES Appendix G

b.

Stock corporation w i t h o u t par value

979

1 / 5 of 1% of the authorized capital stock computed at P100.00 per share stock or the subscription price of the subscribed capital stock whichever is higher but not less than P1,000.00

8. Articles of Incorporation of N o n stock corporation

P500.00

9. By-laws of both stock and nonstock corporation

P500.00

10.

A m e n d e d Articles of Incorporation of both stock and non-stock corporation

P500.00

11.

A m e n d e d Articles of Incorporation where amendment consists of extending the term of corporate existence

1 / 5 of 1% of the authorized capital stock but not less than P2,000.00

12.

A m e n d e d Articles of Incorporation Re: Conversion/Reclassification of shares

P2,000.00

13.

A m e n d e d by-laws of both stock and non-stock corporation

P500.00

14.

Increase of Capital Stock

15.

a.

Corporation w i t h par value

1 / 5 of 1% of the increase in capital stock or the subscription price of the subscribed capital stock whichever is higher but not less P1,000.00

b.

Corporation value

1 / 5 of 1% of the increase in capital stock computed at P100.00 per share or the subscription price of the subscribed capital stock whichever is higher but not less than P1,000.00

without

par

Decrease of Capital Stock a.

Return of Capital

P3,000.00

b.

A l l others

P2,000.00

16.

Certificate of incurring, creating, increasing bonded indebtedness

1 / 1 0 of 1% of the total indebtedness but not less than P500.00

17.

Merger or consolidation of corporations

1 / 5 of 1% of the equity of the absorbed corporation/s but not less than P3,000.00


980 a.

In merger, in case of simultaneous filing of application for increase of authorized capital stock by the surviving corporation

Filing fee for increase in Capital stock (refer to item 14 above) or the filing fee for Merger (refer to item 17 above) whichever is higher

b.

In consolidation where the total equity of constituent corporations is different from the authorized capital of the consolidated corporation

1 / 5 of 1% of total equity of the constituent corporation or the filing fee for Articles of Incorporation (refer to item 7 above) whichever is higher

18.

Valuation of consideration for shares of stock

1 / 5 of 1% of the amount of shares of stock to be issued but not less than P2,000.00

19.

Equity restructuring

20.

a.

to wipe out existing deficit

P3,000.00

b.

to create additional paid-in capital

1 / 5 of 1% of the amount infused but not less than P1,000.00

Stock/Cash dividend of up to P50,000,000.00 declared by the corporation whose securities are not listed.

P500.00

2 1 . Stock/Cash dividen d of over P50,000,000.00 declared by the corporation whose securities are not listed

P1,000.00

22.

Property D i v i d e n d Declaration

1 / 5 of 1% of the amount infused but not less than P1,000.00

23.

Application under the Foreign Investment Act (aside f r o m the filing fee for articles of incorporation)

P2,000.00

24.

Application of Corporations:

1 % of the actual i n w a r d remittance of the corporation converted into Philippine currency but not less than P2,000.00

Stock

a.

branch office

b.

representative office

Foreign

1 / 1 0 of 1% of the actual i n w a r d remittance of the corporation converted into Philippine currency but not less than P2,000.00


981

25.

Application of Non-Stock Foreign Corp .

P2,000.00

26.

Application for Area or Regional Headquarters

P5,000.00

27.

Application for Regional Operating Headquarters or petition for Conversion of an A r e a or Regional Headquarters into a Regional Operatin g H e a d q u a r ters.

1% of the actual remittance but not less than 1% of peso equivalent of $200,000 at the time of remittance

28.

Petition for A m e n d m e n t of License of a foreign corporation

P2,000.00

29.

Cancellation of license of a foreign corp.

P2,000.00

30.

Cancellation of license of Regional Headquarters of multina tional corporation

P1,000.00

31.

Cancellation of license of Regional Operating Headquarters of M u l t i n a t i o n a l C o m p a n y

P2,000.00

32.

A p p o i n t m e n t of a Agent or Substitute Agent

Resident Resident

P1,000.00

33.

Revocation of A p p o i n t m e n t of Resident Agent or Substitute Agent

P1,000.00

34.

A m e n d e d Articles of Incorporation of a Foreign Corporation

P1,000.00

35.

A m e n d e d By-Laws of a Foreign Corporation

P1,000.00

36. Recording of Deed of Assignment of Shares of Stock

P300.00

37.

Petition to set aside Order of Suspension / Revocation

P1,000.00

38.

Petition for Correction in A r t i cles of Incorporation, By-laws or amendments thereto

P1,000.00

39.

Certification on Corporate Information, recording of deed of assignment of stock

P300.00

982

40.


Certificate of company status

P500.00

41. Certification of paid-up capital, Outstanding capital, Percentage of Filipino stockholdings, etc.

P400.00

42.

Accreditation of Appraisal C o m panies

P5,000.00

43.

Registration fee for Stock and Transfer Book

P150.00

44.

Registration fee for Membership Book

P75.00

45.

N a m e Verification/Reservation Fee

P40.00 per allowed name

Corporation Finance D e p a r t m e n t Application 1. Registration Statement (Registration of equity securities, commercial papers or debt securities, proprietary or nonproprietary shares or memberships, warrants and options)

Filing Fee Not more than P500 Million worth of securities: 0.10% of the m a x i m u m aggregate price of the securities to be offered More than P500 Million but not more than P750 Million; P500,000 plus 0.075% of the excess over P500 M i l l i o n More than P750 million but not more than PI Billion: P687,500 plus 0.05% of the excess over P750 M i l l i o n More than PI Billion: P812,500 plus 0.025% of the excess over P I Billion (in case of options or warrants which have no issue value: Minimum of P50,000.00 in addition to the fees which may be due on the underlying shares)

2. Voluntary Revocation of Securities under SRC Rule 13

P5,000.00


3. A m e n d e d Registration Statement in accordance w i t h SRC Rule 14

983

P10,000.00

In case of an increase in offering price: 1 / 1 0 of 1% of the amount of difference between the highest aggregate amount per old range and the total amount based on new volume or price.

4. Confirmation for exemption u n der Section 10.1 of the Securities Regulation Code (SRC)

1 / 1 0 of 1% of the aggregate value of the securities to be sold or issued

5. Request for exemption under Section 10.2 of the Securities Regulation Code

1 / 1 0 of 1% of the aggregate value of the securities to be sold or issued

6. Request for exemptive relief u n der Section 72.2 of the SRC Rule 19

P5,000.00

7. Accreditation of External A u d i tor (Original and Renewal)

P2,000.00

8. Accreditation of an A u d i t i n g F i r m (Original and Renewal)

P5,000.00

9. Accreditation of Credit Rating Agency

Original application: P50,000.00

Annual fee: P10,000.00 10.

Original Application for a Certificate of Authority to operate as a Financing Company ( H e a d Office and each Branch)

1 / 1 0 of 1% of the amount of Paid-up capital stock

11.

A n n u a l Fee ( H e a d and Branch Office)

1 / 8 of 1% of the required paid-up capital stock

12. Registration as Investment C o m pany 13.

P5,000.00

Other Filings a.

Information Statement filed by the registrant (SEC Form 20-IS)

P5,000.00

b.

Information Statement filed by a person other than Registrant under SRC Rule 20

P2,000.00


984

c.

Tender Offer Statement (SEC Form 19-1) and other appropriate filings under Section 21 of the SRC

Not more than P500 Million worth of Securities: 0.10% of the m a x i m u m aggregate price of the securities to be offered More than P500M million but not more than P750 Million: P500,000.00 plus 0.075% of the excess over P750 M i l l i o n More than P750 Million but not more than PI Billion: P687,500 plus 0.05% of the excess over P750 M i l l i o n More than PI Billion: P812,500 plus 0.025% of the excess over P I Billion

d.

Listing Fee

P2,500.00

e.

Annua l Information Statement of Exempt Commercial Paper Issuer (SEC F o r m 85-18-1)

P10,000.00

f.

Certification Fee

P300.00

N o n - T r a d i t i o n a l Securities a n d Instruments D e p a r t m e n t A.

Registration/Licensing of Securities

Application

Filing Fee

1. N e w and Additional

1 / 1 0 % of 1% of the m a x i m u m aggregate price at w h i c h the securities are proposed to be offered

2. Petition for Price Increase

P2,500.00

3. Petition for amendment of Registration Statement/contracts/ all applications

P2,500.00

4. Petition for release of balance

P2,500.00

5. Petition for cancellation of registration

P2,500.00

6. Petition for suspension and / o r cancellation of permit to sell

P2,500.00


B.

Dealer/Branch/Salesmen/General

Agent

1. N e w 1.1

Dealer a.

H e a d Office

b.

Branch Office

P10,000.00

1)

Within Metro Manila

P5,000.00

2)

Outside M e t r o Manila

P2,500.00

1.2

General Agen t

1.3

Salesman

P5,000.00

a.

Dealer

P200.00

b.

General Agent

P200.00

2. Renewal 2.1

Dealer a.

H e a d Office

b.

Branch Office

P5,000.00

1)

Within Metro Manila

P2,500.00

2)

Outside M e t r o Manila

Pl,500.00

2.2

General Agent

P2,500.00

2.3

Salesman

P200.00

3. Closure of Branch Office

P1,000.00 C. Others

1. A p p r o v a l of Trust Agreement

P2,500.00

2. Accreditation of Pre-need Actuaries

P1,000.00

3. Certifications

P300.00

4. Accreditation of Pre-need External Auditors (Sec. 6.3 of SEC MC N o . 13, series of 2003)

P2,000.00

D. Alternative Trading System (ATS) 1. Registration and Licensing of the system or renewal

985


986

1.1 Alternative Trading System

P50,000.00

1.2 Semestral Transaction Fee a.

For first two (2) billion of the aggregate amount of the sales of securities transacted on such ATS during the preceding semester

1/300 of 1 %

b.

For the next two (2) billion

1 / 2 0 0 of 1 %

c.

Onwards

1 / 1 0 0 of 1 %

2. Application for exemption u n der ATS

P5,000.00

3. Certification under ATS

P300.00

M a r k e t Regulatio n D e p a r t m e n t A.

Registration/Licensing

Application

Filing Fee

1. N e w 1.1

1.2

Broker-Dealer a.

H e a d Office

psaooo.oo

b.

Branch

piaooo.oo

Broker a.

1.3

H e a d Office

P25,000.00

Dealer a.

H e a d Office

P25,000.00

1.4

Salesperson

P2,000.00

1.5

Associate Person

P3,000.00

1.6

Investment C o m p a n y Adviser a.

1.7

H e a d Office

Certified investment Distributor / Salesperson / Certified Investment Solicitor

P10,000.00 2004 - P945.00 2005 - Pl,420.00 2006 - P2,125.00


1.8

1.9

Investment H o u s e s / Underwriters of Securities/ Government Securities Eligible Dealers a.

H e a d Office

P50,000.00

b.

Branch

P10,000.00

Investment H o u s e s / Underwriters of Securities Dealing in G o v e r n m e nt Securities a.

H e a d Office

P50,000.00

b.

Branch

piaooo.oo

1.10

Associated Person

P1,000.00

1.11

Transfer Agents

P10,000.00

1.12

Stock Exchange

P50,000.00

a.

1.13

A d d i t i o n a l fees

1 / 1 0 0 t h of 1% of the aggregate amount of securities transacted during the preceding calendar year

Clearing Agencies and Central Depositories a.

A d d i t i o n a l Fees

P50,000.00

2. Renewal 2.1

2.2

Broker-Dealer a.

H e a d Office

P20,000.00

b.

Branch

P5,000.00

Broker a.

2.3

987

H e a d office

P10,000.00

Dealer a.

H e a d Office

piaooo.oo

2.4

Salesperson

P1,000.00

2.5

Associated Person

Pl,500.00

2.6

Investment Company Adviser a.

H e a d Office

P3,000.00


988

2.7

2.8

2.9

2004 - P650.00

Certified Investment Distributor / Salesperson / Certified Investment Solicitor

2005 - P815.00 2006 - Pl,015.00

Investment Houses/ Underwriters of Securities/ Government Securities Eligible Dealers a.

H e a d office

P20,000.00

b.

Branch

P5,000.00

Investment Houses/ Underwriters of Securities Dealing in Government Securities a.

H e a d Office

P30,000.00

b.

Branch

P5,000.00

2.10

Associated Person

P500.00

2.11

Transfer Agents

P3,000.00 B. Others

1. Additional Listing of PSE shares

P10,000.00

2. Listing Fee for PSE Shares

1 / 1 0 of 1% of the numbe r of shares to be listed x placement fee

3. Certification

P300.00

Economic Research and Information Department A. Preparation of statistical reports, company listings and related information on SEC-registered entities Application

Service

Charge/Fee

1. Computer usage / processing time

P2.00 per m i n u t e

2. Special program fee for institut i o n a l / i n d i v i d u a l researchers

P500.00 per transaction

3. H a r d copy of documents w i t h list containing various information such as address, industry classification, equity structure, etc.

P5.00 per page


989

4. Soft copy of documents w i t h list containing various information such as address, industry classification, equity structure, etc. a.

C D - R W media

PIOO.OO per piece

b.

1.44 MB floppy diskette

P50.00 per piece

B. SEC Publication 1. SEC Bulletin

P150.00 per copy

Human Resource and Administrative Department Application

Service

Charge/Fee

1. Public Reference U n i t Service Charge

P20.00 per transaction

2. Reproduction of Documents

Plain M i c r o f i l m Copy

Authenticated Copy

a.

Articles of Incorporation

PIOO.OO

P150.00

b.

By-Laws

PIOO.OO

P150.00

c.

General Information Sheet

P25.00

P50.00

d.

Increase in Capital Stock

P50.00

PIOO.OO

e.

Resolution

P15.00

P50.00

f.

Secretary's Certificate

P15.00

P50.00

g.

Board Resolution

P15.00

P50.00

h.

Registration Data Sheet

P25.00

P50.00

i.

Deed of Assignment

P15.00

P50.00

j.

Borrowing fee for hard copy ( P R U paper copy not available in microfilm or CD)

Reproduction Cost P50.00/document

(Xerox)

plus

3. Reproduction of documents not mentioned in item 2 above.

P5.00/page plus P20.00/corporation

4. Authentication of documents not mentioned in item 2 above.

P5.00/page plus P20.00/documents

-

oOo

-

Appendix H

CONSOLIDATED SCALE OF FINES (SEC M E M O . C I R . N O . 6, S E P T . 22, 2005) The Commission resolved to approve the following revised administrative penalties for each specified violation of the Securities Regulation Code (SRC) and its A m e n d e d Implementing Rules and Regulations (IRR), Investment Company Act ( I C A ) and I C A Rule 35-1, Pre-Need Rules, and the Financing Company Act and its Implementing Rules:

SRC/IRR Provisions

Description

First Offense

Second Offense

Third Offense

Sections 8 and 12; SRC Rules 8&12

SELLING OR OFFERING FOR SALE OR DISTRIBUTION OF SECURITIES TO THE PUBLIC WITHOUT PRIOR REGISTRATION OR PERMIT TO SELL

1% of the amount of each transaction or P10,000 per transaction, whichever is higher.



Section 10; SRC Rule 10.1

LATE FILING OF NOTICE OF EXEMPTION PURSUANT TO SRC RULE 10.1 (k &1)

P2,000 plus P100 per day of delay

P4,000 plus P600 per day P200 per day. of delay of delay

For listed companies: P10,000 plus P100 per day of delay

990



CONSOLIDATED SCALE OF FINES Appendix H

NONCOMPLIANCE WITH THE DISCLOSURE REQUIREMENTS UNDER SRC RULE 10.1 Section 14; SRC Rule 14

991

PiaOOO plus P100 per day of delay



Change in the Qualitative Terms and Conditions of the Securities including work program or use of proceeds




Increase in the number of shares or offering price per share (in excess of the price range, if any)

1% of the amount of each sale in excess of the authorized shares or price, or P10,000 per transaction, whichever is higher, plus P100 per day of delay of the riling of the amendment

2% of the amount of each sale in excess of the authorized shares or price, or P20,000 per transaction, whichever is higher, plus P200 per day of delay of the filing of the amendment

6% of the amount of each sale in excess of the authorized shares or price, or P60,000 per transaction, whichever is higher, plus P600 per day of delay of the filing of the amendment

FAILURE TO TIMELY PUBLISH THE NOTICE OF AMENDMENTS




FAILURE TO REFUND INVESTMENT (In case of derogation of rights of purchasers due to the amendments)

5% of the amount of the unrefunded investment plus P100 per day of delay of the refund

15% of the amount of the unrefunded amount plus P200 per day of delay of the refund

30% of the amount of the unrefunded amount plus P600 per day of delay of the refund

FAILURE TO AMEND REGISTRATION STATEMENT IN ACCORDANCE WITH SRC RULE 14


992

Section 17.1;' SRC Rule 17.1

Section 17.1; SRC Rule 17.1

LATE FILING OF CURRENT REPORT (SEC. FORM 17-C)

Reprimand / Warning



INCOMPLETE CURRENT REPORT (SEC FORM 17-C) This shall be in addition to the penalty for late filing of the report per due date under the Rules.

Reprimand/ Warning

PiaOOO plus P200 per day of delay of filing the amended report

P2a000 plus P400 per day of delay of filing the amended report

LATE FILING OF QUARTERLY REPORT (SEC FORM 17-Q)

Reprimand/ Warning



INCOMPLETE QUARTERLY REPORT (SEC FORM 17-Q) This shall be in addition to the penalty for late filing of the report per due date under the Rules.

Reprimand/ Warning

P20,000 plus P300per day of delay of filing the amended report


LATE FILING OF ANNUAL REPORT (SEC FORM 17-A)

Reprimand/ Warning

PlOaOOO plus P500 per day of delay

P200,000 plus P1,000 per day of delay

INCOMPLETE ANNUAL REPORT (SEC FORM 17-A) This shall be in addition to the penalty for late filing of the report per due date under the Rules.

Reprimand/ Warning

P30,000 plus P500 per day of delay of filing the amended report

P60,000 plus P1,000 per day of delay of filing the amended report

LATE FILING OF THE NOTICE OF SUSPENSION TO FILE REPORTS (SEC FORM 17-EX)




'See amendment, infra.


Section 18; SRC Rule 18

993

LATE FILING OF MONTHLY REPORT ON EXEMPT COMMERCIAL PAPERS

Reprimand/ Warning

P10,000 plus PI 00 per day of delay


LATE FILING OF QUARTERLY REPORT ON EXEMPT COMMERCIAL PAPERS

Reprimand/ Warning



LATE FILING OF ANNUAL INFORMATION STATEMENT ON COMMERCIAL PAPERS AND/ OR PAYMENT OF ANNUAL EXEMPTION FEE

Reprimand/ Warning



LATE FILING OF REPORTS BY 5% OR MORE HOLDERS OF EQUITY SECURITIES (SEC FORM18-A/18-AS)

Reprimand / Warning

1% of the amount of each purchase or disposition, or P10,000 per transaction, whichever is higher plus P100 per day of delay.

2% of the amount of each transaction or P20,000 per transaction, whichever is higher plus P200 per day of delay.

INCOMPLETE REPORTS BY 5% OR MORE HOLDERS OF EQUITY SECURITIES (SEC FORM18-A/18-AS) This shall be in addition to the penalty for late filing of the report per due date under the Rules.

Reprimand/ Warning

P10,000 plus P300 per day of delay of the submission of the amended report


994

Section 19.1; SRC Rule 19.1

Section 20 [in relation with 17.1(b)]; SRC Rule 20


LATE FILING OF TENDER OFFER REPORT (SEC FORM 19-1)

P50,000 plus P500 per day of delay of filing the report

PI00,000 plus P1,000 per day of delay of filing the report

P200,000 plus P2,000 per day of delay of filing the report

INCOMPLETE TENDER OFFER REPORT (SEC FORM 19-1) This shall be in addition to the penalty for late filing of the report per due date under the Rules.




FAILURE TO CONDUCTA TENDER OFFER Pursuant to SRC Rule 19.1

P100,000 or .01% of the aggregate amount of the tender offer, whichever is higher plus P500 per day of delay

P200,000 or .02% of the aggregate amount of the tender offer, whichever is higher plus P1,000 per day of delay

P300,000 or .06% of the aggregate amount of the tender offer, whichever is higher plus P2,000 per day of delay

FAILURE TO COMPLY WITH ANY OTHER REQUIREMENTS OF SRC RULE 19-1

P50,000 plus P500 per day of continuing violation

P100,000 plus P1,000 per day of continuing violation


LATE FILING OF INFORMATION STATEMENT (SEC FORM 20-IS)

Reprimand/ Warning



INCOMPLETE INFORMATION STATEMENT (SEC FORM 20-IS)

Reprimand/ Warning



FAILURE TO COMPLY WITH ANY OF THE OTHER PROCEDURAL REQUIREMENTS OF SRC RULE 20

Reprimand/ Warning





995

LATE FILING OF STATEMENT OF BENEFICIAL OWNERSHIPS (SEC FORM 23 A / B )

Reprimand / Warning

1% of the amount of each purchase or disposition, or PI0,000 per transaction, whichever is higher plus P100 per day of delay

2% of the amount of each transaction or P20,000 per transaction, whichever is higher plus P200 per day of delay

INCOMPLETE STATEMENT OF BENEFICIAL OWNERSHIP (SEC FORM 23-A/B) This shall be in addition to the penalty for late filing of the report per due date under the Rules

Reprimand/ Warning



FOR DIRECTORS/OFFICERS


Qualifying or not more than shares (100) shares

Reprimand / Warning

P10,000 plus P100 per day of delay of the submission of the report

P20,000 plus P200 per day of delay of the submission of the report

More than 100 shares but less than 5% of the outstanding equity security

Reprimand / Warning



More than 5% but less than 10%

Reprimand / Warning

P10,000 plus PI 00 per day of delay


FAILURE TO ELECT INDEPENDENT DIRECTOR(S) Or ELECTION OF AN UNQUALIFIED INDEPENDENT DIRECTOR

Reprimand / Warning


P150,000 plus PLOO0 per day of continuing violation

996

Section 54

Section 68


MISREPRESENTATION OR MISLEADING STATEMENTS IN ANY FILING REQUIRED TO BE SUBMITTED TO THE COMMISSION (This is in addition to the penalty on the principal report, if any.)

PI00,000 plus P500 per day of continuing violation



Failure to submit any of the certifications on corporate governance which were represented to be submitted

Reprimand/ Warning

P25,000 plus P500 per day of violation

P50,000 plus P1,000 per day of violation

Any misrepresentation in the submitted Manual on Corporate Governance

Reprimand/ Warning


FAILURE TO COMPLY WITH ANY OF THE REQUIREMENTS OF SRC RULE 68 Or INCOMPLETE DISCLOSURE IN THE FINANCIAL STATEMENTS (That is in addition to the penalty on the late or incomplete filing of the annual report)




MATERIAL MISTATEMENTS IN THE FINANCIAL REPORT

P50,000 or 1/10 of l%of the amount of misstatement, whichever is higher, plus P500 per day of continuing violation

P100,000 or 1/10 of 2% of the amount of misstatement whichever is higher, plus P1,000 per day of continuing violation

P200,000 or 1/10 of 6% of the amount of misstatement, whichever is higher, plus P2,000 per day of continuing violation

pioaooo plus P1,000 per day of continuing violation


SRC and IRR provisions Persons

SRC/IRR Provisions

on Exchange, Brokers

Description

997

and Dealers,

Other Selling

First Offense

Second Offense

Third Offense

MANIPULATE PRACTICES

BD — P100,000.00 AP/ S-P50,000.00

Pisaooo.oo P75,000.00

P200,000.00 Pioaooo.oo

SRC Rule 24.1(d) — 1

ADVERTISEMENTS AND COMMUNICATIONS WITH THE PUBLIC

Reprimand/ Warning

BD — pioaooo.oo AP/ s-psaooo.oo

P15a000.00 P75,000.00

SRC Rule 24.1(d) - 2

PUBLICATION OF TRANSACTIONS AND QUOTATIONS

Reprimand/ Warning

BD — pioaooo.oo AP/ S-P50,000.00

pisaooo.oo P75,000.00

SRC Rule 24.1 (d)-3

PAYMENT TO INFLUENCE MARKET PRICES

BD — P100,000.00 AP/ S-P50,000.00

pisaooo.oo P75,ooaoo

P2oaooo.oo P100,000.00

SRC Rule 24.2-3

PROHIBITION ON GUARANTEES AGAINST LOSS

Reprimand/ Warning

BD — pioaooo.oo AP/ s-psaooo.oo

pisaooo.oo P75,000.00

Section 25

VIOLATION OF REGULATION OF OPTION TRADING

P50,000.00

P75 000.00

pioaooo.oo

Section 26

FRAUDULENT TRANSACTIONS


P150,000.00 P75,000.00

P200 000.00 pioaooo.oo

SRC Rule 26.3-1

USE OF INFORMATION OBTAINED IN FIDUCIARY CAPACITY

Reprimand/ Warning

P50,000.00

P75,000.00

SRC Rule 26.3 -2(d)

PROHIBITED REPRESENTATIONS

P50,000.00

P75,0O0.O0

pioaooo.oo

Section 27

INSIDER'S TRADING


P150,000.00 P75,000.00

P200,000.00 pioaooo.oo

SRC Rule 24.1 (So)-I

/

/

998

Section 28.1


FAILURE TO REGISTER AS BROKERS, DEALERS OF: EQUITY SECURITIES

pioaooo.oo

N/A

Reprimand/ Warning

P50,000.00

N/A

piaooo.oo

P25,000.00 PlOO/day of delay

50,000.00 PlOO/day of delay

PROPRIETARY SHARES SRC Rule 28.1l(E)(vi)

FAILURE TO REGISTER BRANCH OFFICE

SRC Rule 28.1l(E)(viii)

FAILURE TO MAINTAIN REGISTERED AP

Reprimand/ Warning



SRC Rule 28.1l(E)(xi)

FAILURE TO MAINTAIN SEPARATE BANK ACCOUNT FOR CLIENT FUND

Reprimand / Warning

20,000.00

25,000.00

SRC Rule 28.1l(E)(xiii)

FAILURE TO REPORT AMENDMENT

Reprimand/ Warning


15,000.00 -do-

SRC Rule 28.1-4

FAILURE TO REGISTER AS:

Reprimand/ Warning

10,000.00 5,000.00

15,000.00 7,000.00

COMPANY INDIVIDUAL

Reprimand/ Warning

10,000.00 5,000.00

20,000.00 7,000.00

FAILURE TO NOTIFY DISCONTINUATION OF EMPLOYMENT OF SALESMAN, ASSOCIATED PERSON (SEC FORM 28-1)

Reprimand/ Warning



VIOLATION OF RULES ON AFFILIATED TRANSACTIONS

Reprimand / Warning

10,000.00

25,000.00

PlOO/day of delay

SALESMAN COMPANY INDIVIDUAL ASSOCIATED PERSON

SRC Rule 28.14(C)

SRC Rule 30.1


SRC Rule 30.2-1

SRC Rule 30.2-2

SRC Rule 30.2-3

ETHICAL STANDARDS RULE

999

Reprimand/ Warning

50,000.00

100,000.00

CONFIRMATION OF CUSTOMER ORDERS

-do-

10,000.00

15,000.00

CLIENT AGREEMENT

-do-

10,000.00

15,000.00

-do-

50,000.00

100,000.00

-do-

50,000.00

100,000.00

10,000.00

15,000.00

20,000.00

Reprimand/ Warning

10,000.00

15,000.00

FAILURE TO ESTABLISH/MAINTAIN EFFECTIVE & APPROPRIATE COMPLIANCE FUNCTION

Reprimand/ Warning

25,000.00

50,000.00

25,000.00

50,000.00

100,000.00

FAILURE TO INFORM THE COMMISSION OF OCCURRENCES OF MATERIAL NONCOMPLIANCE WITH LEGAL REQUIREMENTS FAILURE TO REPORT TO MANAGEMENT AND TO MAINTAIN A LOGBOOK

Reprimand / Warning

5,000.00

7,000.00

FAILURE TO FILE COMPLIANCE REPORT

Reprimand/ Warning



CLIENT AGREEMENT WITH DISCRETIONARY ACCOUNT SUITABILITY RULE

SRC Rule 30.2-4

CHURNING/ EXCESSIVE TRADING RULES ON COMMISSIONS & CHARGES FOR SERVICES OF BROKER DEALER

SRC Rule 30.2-5 SRC Rule 30.2-6

1000


SRC Rule 30.2-7

FAILURE TO ESTABLISH, IMPLEMENT TRAINING PROGRAM

Reprimand/ Warning

10,000.00

15,000.00

SRC Rule 30.2-9

FAILURE TO SUBMIT NAMES OF . STOCKHOLDERS, MEMBERS, PARTICIPANTS, CLIENTS, RELATED INFORMATION

Reprimand / Warning

10,000.00

15,000.00

Section 32

PROHIBITION ON THE USE OF UNREGISTERED EXCHANGE, FAILURE TO RENEW LICENSE, REGULATION OF OVER THE COUNTER MARKET

200,000.00

SRC Rule 32.1

TRADING OF UNREGISTERED SECURITIES OR IN UNREGISTERED EXCHANGE/MARKET

B/D — P100,000.00 AP/SP — P50,000.00

P150,000.00 P75,000.00

P200,000.00

SRC Rule 32.3 (a)

BEST EXECUTION RULE

B/D — P50,000.00 AP/S — 25,000.00

75,000.00 50,000.00

100,000.00 75,000.00

SRC Rule 33.2 (c)

COMPOSITION OF THE BOARD OF AN EXCHANGE

Reprimand/ Warning

100,000.00

150,000.00

SRC Rule 33.2 (c)

FAILURE TO COMPLY WITH THE OWNERSHIP LIMIT REQUIREMENT

P100,000.00 100.00 day of delay

SRC Rule 33.2 (d)

FAILURE OF AN EXCHANGE TO PROTECT CUSTOMER ACCOUNTS IN CASE OF BUSINESS FAILURE

pioaooo.oo

SRC Rule 34.1-1

VIOLATION OF CUSTOMER FIRST POLICY

Reprimand/ Warning

100.00/day of delay

pioaooo.oo

P2oo,ooaoo P150,000.00 100.00/day of. 100.00/day delay of delay

P150,000.00 100.00/day of delay

P200,000.00 100.00/day of delay

P25,000.00

P50,000.00


SRC Rule 34.1-2

VIOLATION OF CHINESE WALLS POLICY

SRC Rule 364-1 SRC Rules 36.4-2

1001

P25,000.00

P50,000.00

pioaooo.oo

FAILURE TO REGISTER AS A TRANSFER AGENT

Reprimand / Warning

P50,000.00 100.00/day of delay

P75,000.00 100.00/day of delay

FAILURE TO SUBMIT

Reprimand / Warning

P10,000.00 PIOO.OO/day of delay

Reprimand/ Warning

piaooo.oo PIOO.OO/day of delay

Reprimand/ Warning

piaooo.oo PlOO.OO/day of delay

• ANNUAL REPORT; • EXCEPTION REPORT; • PERIODIC REPORT TO ISSUER; • ANNUAL AUDITED FINANCIAL STATEMENTS; • GENERAL INFORMATION SHEET; • AFFIDAVIT OF NON HOLDING OF MEETING; • MONTHLY RECONCILIATION OF PCD & TA; • MONTHLY CERTIFICATION AS TO NUMBER OF SHARES REGISTERED UNDER PCD NOMINEE; • NOTICE OF CHANGE OF ADDRESS; • OTHER REQUIRED REPORTS FAILURE TO MAINTAIN COMPLAINT LOG SRC Rule 36-4.3

FAILURE TO RETAIN REQUIRED RECORDS

P25,000.00 P100.00/ day of delay

1002


SRC Rule 39.11(D)

FAILURE TO SUPERVISE LISTED COMPANIES

Reprimand / Warning

P50,000.00

P75,000.00

SRC Rule 39.11(E)

FAILURE TO COMPLY WITH REQUIREMENTS ON COMPLIANCE & SURVEILLANCE

Reprimand / Warning

P100,000.00

P150,000.00

SRC Rule 39.1KF)

FAILURE OF SRO TO SUBMIT EXAMINATION CALENDAR OR NOTIFY OF ANY AMENDMENT THERETO

Reprimand/ Warning

P10,000.00

P25,000.00

SRC Rule 39.1KF)

FAILURE OF SRO TO EXAMINE MEMBERS DURING ONE EXAMINATION CYCLE

Reprimand / Warning

P50,000.00

P75,000.00

SRC Rule 39.1KF)

FAILURE OF SRO TO FILE MONTHLY REPORTS OF ITS PERIODIC EXAMINATION

Reprimand / Warning

piaooo.oo

P25,000.00

SRC Rule 39.1KF)

FAILURE TO SRO TO SEND DEFICIENCY LETTER, IF WARRANTED

Reprimand/ Warning

P50,000.00

P75,000.00

SRC Rule 39.1KF)

FAILURE OF SRO TO INITIATE INVESTIGATION, IF WARRANTED

Reprimand/ Warning

P50,000.00

P75,000.00

SRC Rule 39.1KG-i)

FAILURE OF SRO TO INVESTIGATE SUSPECTED VIOLATIONS OF SRC SECTIONS 24,

Reprimand/ Warning

P50,000.00'

P75,000.00

Reprimand/ Warning

P50,000.00

P75,000.00

26, 27 SRC Rule 39.11 (G-ii)

FAILURE OF SRO TO INVESTIGATE VIOLATION OF RULES ON SALES PRACTICES, ETC.


1003

SRC Rule 39.11 (G-iii)

FAILURE OF SRO TO NOTIFY THE COMMISSION OF INVESTIGATION OF VIOLATION OF SRC SECTIONS 24, 26,27

Reprimand / Warning

P10,000.00

P25,000.00

SRC Rule 39.11(H)

FAILURE TO COMPLY WITH RULES ON DISCIPLINE OF SRO MEMBERS & PARTICIPANTS

Reprimand/ Warning

P50,000.00

P75,000.00

SRC Rule 39.1KD

FAILURE TO COMPLY WITH DISCIPLINARY ACTION OF THE COMMISSION

Reprimand/ Warning

P50,000.00

P75,000.00

SRC Rule 39.110)

FAILURE OF SRO TO FILE REQUIRED REPORT

Reprimand/ Warning

P10,000.00

P25,000.00

SRC Rule 39.12(B)

FAILURE TO REGISTER AS AN SRO (SEC FORM 39)

Reprimand/ Warning

P200,000.00

—

SRC Rule 39.12(C)

FAILURE TO AMEND SEC FORM 39

Reprimand/ Warning

P25,000.00

P50,000.00

SRC Rule 39.12(D)

FAILURE OF SRO TO FILE ANNUAL RETURN (SEC FORM 39-AR)

Reprimand/ Warning

piaooo.oo

P25,000.00

SRC Rule 39.12(F)

FAILURE OF SRO TO SEND TO THE COMMISSION COPIES OF NOTICES, REPORTS OR RECORDS OF CHANGES COVERED BY AMENDMENTS

Reprimand / Warning

piaooo.oo

P25,000.00

SRC Rule 39.1-3

FAILURE TO COMPLY WITH RULES ON ALLOCATION OF REGULATORY RESPONSIBILITIES AMONG SROS

Reprimand/ Warning

piaooo.oo

P25,000.00

1004


Section 40.2

FAILURE OF SRO TO COMPLY WITH SRC PROVISIONS

Reprimand / Warning

piaooo.oo

P25,000.00

SRC Rule 40.3

FAILURE OF SRO, REGISTERED EXCHANGE OR TRADING PARTICIPANT AND ANY REGISTERED CLEARING AGENCY TO SUBMIT PROPOSED RULE OR AMENDMENT THERETO OR TO OBSERVE PROCEDURE ON RULE MAKING

Reprimand / Warning


P25,000.00 P100.00/ day of delay

SRC Rule 40.4

FAILURE OF SRO, REGISTERED EXCHANGE OR TRADING PARTICIPANT AND ANY REGISTERED CLEARING AGENCY TO COMPLY WITH THE COMMISSION'S ORDER TO EFFECT CHANGES IN ITS RULE/PRACTICE

Reprimand/ Warning

Section 40.6

FAILURE OF SRO TO DISCIPLINE A MEMBER OR PARTICIPANT

Reprimand/ Warning

Section 40.7

FAILURE OF SRO TO NOTIFY THE COMMISSION OF ANY DISCIPLINARY SANCTION ON ANY MEMBER

Reprimand / Warning

Section 41

USE OF UNREGISTERED CLEARING AGENCY

Reprimand/ Warning

P200,000.00

SRC Rule 42KA)

FAILURE TO REGISTER AS CLEARING AGENCY

Reprimand / Warning

P200,000.00


P25,000.00 PIOO.OO/ day of delay

P50,000.00

P75,000.00

piaooo.oo

P25,000.00 P100.00/ day of delay

PlOO.OO/day of delay


1005

SRC Rule 42KB)

FAILURE OF CLEARING AGENCY TO PAY PRESCRIBED ANNUAL FEE

Reprimand/ Warning


P75,0O0.00 P100.00/ day of delay

SRC Rule 421(D)

FAILURE TO AMEND APPLICATION INFORMATION

Reprimand/ Warning

P25,000.00 PlOO.OO/day of delay

P50,000.00 P100.00/ day of delay

SRC Rule 42KE)

FAILURE OF CLEARING AGENCY TO FILE WITH ANNUAL AUDITED BALANCE SHEET ETC.

Reprimand/ Warning

piaooo.oo

P25,000.00 P100.00/ day of delay

SRC Rule 42-2

FAILURE TO REPORT BREACHES OF RULES OR DIFFICULTIES BY PARTICIPANT

Reprimand/ Warning

SRC Rule 48.1

MARGIN REQUIREMENT

SRC Rule 49.1-1

NET CAPITAL RULE:

PlOO.OO/day of delay


P25,000.00 P100.00/ day of delay

Reprimand/ Warning

10,000.00

15,000.00

BELOW 5% OF AGGREGATE INDEBTEDNESS OR 5 MILLION WHICHEVER IS HIGHER

Reprimand/ Warning

Voluntary suspension

DAILY DETERMINATION & SHOULD BE AVAILABLE ANYTIME UPON REQUEST

Reprimand/ Warning

10,000 PlOO/day of delay


IF BELOW 120%, SUBMIT DAILY COMPUTATION

Reprimand / Warning



LATE FILING OF FINOP REPORT

Reprimand / Warning


15,000.00 P100.00/ day of delay

1006


EFFECT PROPOSAL (MEASURES TO BE TAKEN) WITHIN 10 DAYS

Reprimand / Warning

10,000.00 PlOO.OO/day of delay

15,000.00 P100.00/ day of delay

ERRONEOUS COMPUTATION

Reprimand/ Warning

10,000.00

15,000.00

NOT USING THE REQUIRED FORMAT

Reprimand / Warning

10,000.00

15,000.00

SRC Rule 49.1-1 (H)

VIOLATION OF LIMITATION OF WITHDRAWAL OF EQUITY CAPITAL

Reprimand/ Warning

25,000.00

50,000.00

SRC Rule 49.2

CUSTOMER PROTECTION RESERVES & CUSTODY OF SECURITIES

Reprimand/ Warning

25,000.00

50,000.00

SRC Rule 49.2-4

VIOLATION OF SPECIAL RESERVE ACCOUNT

Reprimand/ Warning

25,000.00

50,000.00

SRC Rule 49.3

LENDING & VOTING CUSTOMERS SECURITIES

Reprimand/ Warning

25,000.00

50,000.00

SRC Rule 50

PURCHASES AND SALES IN CASH ACCOUNT -T + 3 VIOLATION -FAILURE TO LIQUIDATE (PER TRANSACTION, NO MAXIMUM)

Reprimand/ Warning

10,000.00

15,000.00

SRC Rule 52.1-1

BOOKS AND RECORDS RULE: Reprimand/ Warning

25,000.00 P200.00/day of delay

Immediate suspension

Immediate suspension

50,000.00 P200.00/ day of delay

Reprimand / Warning

25,000.00

SRC Rule 49.1-1

NOT CURRENT

SRC Rule 52.1-2

NOT AVAILABLE RECORDS RETENTION RULE PRESERVATION FOR 5 YEARS

50,000.00


1007

ACCESSIBLE FOR 2 YEARS

Reprimand / Warning

10,000.00

15,000.00

CEASED OPERATION

Reprimand/ Warning

25,000.00

50,000.00

SRC Rule 52.1-4

REPORT OF EXCHANGE MEMBERS, BROKERS, DEALERS TRADING THROUGH MEMBERS

Reprimand / Warning

10,000.00

15,000.00

SRC Rule 52.1-5

FAILURE TO FILE ANNUAL AUDITED FINANCIAL REPORTS OF BROKERS, DEALERS WITHIN THE PERIOD

Reprimand/ Warning

10,000.00 PlOO.OO/day of delay

15,000.00 P100.00/ day of delay

SRC Rule 52.1-6

CUSTOMER ACCOUNT INFORMATION RULE (MAXIMUM OF 10 CLIENTS)

Reprimand / Warning

10,000.00

15,000.00

SRC Rule 52.1-7

ORDER TICKET RULE (MAXIMUM OF 10)

Reprimand/ Warning

10,000.00

15,000.00

SRC Rule 52.1-8

FAILURE TO SEND CUSTOMER ACCOUNT STATEMENT MONTHLY

Reprimand / Warning

10,000.00

15,000.00

SRC Rule 52.1-9

FAILURE TO PRESERVE SEPARATE FILE OF COMPLAINTS RECEIVED AND ACTION TAKEN

Reprimand / Warning

10,000.00

15,000.00

SRC Rule 52.1-10

MONTHLY SECURITIES COUNT BY BROKER, DEALER

Reprimand / Warning

10,000.00

15,000.00


PRE-NEED RULES (Implementing Rules of Section 16 of the SRC)

1% of the amount of each transaction or P10,000 per transaction, whichever is higher



Change in the Qualitative Terms and Conditions of the Plans




Rule 6.1.a; SEC Memo. Circular No. 3, Series of 2002

PRICE INCREASE MADE WITHOUT PRIOR APPROVAL OF SEC

1% of the amount of each sale in excess of the authorized price, or P10,000 per transaction, whichever is higher, plus PI 00 per day of delay in obtaining approval

2% of the amount of each sale in excess of the authorized price, or P20,000 per transaction, whichever is higher, plus P200 per day of delay in obtaining approval

6% of the amount of each sale in excess of the authorized shares or price, or P60,000 per transaction, whichever is higher, plus P600 per day of delay in obtaining approval

Rule 6.1.b

RESALE OR CANCELLED OR LAPSED PLANS

P50,000

P100,000

P200,000

Rules 6.1.c,

UNREGISTERED AND UNLICENSED SALESMEN OR GENERAL AGENT

Reprimand/ Warning



Rule 3; Rule 35.1

ISSUING, OFFERING FOR SALE OR SELLING PRE-NEED PLANS WITHOUT PRIOR REGISTRATION WITH SEC.

Rule 4

FAILURE TO AMEND REGISTRATION STATEMENT IN ACCORDANCE WITH SRC RULE 14

15.4 and 15.6


Rule 6.1.d; Rule 33

FAILURE TO SECURE PRIOR SEC APPROVAL TO THE FOLLOWING:

1009

Reprimand / Warning



(1) Appointment of salesmen or general agent; or (2) Opening, closure or transfer of branches Rule 6.1.f and 16.1

FAILURE TO COMPLY WITH TRUST FUND DEPOSIT RATES USED IN THE ACTUARIAL STUDIES SUBMITTED UNDER RULE 4.1 PAR. 7(I)(c)

Reprimand/ Warning



Rule 6.1.i

IMPAIRMENT OF CAPITAL

Reprimand/ Warning



Rule 35.4

AUDITED FINANCIAL STATEMENTS:




P50,000 or 1/10 of 1% of the amount of misstatement, whichever is higher, plus P500 per day of continuing violation



Failure to comply with any of the requirements of PNUCAunder Pre-Need rule 31; or Incomplete disclosure per SRC Rule 68 MATERIAL MISTATEMENT IN THE FINANCIAL REPORT

1010





FAILURE TO SUBMIT ANY OF THE CERTIFICATIONS ON CORPORATE GOVERNANCE WHICH WERE REPRESENTED TO BE SUBMITTED

Reprimand/ Warning



ANY MISREPRESENTATION IN THE SUBMITTED MANUALON CORPORATE GOVERNANCE

Reprimand/ Warning



FAILURE TO PUBLISH THE AUDITED FINANCIAL STATEMENTS WITHIN 120 DAYS AFTER THE END OF FISCAL YEAR

Reprimand / Warning


Rule 6.1.k

FAILURE TO PROVIDE A DISCLAIMER PER SEC MEMO CIRCULAR NO. 4, SERIES OF 2004

Reprimand/ Warning



Rule 6.1.n

VIOLATION OF ANY OTHER CONDITION IMPOSED IN THE CERTIFICATE OF REGISTRATION OR PERMIT TO SELL

Reprimand/ Warning



Rule 35.5; Rule 8.1

MISREPRESENTATION OR MISLEADING STATEMENTS IN ANY FILINGS REQUIRED TO BE SUBMITTED TO THE COMMISSION (This is in addition to the penalty on the principal report, if any.)

Rule 6.1.j; Rule 23 2.1

pioaooo plus P1,000 per day of continuing violation


1011

Rule 7.1

FAILURE TO CONSTTrUTE A COMPLAINTS ACTION UNIT

Reprimand/ Warning



Rule 7.2

FAILURE TO DESIGNATE A COMPLIANCE OFFICER

Reprimand/ Warning



FAILURE TO TIMELY DISCLOSE CHANGE OF COMPLIANCE OFFICER

Reprimand / Warning



Rule 7.3

LATE FILING OF REQUIRED LIST: accredited mortuaries, telephone numbers and contact person of pre-need selling life plan

Reprimand/ Warning



Rule 8.3

REFUSAL TO FURNISH INFORMATION REQUIRED BY THE COMMISSION

Reprimand/ Warning



Rule 9.2

FAILURE TO PRODUCE ALL THE BOOKS AND RECORDS OF THE PRE-NEED COMPANY FOR EXAMINATION OF SEC AUDITORS




Rule 9.3

REFUSAL OF THE ISSUER TO PERMIT EXAMINATION OF A FINANCIAL AND RELATED DOCUMENTS TO BE MADE BY THE COMMISSION




1012


Rule 12.1

FAILURE TO OBTAIN SEC APPROVAL ON THE AMENDMENT OF ANY. Pre-need Plan Contract: Trust Agreement; Other pertinent documents




Rule 13.3

INFORMATION BROCHURE IS NOT ACCURATELY REFLECTING THE TERMS OF THE PLAN OR THE FINANCIAL ABILITY OF THE PRE-NEED COMPANY

Reprimand / Warning

P50,000

P100,000

Rule 15.1

OPERATION WITHOUT PRIOR SEC REGISTRATION AS DEALER




Rule 16.4

WITHDRAWAL FROM TRUST FUND OTHER THAN THE PLANHOLDERS' BENEFIT (This is Imposable upon the Trustee)

Reprimand/ Warning



Rule 17

FAILURE TO CREATE OR MAINTAIN THE REQUIRED INVESTMENT PORTFOLIO (This is Imposable upon the Trustee)

Reprimand/ Warning



Rule 18

FAILURE TO COMPLY WITH THE LIQUIDITY RESERVE REQUIREMENT (This is Imposable upon the Trustee)

Reprimand/ Warning




1013

Rule 19

FAILURE TO MAKE ADDITIONAL DEPOSITS TO TRUST FUND TO COVER DEFICIENCIES WITHIN THE PRESCRIBED PERIOD

Reprimand/ Warning



Rule 20.1

FAILURE OF THE TRUSTEE TO EXERCISE DUE DILIGENCE FOR THE PROTECTION OF THE PLANHOLDERS

Reprimand / Warning


PlOaOOO plus P600 per day of continuing violation

(This is Imposable upon the Trustee) Rule 20.2

INVESTMENT OF THE TRUST FUND TO DOSRI OR PROHIBITED ACCOUNTS (This is Imposable upon the Trustee)

Reprimand/ Warning



Rule 21

FAILURE TO COMPLY WITH THE DIRECTIVE OF THE COMMISSION TO CONVERT THE TRUST FUND ASSETS OF THE INVESTMENT TO PROTECT THE INTEREST OF THE PLANHOLDERS (This is Imposable upon the Trustee)

Reprimand/ Warning



Rule 22

ENCUMBRANCE, CONVEYANCE OR MORTGAGE OVER ALL OR SUBSTANTIALLY ALL THE ASSETS OF THE ISSUER WITHOUT PRIOR APPROVAL OF THE COMMISSION

P100,000 plus P500 per day upon discovery

P200,000 plus PL000 per day upon discovery

P400,000 plus P2,000 per day upon discovery


1014

Rule 23

NON-FILING OR LATE FILING OF ANY OF THE FOLLOWING:

Reprimand/ Warning



• Audited Financial Statements; • Actuarial Valuation Report; • Corporate Governance Manual 23.1-23.1.2

INCOMPLETE REPORT (This shall be in addition to the penalty for late filing of the report per due date under the Rules)

Reprimand/ Warning



Rule 24

NON-FILLING/ LATE FILING OF QUARTERLY REPORTS

Reprimand / Warning



Rule 24.124.4

INCOMPLETE QUARTERLY REPORT

Reprimand/ Warning



Reprimand/ Warning



(This shall be in addition to the penalty for late filing of the report per due date under the Rules) Rule 25

NON-FILING/ LATE FILING OF FOLLOWING MONTHLY REPORTS. •

Sales Reports;

•

Collection Reports;

•

Trust Fund Deposits;

•

List of Salesmen Terminated and Apprenticeship;

•

Trust Fund Statement


1015

Rule 35

PAYMENT OF EXCESSIVE COMMISSION

Reprimand/ Warning



Rule 35.3

OVERPRICING OF PLANS

Reprimand/ Warning

P50,000 plus P300 per day from time of discovery

P60,000 plus P300 per day from time of discovery

INVESTMENT

COMPANY ACT

&

ICA

RULE

35-1

Sections 7 and 24

VIOLATION OF REGISTRATION REQUIREMENTS




Section 8

ELECTION OF CERTAIN INELIGIBLE AFFILIATED PERSONS AND UNDERWRITERS



P150,000 plus Pl,800 per day of continuing violation

Section 9

UNAUTHORIZED AFFILIATIONS OF DIRECTORS, OFFICERS AND EMPLOYEES




Section 10

PROHIBITED OFFERS TO EXCHANGE SECURITIES




Section 11

UNAUTHORIZED OR ILLEGAL ACTIVITIES OF INVESTMENT COMPANIES




Section 12

UNAUTHORIZED CHANGES IN INVESTMENT POLICY (Imposable on responsible directors and officers)




1016


Section 14

UNAUTHORIZED CONTRACTS OF ADVISERS AND UNDERWRITERS (Imposable on responsible directors and officers)




Sections 22 and 23; ICA Rule 35-1 (e)

VIOLATION OF REQUIREMENTS ON DISTRIBUTION, REDEMPTION, AND REPURCHASE OF SECURITIES




Section 26

EXCESSIVE PERIODIC PAYMENT PLAN

Reprimand / Warning



Sections 25, 27, & 30, ICA Rule 35-1 (c)(3)

FAILURE TO SUBMIT REQUIRED REPORTS UNDER THESE SECTIONS AND/OR TO PUBLISH DAILY PRICES

Reprimand/ Warning



Section 32

MISREPRESENTATIONS




ICA Rule 35-1 (d)

VIOLATION OF RECITED INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS

Reprimand/ Warning



ICA Rule 35-1 (c)(2)

NON-DEPOSIT OF SALES PROCEEDS TO A CUSTODIAN BANK


P20,000 plusP400 per day of continuing violation


ICA Rule 35-1 (c)(3)

REDEMPTION OF ORIGINAL CAPITAL FOR LESS THAN 12 MONTHS

Reprimand / Warning

P10,000 per redemption


ICA Rule 35-1 (0(2)

LATE FILING OF MONTHLY SALES/ REDEMPTION REPORT

Reprimand / Warning




1017

ICA Rule 35-1 (e)(3)

FAILURE TO EFFECT REDEMPTION REQUEST WITHIN 7 BANKING DAYS

Reprimand / Warning


Section 35 ICA Rule 35-

FAILURE TO REGISTER AS AN INVESTMENT COMPANY ADVISER

Reprimand/ Warning

100,000.00

ICA Rule 35l(g)(l)-A

FAILURE TO MAINTAIN THE MINIMUM UNIMPAIRED NET WORTH OF AT LEAST P10 M EXCLUSIVE OF REVALUATION SURPLUS

Reprimand/ Warning

25,000.00

50,000.00

Section 40

FAILURE TO REGISTER AGENTS & INVESTMENT SOLICITORS Reprimand / Warning

10,000.00

15,000.00

5,000.00

7,000.00

KgKD

Company


Individual

FINANCING

COMPANY ACT

AND

ITS

IMPLEMENTING

RULES

Sec. 7(c), FCA of 1998; Section 4(a), ERR

ENGAGING IN THE BUSINESS OF A FINANCING COMPANY WITHOUT CERTIFICATE OF AUTHORITY (CA) TO OPERATE AS A FINANCING COMPANY

P10,000 plus P100 per day



Section 5(b), IRR

FAILURE TO OPERATE WITHIN 120 DAYS FROM GRANT OF CA


PI 5,000 plus P200 per day


1018


Section 6(a), IRR

NO CATO ESTABLISH/ OPERATE A BRANCH OFFICE




Section 8, IRR

LATE PAYMENT OF ANNUAL FEE BEFORE THE ANNIVERSARY DATE OF CA

Reprimand/ Warning



Section 9(a), IRR

INVESTMENT IN REAL ESTATE AND IN SHARES OF STOCK IN A REAL ESTATE DEVELOPMENT CORPORATION AND OTHER REAL BASED PROJECTS IN EXCESS OF 25% OF THE COMPANY'S NETWORTH

Reprimand/ Warning

PI 0,000 plus P100 per day

P10,000 plus P300per day

Section 9(b), IRR

LESS THAN 51% OF THE FUNDS HAVE NOT BEEN USED IN FINANCING COMPANY

Reprimand/ Warning



Section 9(c), IRR

TOTAL CREDIT EXTENDED TO COMPANY'S DIRECTORS, OFFICERS, STOCKHOLDERS AND RELATED INTEREST (DOSRI) IN EXCESS OF 15% OF THE FORMER'S NETWORTH

Reprimand/ Warning



Section 9(d), IRR

TOTAL, CREDIT EXTENDED TO THIRD PERSON (SINGLE BORROWER LIMIT) IN EXCESS OF 30% OF THE COMPANY'S NETWORTH

Reprimand/ Warning



Section 11, IRR

IMPAIRMENT OF PAID-UP CAPITAL

Reprimand/ Warning

P10,000

P15,000

AcnvrnES


1019

Section 13(a), IRR

LATE FILING OF QUARTERLY REPORTS

Reprimand / Warning



Section 13(b), IRR

LATE FILING OF ANNUAL AUDITED FINANCIAL STATEMENTS

Reprimand/ Warning



AMLA, as amended

FAILURE TO FILE ANTI-MONEY LAUNDERING OPERATING MANUAL

PI00,000

SEC Circular No. 2, S. 2002

FAILURE TO TIMELY SUBMIT MANUAL ON CORPORATE GOVERNANCE

Reprimand / Warning

P500 per day

FAILURE TO SUBMIT ANY OF THE FOLLOWING CERTIFICATION, AS REPRESENTED IN THE MANUAL:

Reprimand/ Warning



Reprimand/ Warning


P10,000 plus P300per day

Certification by Corporate Secretary on the Attendance of Directors Certification by the Compliance Officers on the Extent of Compliance with Manual on Corporate Governance FAILURE TO COMPLY WITH OTHER REPRESENTATIONS IN THE MANUAL OF CORPORATE GOVERNANCE

Continued non-payment of the assessed fine a n d / o r failure to comply with the requirement, despite notice and hearing for a period of fifteen (15) days, shall be a sufficient ground for the Commission to take other appropriate action or remedies available under the Securities Regulation Code and other related laws. The commission of a fourth offense for the same violation is a ground for the suspension/revocation of the erring company's registration or secondary license which shall be mad e after notice and hearing, in accordance with the

1020


above-mentioned procedures. Erring companies which are primarily regulated by other government agencies shall be endorsed thereto. The imposition of the foregoing penalties shall be without prejudice to the imposition of other administrative sanctions or to the filing of criminal charges against the person/s responsible for the violation.

Amendment to the Consolidated Scale of Fine (SEC Memo. Cir. No. 6, Series of 2005) The Commission En Banc, in its meeting held on M a y 13, 2009, approved the amendment of the Consolidated Scale of Fines (SEC M e m o r a n d u m Circular No . 6, Series of 2005) by deleting the w o r d "Warning" as a penalty for the First Offense and including a sub-group for public companies engaged in the business of providing "health and educational" services after paragraph 3 of said Circular as follows: "However, if the violation of the SRC Rule 17.1 and its I m p l e m e n t i n g Rules and Regulations is committed more than three (3) times by any of the public companies enumerated below, the Commission m a y impose a fine, in lieu of suspension or revocation, equivalent to the basic penalty plus the daily penalty per current Scale and increments of PI0,000.00 and PIOO.OO on the basic penalty and the daily penalty, respectively: i.

Public companies engaged in the business of formal education as defined under Section 20 of Batas Pambansa Bilang 232 w h i c h includes preparatory grade or the one-year preparatory level prior to Grade I, elementary education, secondary a n d / o r tertiary education; a n d

ii.

Public companies engaged in the business of health care services rendered by health care institutions as defined under Section 4(0)(1), Article II of Republic Act 7875, excluding wellness centers and health care institutions engaged exclusively in out-patient psychotherapy and counseling for mental disorders, d r u g and alcohol abuse or dependency treatment, cosmetic surgery, home and rehabilitation services, optometric services, or n o r m a l obstetrical delivery.

Attached as Annex " A" is a Table of penalties for public companies engaged in the business of education and health care services to the public." The foregoing amendment shall take effect fifteen (15) days f r o m publication in t w o (2) newspapers of general circulation in the Philippines. June 8, 2009, M a n d a l u y o n g City, Philippines.

— oOo —

Appendix I

SCALE OF FINES FOR NON-COMPLIANCE WITH THE FINANCIAL REPORTING REQUIREMENTS OF THE COMMISSION (SEC MEMO. CIR. NO. 8, SERIES OF 2009) In line w i t h the continuing efforts to strengthen compliance by corporations w i t h the financial reporting requirements provided for in Section 141 of the Corporation Code, Section 68 of the Securities Regulation Code, Pre-Need Uniform Chart of Accounts ( P N U C A ) , as revised, Investment C o m p a n y Act, Financing Company Act, Lending C o m p a n y Act and Investment Houses Law, the Commission, in its meeting on June 18, 2009, approved the scale of administrative penalties set forth below. I.

Scale of Fines

(A) Ordinary Commission

corporations

with

no

Violation Material deficiency in the financial statements or non-compliance with the requirements of the Rules

Stock Corporations Deficit Capital Deficiency Retained Earnings: 0 to 100,000 P100,0001 to P500,000 P500,001 to P5,000,000 P5,000,001 to P10,000,000 Above P10,000,000 Non-stock Corporations Negative Fund Balance Fund Balance/Equity Up to P100,000 P100,001 to P500,000 P500,001 to P10,000,000 Above P10,000,000

1022

secondary

license

issued

by

the

1st Offense

2nd Offense

3rd Offense

P500

P1,000

P2,000

300 P500 1,000 2,000 3,000 4,000

600 P1,000 P2,000 P4,000 P6,000 P8,000

1,200 P2,000 P4,000 P8,000 P12,000 P16,000

P200

P400

P800

P300 500 1,000 2,000

P600 1,000 2,000 4,000

1,200 2,000 4,000 8,000

SCALE OF FINES FOR NON-COMPLIANCE WITH THE FINANCIAL REPORTING REQUIREMENTS OF THE COMMISSION Appendix I An amount based on the above scale or 1/10 of 1% of the amount of misstatement, whichever is higher

Material misstatement in the financial statements

(B) Branches and regional offices of foreign operate in the Philippines by the Commission

1st Offense

Violation Material deficiency in the financial statements or noncompliance with the requirements of the Rules


An amount based on the Above scale or 2 / 1 0 of 1% of the amount of misstatement whichever is higher

corporations

2nd Offense

An amount based on the above scale or 4 / 1 0 of 1% of the amount of misstatement, whichever is higher

licensed

3rd Offense

Net Cash Receipts 0 to P100,000

P500

P1,000

P2,000

pioaoooi to P500,000

P1,000

P2,000

P4,000

P500,001 to P5,000,000

P2,000

P4,000

P8,000

P3,000

P6,00

P12,000

P4,000

P8,000

PI 6,000

P5,000,001 to P10,000,000 Above P10,000,000

An amount based on the above scale or 1/10 of l%of the amount of misstatement, whichever is higher

An amount based on the above scale or 2 / 1 0 of 1% of the amount of misstatement whichever is higher

An amount based on the above scale or 4 / 1 0 of l%of the amount of misstatement. whichever is higher

to


(C)

Lending Companies; Transfer Agents Annual Financial Statements

1"* Offense

Violation Material deficiency in the financial statements or non-compliance with the requirements of the Rules

Deficit Retained Earnings: Up to pioaooo pioaooi to P500,000 P50a001 to P5,000,000 P5,000,001 to pio,ooo,ooo Above P10,000,000

nd

Offense

3

Offense

ri

P500

P1,000

P2,000

P1,000

P2,000

P4,000

2,000

4,000

8,000

3,000

6,000

12,000

4,000

8,000

16,000

5,000

10,000

20,000

An amount based on the above scale or 1/10 of l%of the amount of misstatement, whichever is higher


2



Interim Financial Statements Violation Material deficiency in the financial statements or noncompliance with the requirements of the Rules

1" Offense

2

n d

Offense

3" Offense 1

Deficit Retained Earnings:

P100

P200

P400

Up to pioaooo

P200

P400

P800

P100,001 to P500,000

400

800

1,600

P500,001 to P5,000,000

600

1,200

2,400

P5,000,001 to P10,000,000

800

1,600

3,200

1,000

2,000

4,000

Above P10,000,000

SCALE OF FINES FOR NON-COMPLIANCE WITH THE FINANCIAL REPORTING REQUIREMENTS OF THE COMMISSION Appendix I Material misstatement in the financial statements

(D)

Financing

Annual Financial

An amount based on the above scale or 1 / 1 0 of l%of the amount of misstatement, whichever is higher

An amount based on the above scale or 2 / 1 0 of l%of the amount of misstatement whichever is higher


1st Offense

2nd Offense

3rd Offense

Companies

Statements

Violation Material deficiency in the financial statements


or noncompliance with the requirements of the Rules

pioaooo

P1,000

P2,000

P4,000

P2,000

P4,000

P8,000

3,000

6,000

12,000

4,000

8,000

16,000

5,000

10,000

20,000

6,000

12,000

24,000

Up to

pioaooi to

P5oaooo

P500,001 to

P5,ooaooo P5,000,001 to

piaooaooo Above

piaooaooo Material misstatement in the financial statements

An amount based on the above scale or 1/10 of 1% of the amount of misstatement. whichever is higher

An amount based on the above scale or 2 / 1 0 ofl%of the amount of misstatement whichever is higher



Interim Financial Statements 1st Offense

2nd Offense

3rd Offense


P400

P800

Pl,600

Up to P100,000

P600

Pl,200

P2,400

pioaooi to psoaooo

800

1,600

3,200

P500,001 to P5,000,000

1,000

2,000

4,000

P5,000,001 to piaooaooo

1,200

2,400

4,800

Above piaooaooo

1,400

2,800

5,600


An amount based on the above scale or 1/10 of l%of the amount of misstatement. whichever is higher


(E) Dealers

Brokers (GSEDs)

and

Dealers

of securities;

An amount based on the above scale or 2 / 1 0 of 1% of the amount of misstatement whichever is higher Government

An amount based on the above scale or 4 / 1 0 of 1% of the amount of misstatement whichever is higher Securities

Eligible

Annual Financial Statements Violation Material deficiency in the financial statements or noncompliance with the requirements of the Rules

I 'Offense s

2

n d

Offense

3 Offense rd


P2,500

P5,000

P10,000

Up to P1,000,000

P5,000

P10,00

P20,000

Pl,000,001 to P10,00,000

6,000

12,000

24,000

P10,000,001 to P20,000,000

7,000

14,000

28,000

P20,000,001 to P30,000,000

8,000

16,000

32,000

Above P30,000,000

9,000

18,000

36,000

SCALE OF FINES FOR NON-COMPLIANCE WITH THE FINANCIAL REPORTING REQUIREMENTS OF THE COMMISSION Appendix I Material misstatement in the financial statements

An amount based on the above scale or 1 / 1 0 of l%of the amount of misstatement, whichever is higher



1st Offense

2nd Offense

3rd Offense

Interim Financial Statements Violation Material deficiency in the financial statements or noncompliance with the requirements of the Rules


P500

P1,000

P2,000

P1,000

P2,000

P4,000

2,000

4,000

8,000

3,000

6,000

12,000

P30,000,000

4,000

8,000

16,000

Above P30,00a000

5,000

10,000

20,000

Up to P1,000,000 Pl,000,001 to

piaooaooo piaoaooi to P20,000,000

rcaooaooi to


An amount based on the above scale or 1/10 of 1% of the amount of misstatement. whichever is higher




1028

(F) Securities

Investment Houses; Universal Banks Investment Company

Registered as

Underwriters

of

Advisers Annual Financial Statements 1st Offense


Deficit Retained Earnings: Up to P5,ooo,ooo P5,000,001 to piaooaooo P15,00,001 to P30 000,000

2nd Offense

3rd Offense

P5,000

P10,000

P20,000

piaooo

P20,000

P40,000

11,000

22,000

44,000

12,000

24,000

48,000

P3aooo,ooi to pso.ooaooo

13,000

26,000

52,000

Above PSO,OOO,OOO

14,000

28,000

56,000

/


An amount based on the above scale or 1/10 of 1% of the amount of misstatement, whichever is higher



Interim Financial Statements Violation Material deficiency in the financial statements or non-cmpliance with the requirements of the Rules

1st Offense

2nd Offense

3rd Offense


P1,000

P2,000

P4,000

Up to P5,000,000

P3,000

P6,000

P12,000

P5,000,001 to P15,000,000

4,000

8,000

16,000

P15,00,001 to P30,000,000

5,000

10,000

20,000

P30,000,001 to P50,000,000

6,000

12,000

24,000

Above P50,000,000

7,000

14,000

28,000

SCALE OF FINES FOR NON-COMPLIANCE WITH THE FINANCIAL REPORTING REQUIREMENTS OF THE COMMISSION Appendix I An amount based on the above scale or 1 / 1 0 of l%of the amount of misstatement. whichever is higher

Material mistatement in the financial statements

(G) Clearing Agency Securities Exchange/s Annual

Financial

and

or noncompliance with the requirements of the Rules


Agency

as


Depository;

Stock

and

Statements

Violation Material deficiency in the financial statements

Clearing


1st Offense

2nd Offense

3rd Offense


piaooo

P20,000

P40,000

Up to P10,000,000

P20,000

P40,000

P80,000

piaooaooi to P20,000,000

21,000

42,000

84,000

P20,00,001 to P50,000,000

22,000

44,000

88,000

P50,000,001 to pioaooaooo

23,000

46,000

92,000

Above pioaooaooo

24,000

48,000

96,000

An amount based on the above scale or 1/10 of 1% of the amount of misstatement, whichever is higher


An amount based on the above scale or 4 / 1 0 of l%of the amount of misstatement whichever is highei


Interim Financial Statements 1st Offense


2nd Offense

3rd Offense


P4,000

P8,000

P16,000

Up to P10,000,000

P5,000

P10,000

P20,000

P20,000,000

6,000

12,000

24,000

P20,00,001 to P50,000,000

7,000

14,000

28,000

8,000

16,000

32,000

9,000

18,000

36,000

piaooaooi to

P50,000,001 to

pioaooaooo Above

pioaooaooo

An amount based on the above scale or l/10ofl%of the amount of misstatement, whichever is higher


(H)

Pre-need



Corporations

Annual Financial Statements

Violation

1st Offense

Material deficiency in the financial statements or noncompliance with the requirements of the Rules

Active:


1

2nd Offense Active:

P25,000

3rd Offense Active:

P50,000

P100,000

Inactive

Inactive

P12,500

P25,000

P50,000

Active:

Active:

Active:

P25,000

P50,000

P50,000

Inactive

Inactive

Inactive

P12,500

P25,000

P25,000

Inactive

"With dealer license. Without dealer license.

2

SCALE OF FINES FOR NON-COMPLIANCE WITH THE FINANCIAL REPORTING REQUIREMENTS OF THE COMMISSION Appendix I Failure to comply with the requirements of PNUCA

Interim Financial

Active: P25,000 Inactive

Active:

P12,500

pioaooo

Inactive

Inactive

P25,000

P50,000

Statements


1st Offense Active:

1

P5,000 Inactive

2

P2,soo


Active:

Failure to comply with the requirements of PNUCA

Active:

(I)

Active:

P50,000

1

P5,000 Inactive

2

P2,500 1

P5,000 Inactive

2

P2,500

2nd Offense

3rd Offense

Active:

Active:

P10,000 Inactive

P20,000 Inactive

P5,000

P10,000

Active:

Active:

P10,000 Inactive

P20,000 Inactive

P5,000

P10,000

Active:

Active: P20,000

P10,000 Inactive P5,000

Inactive P10,000

Issuers of securities registered under the SRC and public companies

Annual Financial Statements Violation

1st Offense

2nd Offense

3rd Offense


P25 000 plus P500 per day until completed/ complied

P50,000 plus P1,000 per day until completed/ complied

pioaooo plus P2,000 per day until completed/ complied


P50,000 or 1/10 of 1% of the amount of misstatement, whichever is higher, plus P500 per day until corrected

PlOaOOO or 1/10 of

2% of the amount of misstatement, whichever is higher, plus P1,000 per day until corrected

P200,000 or 1/10 of 4% of the amount of misstatement, whichever is higher, plus P1,000 per day until corrected

/

With dealer license. Without dealer license. 2


Interim Financial Statements Violation

1st Offense

2nd Offense

3rd Offense


PiaOOO plus P100 per day until completed / complied

P20,000 plus P500 per day until completed/ complied

P30,000 plus P1,000 per day until completed / complied


P25,000 or 1/10 of 1% of the amount of misstatement, whichever is higher, plus P500 per day until corrected

P50,000 or 1/10 of 2% of the amount of misstatement, whichever is higher, plus P1,000 per day until corrected

P 1 0 0 , 0 0 0 o r l / 1 0 of 4% of the amount of misstatement, whichever is higher, plus P1,000 per day until corrected

The penalty for material deficiencies in the financial statements of a public company engaged in the business of providing health and education services are covered by SEC M e m o r a n d u m Circular N o . 4, Series of 2009, or any amendments thereto. II.

Definition For purposes of this Circular, Retained Earnings shall m e a n the accumulated profits realized out of n o r m a l and continuous operations of the business after deducting therefrom distributions to stockholders and transfers to capital stock or other accounts. The Retained Earnings for the purpose of computing the penalty under this Circular shall be the total amount of appropriated and unappropriated retained earnings as shown in the latest financial statements audited by the company's independent auditor.

I I I . Test of M a t e r i a l i t y A.

The following shall be considered a material deficiency in the financial statements (FS) or significant non-compliance w i t h SRC Rule 68: (i)

A n y of the following is not submitted w i t h the FS: (1)

Balance Sheet;

(2)

Income Statement or Statement of Receipts and Disbursements;

(3)

Cash Flow Statement;

(4)

Statement of Changes in Equity or F u n d Balance;

(5)

Notes to Financial Statements;

(6)

Statement of Management's Responsibility;

(7)

Auditor's Report.

SCALE OF FINES FOR NON-COMPLIANCE WITH THE FINANCIAL REPORTING REQUIREMENTS OF THE COMMISSION Appendix I

1033

(ii) The following shall likewise render the financial statements significantly not compliant: (1)

If a listed company, public company, m u t u a l f u n d or issuer of securities to the public, the auditor's opinion is qualified due to a deviation f r o m the applicable financial reporting f r a m e w o r k . However, for listed banks, a qualified opinion of the external auditor shall not be considered a non-compliance w i t h SRC Rule 68 if the qualification pertains to a deviation adopted by the Bangko Sentral ng Pilipinas as part of its prudential reporting requirements;

(2)

The auditor's report is substantially not compliant w i t h the w o r d i n g prescribed by Philippine Standards on Auditin g (PSA) N o . 700, as revised, and other applicable auditing standards and practices.

(iii) T h e Statement of Management's Responsibility is not signed by the prescribed signatories a n d / o r not notarized in the case of a listed or public company; (iv) There is no accounting policy for a significant account; For purposes of these Guidelines, a significant account means a Balance Sheet or Income Statement item, the amount of w h i c h is equivalent to: For listed companies, public companies, mutual funds, issuers of securities to the public, and pre-need companies

other

(1)

5% or more of Total Current Asset, if it is one of the current asset items;

(2)

5% or more of Total Non-Current Asset, if it is one of the noncurrent asset items;

(3)

5% or more of Total Current Liabilities, if it is one of the current liabilities items;

(4)

5% or more of Total Long-Term Liabilities, if it is one of the long-term liabilities items;

(5)

% or more of the Total Stockholders' Equity, if it is one of the equity items or the amount of Total Assets if there is capital deficiency;

(6)

5% or more of the Gross Income, Cost of Sales/Services or the Total Operating Expenses, as may be applicable.

For all other corporations, the threshold shall be 10% or more of the items mentioned above. (iv) The required disclosures or presentations under the applicable financial reporting framework and SRC Rule 68/68.1 for a significant account are not provided in the financial statements. In case however of disclosures on related party transactions as


1034

required under PAS 24, any deficiency thereof shall be considered significant regardless of the amount involved if the reporting company is a public company, listed company, issuer of securities to the public or secondary licensee of the Commission. (v)

B.

Five (5) or more of the following minor deficiencies are noted: (1)

The financial statements are not presented in the prescribed comparative format;

(2)

There is no distinction between the current and non-current portion of assets or liabilities except in cases where PAS 1 allows non-classification;

(3)

There are no cross-references statements;

(4)

The number of disclosure items that are not provided for a significant account does not exceed t w o ;

(5)

The Statement of Management's Responsibility is not in full conformity w i t h the prescribed w o r d i n g of SRC Rule 68 or 68.1;

(6)

Such other deficiencies as the Commission m a y consider minor.

to the notes

to financial

A n y of the following shall be considered a material misstatement in the financial statements: (1)

An accounting policy for a significant account is not consistent w i t h PFRS or G A A P , e.g., for non-publicly accountable entities or pre-need companies;

(2)

An accounting policy for a significant account is not consistently applied between periods or to similar transactions and events (inconsistent application); or

(3)

The estimate or assumption used on a significant account is unreasonable and resulted to material misstatement of the financial statements; 1

(4)

There is more than one (1) minor misstatement and the aggregate amount involved for said misstatements meets the test of materiality;

(5)

The financial statements of a corporation w i t h a subsidiary or subsidiaries are not presented on a consolidated basis in violation of PAS 27;

(6)

Such other misstatements in the financial statement, i.e., overstatement or understatement of income, asset, liability or equity, that the Commission m a y consider material.

^ s e the 5% and 10% threshold in item (b) above.

SCALE OF FINES FOR NON-COMPLIANCE WITH THE FINANCIAL REPORTING REQUIREMENTS OF THE COMMISSION Appendix I

1035

IV. Reckoning Date of Computation of Penalty The a m o u nt of daily penalty shall be computed from the date the violation is discovered, as indicated in the comment letter of the Commission, up to the time that a sufficient and meritorious explanation, together with an audit committee or board resolution taking up the matter, and the corrective measures to be taken thereon, are submitted to the Commission. The submission shall include the revised financial statements or an a d d e n d u m to the financial statements, as m a y be directed by the Commission.

V. Delinquency A.

B.

An entity that commits a violation for the fourth time shall be subject to the following penalties: i.

In the case of a corporation holding a secondary license from the Commission, suspension of the license for a period of sixty (60) business days and a monetary penalty equivalent to 200% of the fine for the third offense. Failure to pay the fine w i t h i n the suspension period shall be a ground for the revocation of the company's license;

ii.

In the case of a corporation w i t h no secondary license from the Commission, a monetary penalty equivalent to 200% of the fine for the third offense w i t h a w a r n i n g that a subsequent violation shall be a ground for the revocation of the corporation's registration w i t h the Commission. Failure to pay the fine shall be a ground for the revocation of the company's registration.

An entity that commits a violation for the fifth time shall be subject to the following penalties: i.

In the case of a corporation holding a secondary license from the Commission, revocation of the license and a monetary penalty equivalent to 200% of the fine for the fourth offense;

ii.

In the case of a corporation w i t h no secondary license from the Commission, revocation of its registration and a monetary penalty equivalent to 200% of the fine for the fourth offense. The non-payment of the above monetary penalty shall constitute a derogatory record on the directors and officers of the corporation.

C.

The suspension or revocation of the company's secondary license shall not affect its civil or criminal liability for any act committed prior to such suspension or revocation. The provisions of Section 71.2 of the Securities Regulation Code shall likewise be observed for contracts entered into by the subject company.

VI. Coverage of the Penalty A.

The penalties for the violations cited shall be in addition to the fine imposable for the late filing of the financial statements, as provided for in earlier circulars or may in the future be issued by the Commission.


1036

B.

The imposition of monetary penalty shall be without prejudice to any action that the Commission may institute against the corporation, its directors and officers, in accordance w i t h existing laws and regulations.

VII. Repealing Clause The salient provisions of SEC M e m o r a n d u m Circular N o . 6, Series of 2005 (Consolidated Scale of Fines) and other circulars, rules, orders earlier issued by the Commission that are inconsistent w i t h any of the foregoing enumeration of violations and penalties shall be deemed superseded, repealed or amended by this Circular.

VIII.

Transitory Clause

This Circular shall be applied to violations committed in prior years in so far as the stated penalty is favorable to the corporation. In all other cases, the Circular shall cover financial statements for the period ended December 31,2008 and onwards. This Circular shall take effect on July 15, 2009. Issued this 24th day of June, 2009. M a n d a l u y o n g City, Philippines.

— oOo —

Appendix J

REVISED GENERAL INFORMATION SHEET (SEC Memo. Cir. No. 3, Series of 2006) 1. For Stock Corporation In order to effectively facilitate the monitoring of activities of domestic corporations a n d to keep the stockholders and the public transacting business w i t h domestic corporations properly informed of their organizational and operational status, all domestic corporations are required to submit the revised general information sheets in the f o r m and w i t h i n the period prescribed in SEC M e m o r a n d u m Circular N o . 2 ( S M D Series 1993). 1

Failure to comply w i t h the Circular shall subject the corporation to applicable sanctions prescribed under the scale of penalties provided in SEC M e m o r a n d u m Circular Nos. 3 and 4 ( S M D Series 1993). 2

January 07,1993.

'In line with the "full disclosure" requirement of existing laws, all corporations and partnerships applying for registration with the Securities and Exchange Commission should state in their Articles of Incorporation or Articles of Partnership the (i) specific address of their principal office, which shall include, if feasible, the street number, street name, barangay, city or municipality; and (ii) specific residence address of each incorporator, stockholder, director, trustee, or partner. "Metro Manila" shall no longer be allowed as address of the principal office. Additionally, all corporations are required to state in their General Information Sheet the specific residence address of each stockholder, officer, director or trustee. Filings that do not comply with the foregoing requirements shall be considered as non-compliant with existing rules and regulations. (SEC Cir. No. 3, Feb. 16, 2006.) SEC Memo. Cir. No. 6, series 2006 mandates the submission in electronic format — on diskette or CD — of the General Information Sheet (GSI), the General Form for Financial Statements (GFFS), and the industry-specific Special Forms for Financial Statements (SFFS). ^ e Appendix "H." 1037


1038

GENERAL INFORMATION SHEET STOCK CORPORATION CFNIER Al. INSTRUCTIONS ON T H E USE O F T H E REVISED G E N E R A L INFORMATION SHEET (GS) 1

THIS REPORT IS TO BE SUBMITTED WITHIN THIRTY (30) C A L E N D A R DATE FOLLOWING THE DATE OF THE A N N U A L STOCKHOLDERS MEETING. DO NOT LEAVE A N Y ITEM BLANK. WRITE N. A. IF INFORMATION REQUIRED IS NOT A P P L I C A B L E T O T H E CORPORATION.

2

IF NO MEETING WAS HELD, T H E CORPORATION S H A L L SUBMIT T H E GIS TOGETHER WITH AN AFFIDAVIT OF NON-HOLDING OF MEETING WITHIN THIRTY (30) C A L E N D A R DAYS FROM THE DATE OF T H E S C H E D U L E D A N N U A L / S P E C I A L (AS PROVIDED IN T H E BY-LAWS).

3.

THE REPORT SHOULD BE CERTIFIED A N D SWORN TO BY T H E CORPORATE SECRETARY, OR BY T H E PRESIDENT OR A N Y DULY AUTHORIZED OFFICER O F T H E CORPORATION.

4.

SUBMIT T H R EE (3) COPIES TO T H E RECORDS DIVISION, G R O U N D FLOOR, SEC BUILDING, EDSA, GREENHILLS, M A N D A L U Y O N G , M E T R O M A N I L A .

5.

SHADED BOXES ARE FOR SEC P E R S O N N E L.

6.

ONLY THE GIS ACCOMPLISHED IN A C C O R D A N C E W I T H T H E H E R E I N INSTRUCTIONS SHALL BE COMSIDERED AS HAVING B E E N F I L E D / S U B M I T T E D . A C T U A L DATE O F A N N U A L / S P E C I A L M E E T I N G PRINT LEGIBLY

DATE OF ANNUAL MEETING PER BY-LAWS

REG. NO.

FISCAL YEAR END.

CORPORATE NAME ADDRESS / PRINCIPAL / ACTIVITY PRESENTLY ENGAGED IN

AREA CODE

PRESENT ADDRESS

AREA CODE

TELEPHONE NO.

FAX NO.

PRIMARY PURPOSE/ACTIVITY PRESENTLY ENGAGED IN

CORPORATE TIN INDUSTRY CLASSIFICATION INDUSTRY CODE

PARENT COMPANY REG. NO.

COMPANY NAME AND ADDRESS

SUBSIDIARY / AFFILIATE REG. NO.

TOTAL NUMBER OF EMPLOYEES: SUPERVISORY

NON-SUPERVISORY

COMPANY NAME AND ADDRESS

TOTAL NUMBER OF MANAGERS/ OFFICERS

TOTAL ANNUAL COMWPENSATION OF DIRECTORS DURING THE PRECEEDING FISCAL YEAR P

WITH SEC/ OTHER CITY AGENCY SECONDARY LICENSED/ RS NO.:

CERTIFIED CORRECT: (SIGNATURE OVER PRINTED NAME)

POSITION

NOTE: SHADED AREAS ARE FOR SEC PERSONNEL. USE ADDITIIONAL SHEET/ANNEX IF NECESSARY.

REVISED GENERAL INFORMATION SHEET Appendix J

1039

GENERAL INFORMATION SHEET STOCK CORPORATION PRINT LEGIBLY FINANCIAL PROFILE NUMBER OF STOCKHOLDERS AUTHORIZED CAPITAL

TYPE OF SHARES

CODE

NUMBER OF SHARES/ TYPE

PAR/ STATED VALUE

AMOUNT

N/A

SUBSCRIBED CAPITAl FILIPINO

FOREIGN

TOTAL

PAID-UP CAPITAL FILIPINO FOREIGN TOTAL DIRECTORS/OFFICERS NAME AND ADDRESS (RESIDENCE)

INCR

BOARD

STOCK ILLDR

OFFICER

AUTHORIZED AUTHORIZED

INSTITUTIONS: FOR BOARD — PUT "C" FOR CHAIRMAN "M" FOR MEMBER FOR FOR FOR

NOTE:


1040

GENERAL INFORMATION SHEET STOCK CORPORATION ^^^Z

A.

PRINT LEGIBLY

FORMS OF INVESTMENT OF CORPORATE FUNDS IN ANOTHER CORPORATION

AMOUNT

DATE OF BOARD RESOLUTION

DATE OF STOCKHOLDER RATIFICATION


DATE OF STOCKHOLDER RATIFICATION

STOCKS BONDS/COMMERCIAL PAPERS LOANS / CREDITS / ADVANCES GOVERNMENT TREASURY BILLS OTHERS A.

INVESTMENT OF CORPORATE FUNDS IN ANY OF ITS SECONDARY PURPOSES

NATURE OF SECONDARY PURPOSE C.

TREASURY SHARES: NUMBER OF SHARES

D.

UNRESTRICTED RETAINED EARNINGS AS OF END OF LAST FISCAL YEAR

E

DIVIDENDS DECLARED DURING THE IMMEDIATELY PRECEDING YEAR _

TYPE OF DIVIDENDS

ACQUISITION COST P

AMOUNT

CASH DIVIDEND STOCK DIVIDEND PROPERTY DIVIDEND TOTAL

P OF THE ABOVE

1

(NAME)

(POSITION)

MENTIONED CORPORATION, DO SOLEMNLY SWEAR THAT ALL MATTERS SET FORTH IN THIS REPORT ARE TRUE AND CORRECT TO THE BEST OF MY KNOWLEDGED.

SIGNATURE SUBSCRIBED ARE SWORN TO BEFORE ME THIS

DAY OF

AFFIANT EXHIBITED HIS/HER RESIDENCE CERTIFICATE No. AT

ISSUED ON

NO IAXV PUBLIC

DOC. No. _ PAGE No. . BOOK No. _ SERIES OF

UNTIL, DECEMBER 3 1 , 19 PTR: ISSUED AT ON IBP_


1041

GENERAL INFORMATION SHEET STOCK CORPORATION Z = ^ ^ = ^ = ^ ^ ^ ^ = ^ ^ ^ ^ =

PRINT LEGIBLY ^

=

^

=

CORPORATE NAME

STOCKHOLDERS TAXPAYER'S ID NO.

SHARES SUBSCRIBED

NAME AND ADDRESS

TYPE/ CLASS

NO.

AMOUNT

AMOUNT PAID-UP

NATIONALITY

TOTAL

TOTAL

TOTAL

TOTAL

TOTAL

TOTAL

TOTAL

TOTAL

TOTAL TOTAL

INSTRUCTIONS

NOTE:

INDICATE THE TOP 20 STOCKHOLDERS. If MORE THAN 20. INDICATE THE BEST AS OTHERS

USE: ADDITIONAL, SHEET/ANNEX IF NECESSARY

1042


2. For Non-Stock Corporation

1

GENERAL INFORMATION SHEET (GIS)

1

NON-STOCK CORPORATION FOR THE YEAR General Instructions: 1.

For User Corporation: This GIS shall be submitted within thirty (30) calendar days from the date of the annual members' meeting as stated in the by-laws. Do not leave any item blank. Write "NA" if the information required is not applicable to the corporation or "NONE" if the information is non-existent.

2.

If the annual members' meeting is held on a date other than that stated in the by-laws, the GIS shall be submitted within thirty (30) calendar days from the actual date of the annual members' meeting.

3.

This GIS shall be accomplished in English and Certified and swom to by the Corporate Secretary of the Corporation.

4.

All changes arising between annual meetings and affecting the Information stated in the GIS, such as the death, resignation or cessation of holding of office of a director, trustee, or officer, shall be reflected in an amended GIS labeled as such and the changes clearly highlighted. The amended GIS shall be submitted thirty (30) days after such changes occurred or became effective.

5.

Submit five (5) copies of the GIS to the Central receiving section, ground floor, SEC Bldg., EDSA, Mandaluyong City. All copies shall be on A4 or letter-size paper with the standard cover sheet. The pages of all copies shall use only one side. Corporations submitting a soft copy of their GIS shall submit four (4) hard copies of the GIS. Together with a certification under oath by its president, chief executive officer, or corporate secretary that the soft copy contains the exact data in the hard copies.

6.

Only the GIS accomplished in accordance with these instructions shall be considered as compliant with existing rules and regulations.

7.

This GIS may be used as evidence against the corporation and its responsible directors/trustees/officers for any violation of existing laws, rules and regulations. ===========

= = = = = =

P L E A S E PRINT LEGIBLY

^'In line with the "full disclosure" requirement of existing laws, all domestic nonstock corporations are required to use the revised official General Information Sheet (GIS) for non-stock corporations, GIS-NON-STOCK (v.2006), attached. The official GIS form is available for downloading at the SEC website (www.sec.gov. ph) or from any of the Commission's offices. This Circular shall take effect fifteen (15) days after its publication in a newspaper of general circulation and at the SEC website. Hereafter, only filings that conform to the format of the official GIS from shall be' accepted by the Commission. Filings that deviate from this form shall be considered as non-compliant with existing rules and regulations." (SEC Cir. No. 9, Series of 2006.)


1043

CORPORATE NAME:

DATE REGISTERED:

BUSINESS/TRADE NAME

FISCAL YEAR END:

SEC REGISTRATION NUMBER:

CORPORATE TAX IDENTIFICATION NUMBER (TIN):

DATE OF ANNUAL MEETING-PER BY-LAWS:

WEBSITE/URL ADDRESS:

DATE OFACTUAL MEETING:

EMAIL ADDRESS:

COMPLETE PRINCIPAL OFFICE ADDRESS:

TELEPHONE NUMBER(S):

COMPLETE BUSINESS ADDRESS:

FAX NUMBER(S):

PRIMARY PURPOSE ENGAGED IN: NAME OF EXTERNAL AUDITOR & SIGNING PARTNER:

SEC ACCREDITATION NUMBER:

TELEPHONE NUMBER(S):

IF ENGAGED IN MICROFINANCE BUSINESS, TO BE FILLED UP BY SEC PERSONNEL: CHECK SERVICES INDUSTRY NATIONAL Deposits Insurance Products CLASSIFICATION GEOGRAPHICAL Loans Payment Services CODE: CODE (NGC): Money Others Transfer


1044

GENERAL INFORMATION SHEET NON-STOCK

CORPORATION

= = = = = P L E A S E P R I N T L E G I B LY = = = = = CORPORATE NAME: DIRECTORS / OFFICERS NAME

NATIONALITY

INCORPORATOR

BOARD

OFFICER

CURRENT, COMPLETE RESIDENTIAL ADDRESS

TAX IDENTIFICATION NO. (TIN) FOR FILIPINOS or PASSPORT NO. FOR FOREIGNERS

9.

10.

1.1

1.2.

1.3.

1.4.

1.5.

_L

INSTRUCTION

F O R I N C O R P O R A T O R C O L U M N , P U T " Y " I F A N I N C O R P O R A T O R , "N" I F N O T . F O R B O A R D C O L U M N , P U T " C " F O R C H A I R M A N , "M" F O R M E M B E R . F O R O F F I C E R C O L U M N , I N D I C A T E P A R T I C U L A R P O S I T I O N I F A N O F F I C E R , S U C H AS: PRE-PRESIDENT COO - CHIEF OPERATING

GEO - CHIEF EXEC. OFFICER

CFO-TREAS

OFFICER AUD-EXTERNAL AUDITOR

COS - CORPORATE SECRETARY GOV - GOVERNMENT REPRESENTATIVE

LEF - LEGAL COUNSEL OTR-OTHERS

N-NONE


1045

GENERAL INFORMATION SHEET NON-STOCK CORPORATION

CORPORATE NAME: 1.

I N T E R C O M P A N Y AFFILIAH O N S PARENT COMPANY

SEC REG. NO.

ADDRESS

AFFILIATE

SEC REG. NO.

ADDRESS

NOTE: USE ADDITIONAL SHEET IF NECESSARY 2.

INVESTMENT OF CORPORATE FUNDS IN A N O T H E R CORPORATION 2.1

STOCKS

2.2

BONDS / COMMERCIAL PAPER (issued b y p r i v a t e c o r p o r a t i o n s )

2.3

LOANS/CREDITS/ADVANCES

2.4

G O V E R N M E N T TREASURY BILLS

2.5

OTHERS

INVESTMENT OF CORPORATE F U N D S I N A C T I V I T I E S U N D E R ITS SECONDARY PURPOSES (PLEASE SPECIFY:)

A M O U N T (in P h P )



DATE OF MEMBERS RATIFICATION

3.1

3.3

3.5 4. 5.

F U N D B A L A N C E (in PUP): S E C O N D A R Y L I C E N S E / REGISTRATION / A U T H O R I T Y / A C C R E D I T A T I O N W I T H O T H E R GOVERNMENT AGENCY(IES):


1046

6

5.1

NAME OF AGENCY:

S2

DATE ISSUED:

5.3

DATE STARTED OPERATIONS:

BANCKO SENTRAL NC PILIPINAS

TOTAL ANNUAL COMPENSATION OF DIRECTORS/TRUSTEES DURING THE PRECEDING FISCAL YEAR (in PhP)

INSURANCE COMMISSION

7.

DEPARTMENT OF EDUCATION

TOTAL NO. OF OFFICERS

8.

COMMISSION ON HIGHER EDUCATION

TECHNICAL EDUCATION AND SKILLS DEVELOPMENT AUTHORITY

TOTAL NO. OF RANK & FILE EMPLOYEES

NOTE: USE ADDITIONAL SHEET IF NECESSARY

9.

DEPARTMENT OF SOCIAL WELFARE AND DEVELOPMENT

TOTAL MANPOWER COMPLEMENT


1047

GENERAL INFORMATION SHEET

NONSTOCK CORPORATION I

CORPORATE SECRETARY OF (Position)

(Corporation)

DECLARE UNDER THE PENALTY OF PERJURY, THAT ALL MATTERS SET FORTH LN THIS GENERAL INFORMATION SHEET WHICH CONSISTS OF ( ) PAGES HAVE BEEN MADE IN GOOD FAITH, DULY VERIFIED BY ME AND TO THE BEST OF MY KNOWLEDGE AND BELIEF, ARE TRUE AND CORRECT. I UNDERSTAND THAT THE FAILURE OF THE CORPORATION TO FILE THIS GIS FOR FIVE (5) CONSECUTIVE YEARS SHALL BE CONSTRUED AS NON-OPERATION OF THE CORPORATION AND A GROUND FOR THE REVOCATION OF THE CORPORATION'S CERTIFICATE OF INCORPORATION. IN THIS EVENTUALITY, THE CORPORATION HEREBY WAIVES ITS RIGHT TO A HEARING FOR THE SAID REVOCATION. DONE THIS

DAY OF

, 20

IN

(SIGNATURE)

SUBSCRIBED AND SWORN TO BEFORE ME IN PHILIPPINES ON AFFIANT PERSONALLY APPEARED BEFORE ME AND EXHIBITED TO ME HIS/HER COMMUNITY TAX CERTIFICATE NO. ISSUED AT ON

DOC. NO: PAGE NO. BOOK NO. SERIES OF

NOTARY PUBLIC FOR Notarial Commission No. Commission expires on December 31, Roll of Attorney Number PTRNo. IBP No. Office Address

— oOo —

Appendix K PUBLIC FORM TYPE MASTERLIST (SEC MEMO. CIR. NO. 2, SERIES OF 1997)

To:

A l l Corporations and Partnerships Registered U n d e r A l l Acts and Laws Administered by the SEC, and A l l Companies Subject to Rule l l ( a ) - l Under Section 11 of the Revised Securities Act.

The Public Form Type Masterlist contains the listing of form types for submitting filings to SEC. A l l files referred to above shall use the Masterlist in determining the appropriate form type code that should be indicated in the cover sheet of filings. The basis for this Masterlist and its use is Paragraph 7 of SEC M e m o r a n d u m Circular N o . 2, Series of 1996 on physical filing criteria regarding a standard cover page or sheet for all filing submitted under all acts and laws administered by the SEC and in compliance w i t h RSA Rule 3-4(d)(6) regarding information required to be writte n on the cover page for filings made under the Revised Securities Act. The list shall be revised whenever there are n e w rules creating n e w filing requirements or as there are amendments to existing rules. Revisions to the Masterlist shall be accordingly published from time to time. For your compliance effective immediately. 28 January 1997.

PUBLIC FORM TYPE MASTERLIST AS OF 1/28/97 F O R M TYPE

CODE

FORM

FILING

DESCRIPTION

CODE

CORPORATE AND PARTNERSHIP ARTICLES/ BY LAWS/REORGS/TRUST/DEEDS EL-C EL-P PL-C PL-P

EXPRESS L A N E - D O M C O R P EXPRESS L A N D - D O M P A R T N E R PRIMARY L I C - D O M CORP PRIMARY L I C - D O M PARTNER

1048

01 01 01 01

PUBLIC FORM TYPE MASTERLIST Appendix K

1049

PL-FC PL-FP

PRIMARY LIC-FGN CORP PRIMARY LIC-FGN PARTNER

01 01

P-DOA P-VTA P-CON P-MER

D E E D OF ASSIGN TO T R A N S SHARES V O T I N G TRUST A G R E E M E N T PRIMARY LIC-CONSOLIDATION PRIMARY LIC-MERGER

01 01 01 01

MISCELLANEOUS CORPORATE FILINGS BYLAW BCERT BVRPT REMIT

DELAYED BYLAW / PRIMARY A M D T BANK CERTIFICATE/MANILA B A N K V E R I F I C A T I O N RPT INWARD REMITTANCE

01 01 01 01

SDEPW MEMBK STRBK P-DIS

SECURITY D E P O S I T / W I T H D R A W A L MEMBERSHIP BOOK STOCK /TRANSFER BOOK PRIMARY LIC-DISSOLUTION

01 01 01 01

SECURITIES REGISTRATIONS/EXEMPTIONS S-6EX S-8-1 S-ABS S-CPL S-CPS S-PAY S-WTS SN-CP SN-PV SN-X5 SN-X6

F O R M 6-EX: S O L D A B R O A D 6(B)-1 F O R M 8-1: SECURITIES REG S T M T F O R M ABS: ASSET B A C K S E C U R I T Y F O R M LTCP: C M PAPER L O N G T E R M F O R M STCP: C M PAPER S H O R T T E R M SECURITIES-PAY SEC F O R P R O P SECURITIES WARRANTS REG SEC N T C E - C P E X E M P T D I S C L S T M T SEC N T C E - E X E M P T P R I V A T E OFFER SEC N T C E - R S A 5 E X E M P T S E C U R I T Y SEC N T C E - R S A 6(B) E X E M P T T R A N S

STMT

02 02 02 02 02 02 02 02 02 02 02

MISCELLANEOUS SECURITIES FILINGS PROSP RS-W SR-8A TCERT TQUAL

POST-EFFECTIVE PROSPECTUS R E G SECURITIES W I T H D R A W A L F O R M 8 A - 1 A 3 : N T C E OFFER T E R M I N T R U S T E E CERT OF E L I G I B I L I T Y TRUST I N D E N T U R E Q U A L A P P L

02 02 02 02 02

PROPRIETARY CERTS/SHARES REGISTRATION S-PRS S-PER SCG SR

SEC-PROPRIETARY REG S T M T S E C U R I T I E S - P E R M I T TO OFFER STANDBY CREDIT G U A R A N T E E / A M D T SALES RPT-STOCK S O L D / PCT F I L IP

02 02 02 02

LISTING MATTERS LIST

LISTING APPLICATION

03


1050

LjgTE L

I

S

T

W

LISTING APPL EXEMPTIONS LISTING APPL W I T H D R A W A L

03 03

INVESTMENT COMPANY REGISTRATIONS IC-CL _OP IC-UN IC-EX !C-W SR-IC I C

I N V E S T C O R E G - C L O S ED E N D INVEST CO REG-OPEN E N D INVEST CO R E G - U N I T TRUST I N V E S T CO E X E M P T I O N S INVEST CO W I T H D R A W A L SALES RPT-SECUR S O L D / P C T F I L I P

05 05 05 05 05 05

I N V E S T M E N T C O M P A N Y REGULATORY REPORTS FS-Q PORT TR-IC

I N V E S T C O Q T R A U D I T E D FS I N V E S T C O Q T R P O R T F O L I O RPT A N N U A L T R A N S A C T I O N RPT / I N V C O

05 05 05

BROKER, DEALER, I N V E S T M E N T H O U S E A N D FUND ADVISOR REGISTRATION 19-BD 19-S 24SUB 25EXT 3 7 REQ BD-EX CF-EX GS-EX IA-EX IH-EX

F O R M 19-BD: BKR D L R A D V I S R R E G F O R M 19-S: BD S A L E S M A N R E G BD SUBORD A G R E E M T FOR A P P R O V A L BD APPL E X T E N D CUST P M T PERIOD B D SEC C O U N T E X E M P T R E Q 37A-13 BKR D L R E X E M P T I O N S C O M M O D / F U T EXEMPTIONS G O V T SEC D L R E X E M P T I O N S INVEST A D V EXEMPTIONS INVEST HOUSE EXEMPTIONS

07 07 07 07 07 07 07 07 07 07

BROKER, DEALER, I N V E S T M E N T H O U S E A N D F U N D ADVISOR RENEWAL 19-R 19-SR 19-ST "F BD-W CF-W GS-W IA-W IH-W 3 7

Y

F O R M 19-BDR: BKR D L R A D V R E N E W F O R M 19-SR: B D S A L E S M A N R E N E W F O R M 19-ST: B D S A L E S M A N T E R M I N B D N T C E FOR F I S C A L Y R A P P R O V A L BKR D L R W I T H D R A W A L COMMOD/FUT WITHDRAWAL G O V T SEC D L R W I T H D R A W A L INVEST A D V W I T H D R A W A L INVEST HOUSE W I T H D R A W A L

07 07 07 07 07 07 07 07 07

BROKER A N D DEALER REGULATORY REPORTS/NOTICES 24 COL 24DEP

BD N T C E C O L L A T BELOW PRINCIPAL BD N T C E N O T M A K E REQ DEPOSIT

08 08


1051

24MAT

BD NTCE MATURITY DEBT/C A P PROB

08

24NET

BD NTCE MINIMUM NET CAPITAL

08

24-OP

F O R M 24-FINOP: BD M O N T H L Y RPT

08

24EXT

EXTENSION REQUEST FOR 24-FINOP

08

24BDQ

BD QTR SECURITIES CONTROL INFO

08

31SEC

BD INVENT OF LINKED ISSUER SEC

08

37-AR

F O R M 37-AR: BD A N N U A L RPT/FS

08

INVESTMENT HOUSE

REGULATORY REPORTS

IH-OD

IH C H A N G E S : O F C R S/BD OF DIRS

08

IH129

F O R M 129-1: I H A N N U A L R E P O R T

08

IHQ

IH-QUARTERLY PROGRESS RPT

08

IHSFS

IH-SEMI A N N U A L U N A U D I T E D FS

08

WP-BD

W O R K PERMIT: BD, IH

08

COMMODITIES/FUTURES

BROKERS

AND

DEALERS REGULATORY REPORTS BD-OE

BD CHANGES: OFCRS/EMPLOYEES

08

BDCFB

BD CONTRACTS WITH FGN BKRS

08

BDDHA

BD DAILY HOUSE ACCT TRANS RPT

08

BDDTR

BD DAILY TRANSACTIONS RPT

08

BDMCA

BD MONTHLY CLIENT ACCT MOVEMENT

08

BDMFS

BD MONTHLY UNAUDITED FS

08

BDMSB

BD MONTHLY STMT BY BANK

08

BDMTR

BD MONTHLY TRANSACTIONS RPT

08

BDSFS

BD SEMI A N N U A L AUDITED FS

08

BDUPC

BD UNIMPAIRED PAIDUP CAP

08

CLEARING

AGENCY

AND

EXCHANGE

REGISTRATION 40-CA

F O R M 40-CA: CLEARING A G E N C Y REG

09

CA-EX

CLEAR AGENCY EXEMPTIONS

09

CA-SV

C L E A R A G E N C Y SERVICE PROPOSAL

09

EX-1

E X C H A N G E REGISTRATION

09

EX-EX

EXCH EXEMPTIONS

09

EX-PR

EXCHANGE PRODUCT PROPOSAL

09

RULES

E X C H/C A/SRO R U L E PROPOSAL

09

SRO-1

SELF REG ORG REGISTRATION

09

CA-W

CLEAR AGENCY WITHDRAWAL

09

EX-W

EXCH WITHDRAWAL

09

SRO-W

SELF REG ORG WITHDRAWAL

09

CLEARING

AGENCY

NOTICE

AND

EXCHANGE REGULATORY REPORTS 24EXM

EXCH-MO APPROVED SUBAGRMNT RPT

09

40NTC

C A N T C E PARTICIPANT B R E A C H / DIF

09


1052

-AF WP-EX E X

EXCH- ADDITION AL FEES WORK PERMIT: EX, CA, SRO

/

RSA

54

09 09

TRANSFER AGENT REGISTRATION AND RENEWAL . 40-2K TA-EX TA-W 4 0

T A

FORM 40-TA: TRANSFER AGENT REG TRANS AGENT RENEWAL / RULE 40-2K TRANS AGENT EXEMPTIONS TRANS AGENT WITHDRAWAL

10 10 10 10

TRANSFER AGENT REGULATORY REPORTS 40-AR 40RPT WP-TA

FORM 40-AR: TA ANNUAL RPT TA EXCEPTION/CESSATION REPORT WORK PERMIT: TA, CU

/

FS

10 10 10

PRIVATE COMPANY REPORTS/ORDINARY CORPORATIONS GIS GIS-N ANHAM ANO NAAM NPAM HOLDR

GENERAL INFORMATION SHEET NTCE OF CESSATION / CODE SECT 26 AFFIDAVIT OF NONHOLDING OF AM AFFIDAVIT OF NONCOPERATION NTCE OF ADJOURNMENT OF AM NTCE OF POSTPONEMENT OF AM LIST OF STOCKHOLDERS (PVT CO)

11 11 11 11 11 11 11

ANNUAL FINANCIAL STATEMENTS NOT INCLUDED IN REPORTS FS

FINANCIAL STATEMENT-ANNUAL

12

ANNUAL REPORTS AND PROXIES/ INFO STATEMENTS 11-A AR-SH AR-AA AR-AS AR-FC AR-FR CPX-P PXY-P INFO PROXY CPROX I N F

p

FORM 11-A: ANNUAL REPORT/FS ANNUAL RPT TO SHAREHOLDERS ANNUAL RPT-ASSET BACK ACCTANT ANNUAL RPT-ASSET BACK SERVICER ANNUAL RPT-FGN CORP-PRIMARY/FS ANNUAL RPT-FGN REGIONAL HQ PRELIMINARY CONTEST PXY/CONFID PRELIMINARY PROXY STMT/CONFID PRELIMINARY INFO STMT/CONFID FORM 34-C: INFORMATION STMT FORM 34-A: PROXY STATEMENT FORM 34-A(l): CONTESTED PROXY

13 13 13 13 13 13 13 13 13 13 13 13


1053

QUARTERLY REPORTS 11-Q CPQCF CPQFS QR-AS

QTR

FORM 11-Q: QUARTERLY REPORT/FS RPT-CP / BOND CASH FLOW QTR RPT-CP / BOND INTERIM FS 101 QTR RPT-ASSET BACK SERVICER

85-1

15 15 15 15

CURRENT REPORTS/REPORTING EXEMPTION OR DELAY 11-C 11-EX 11-L

FORM 11-C: CURRENT DISCL RPT FORM 11-EX: NTCE EXMPT RPTNG FORM 11-L: NTCE TO DELAY RPT

16 16 16

COMMERCIAL PAPER REGULATORY REPORTS CPAIN CPM CPM-N CPM-23 CPQ23 CPQES

CP-ANNUAL INFO STMT CP-MONTHLY M-101/1040 CP-MONTHLY M-101/NQB CP-MONTHLY M-23-01 CP-QTR Q-23-01 / INTERIM FS CP-QTR EPS STMT 4-83

04 04 04 04 04 04

PROPRIETARY CERTS/SHARES REPORTS COA DIV EDN MER MOC OFFDR

CHANGE OF ADDRESS DIVIDEND DECLARATION EXPANSION/DEVELOPMENT NTCE MERGER/CONSOLIDATION CONTRACT MGT/OPERATING CONTRACT LIST OF OFFICERS AND DIRECTORS

16 16 16 16 16 16

TENDER OFFERS STEND TENDR

FORM 32-B: SELF-TENDER INFO FORM 33-A: TENDER OFFER STMT

17 17

ACQUISITION REPORTS ACQ ACQ-N

FORM 32-A1: ACQUISITION STMT FORM 32-A2: ACQUISITION NTCE

18 18

BENEFICIAL REPORTS BEN BEN-C

FORM 36-A: BENEFICIAL OWNER FORM 36-B: BENEFICIAL CHANGES

19 19

PRE-NEED REGISTRATION and RENEWALS PN-1 PN-S PN-RB

PRE-NEED CO / PLAN / PRE-NEED SALESMAN REG PN RELEASE OF BALANCE

DLR

FILING

60 60 60

1054

PN-TF PN-EX PN-W PND-R PNS-R


P N A G R E E M E N T W I T H TR F U N D B K PRE-NEED EXEMPTIONS PRE-NEED W I T H D R A W A L PN DEALER RENEWAL PRE-NEED S A L E S M A N R E N E W

60 60 60 60 60

PRE-NEED REPORTS PNAVR PNMCD PNMSA PNMSR PNQFS PNQLP PNQTF PNUPC WP-PN

P N A N N U A L A C T U A R I A L V A L RPT P N M O N T H L Y C O L L E C T I O N / D E P RPTS P N M O N T H L Y S A L E S M A N / A P P R E N RPT P N M O N T H L Y P L A N SALES / H L D R RPT PN QTR U N A U D I T E D FS P N Q T R L A P S E D P L A N S RPT QTR STMT BY PN TRUST F U N D PN DLR U N I M P A I R ED PAIDUP CAP W O R K PERMIT: PN D L R

61 61 61 61 61 61 61 61 61

FINANCING COMPANY REGISTRATION FC-1 FC-EX FC-W

F I N A N C E CO REGISTRATION F I N A N C E CO EXEMPTIONS FINANCE CO W I T H D R A W A L

70 70 70

F I N A N C I N G C O M P A N Y REGULATORY REPORTS FCQ88

F I N C O Q T R R P T FCQ-88-01 O F F D R

71

FCQBS FCQIS

F I N C O Q T R B A L S H E E T 7-26-02B F I N C O Q T R I N C S T M T 7-26-03B

71 71

— oOo —

Appendix L

COPIES OF REPORTS AND OTHER FILINGS WITH THE SECURITIES & EXCHANGE COMMISSION In line w i t h the objectives of the Anti-Re d Tape Act of 2007 and, by way of contribution to the government's efforts to protect the environment, the Securities & Exchange Commission, effective March 15,2010, reduced the number of copies of reports and other filings by reporting corporations w i t h the Commission (exclusive of the filer's receiving copy) as follows:

1.

Filings with the Company Registration and Monitoring Department:

Applications for registration of Articles of Incorporation (AOI)/Articles of Partnership (AOP); By-laws; Amendments of A O I / A O P and By-laws; mergers; licenses of foreign corporations, regional headquarters and regional operating headquarters; General Information Sheet (GIS) and Financial Statements... 3 copies

2.

Filings with the Corporation Finance Department: A. LISTED AND PUBLIC COMPANIES Form Type

DESCRIPTION

COPIES 3

SEC F o r m 12-1

Registration S t a t e m e n t

SEC F o r m 1 7 - A

Annual Report

3

SEC F o r m 1 7 - Q

Quarterly Report

2

SEC F o r m 17-C

Current Report

2

SEC F o r m 1 7 - L

N o t i f i c a t i o n of Inability to File F o r m 1 7 - A or 17-Q

2

SEC F o r m 17-EX

Notification of Suspension of Duty to File R e p o r t s U n d e r Sec. 17 of the Securities Regulation C o d e

2

SEC F o r m 20-IS

Information Statement

2

SEC F o r m 2 3 - A

Initial Statement of Beneficial O w n e r s h i p

2

Statement of C h a n g e s in Beneficial Ownershi p

2

Secretary's Certificate of Attendanc e of Directors

2

SEC F o r m 23-B

1055


1056

Certificate of C o m p l i a n c e with the Revised C o d e of C o r p o r a t e G o v e r n a n c e

2

S E C F o r m 18-A

R e p o r t of 5% Beneficial O w n e r s h i p

2

S E C F o r m 18-AS

R e p o r t of 5% Institutional B u y e r

2

S E C F o r m 19.1

Tender Offer Report

2

B. FINANCING COMPANIES DESCRIPTION

Form Type

COPIES

SEC F o r m F C F S

Semi-Annual Reports

2

S E C F o r m FCIF

Special F o r m for A u d i t e d Financial S t a t e m e n t s

2

C o r p o r a t e Secretary' s Certification on directors'

2

a t t e n d a n c e in b o a r d m e e t i n g s

AMLA

C o m p l i a n c e Officer's Certification on extent of c o m p l i a n c e w i t h the R e v i s ed C o d e o f C o r p o r a t e Governance

2

Revised C o d e o f C o r p o r a t e G o v e r n a n c e

2

Corporate Governance Scorecard

2

Manual on Anti-Money Laundering

2

A M L A Compliance Form

2

C. LENDING COMPANIES DESCRIPTION

Form Type SEC Form LCIF

Semi-Annual

SEC Form LCFS

Special F o r m for A u d i t e d Financial S t a t e m e n t s (LCFS)

Reports

COPIES 2 2

D. COMMERCIAL PAPERS ISSUERS Form T y p e CPAIN

DESCRIPTION Information

Statement

COPIES 2

3. Filings with the Market Regulation Department: A.

TRANSFER AGENTS

Form Type

DESCRIPTION

COPIES

SEC Form 3 6 - A R

Annual Report

2

SEC Form 36-FS

A n n u a l A u d i t e d Financial S t a t e m e n t

2

SEC Form 3 6 - E R

Exception Report

2

COPIES OF REPORTS AND OTHER FILINGS WITH THE SECURITIES & EXCHANGE COMMISSION Appendix L SEC Form MCG-2002

Certificate o f C o m p l i a n c e w i t h the R e v i s e d C o d e

1057

2

of Corporate Governance Certificate of A t t e n d a n c e of Directors in m e e t i n g s o f the B o a r d o f the D i r e c t o r s

B.

2

EXCHANGI:S

Form T y p e

DESCRIPTION

COPIES

SEC Form 33-A

A m e n d m e n t F o r m for E x c h a n g e s

2

SEC Form MCG-2002

Certificate o f C o m p l i a n c e w i t h the Revised C o d e

2

of Corporate Governance Certificate of A t t e n d a n c e of Directors in m e e t i n gs

2

o f the B o a r d o f D i r e c t o r s

C.

E x c h a n g e ' s r e p o r t o n B l o c k Sales

2

Broker/Dealer's report on transactions/trading o f P S E shares.

2

SELF-REGULATORY ORGANIZATIONS

Form T y p e SEC Form 33-SRO

DESCRIPTION

COPIES

A m e n d m e n t F o r m for E x c h a n g e s

2

E x c h a n g e ' s R e p o r t o n Ceiling and Floor Alerts

2

Exchange's Audit Calendar

2

E x c h a n g e ' s m o n t h l y r e p o r t o n periodic e x a m i nation

(N

Exchange's

2

monthly

repor t

on

dockets

of

E x a m i n a t i o n s a n d Investigations being c o n d u c t e d b y the E x c h a n g e E x c h a n g e ' s S e m i - A n n u a l R e p o r t on listed and delisted / s u s p e n d e d issues

D.

2

CLEARING AGENCIES

Form T y p e SEC Form 42-CA

DESCRIPTION

COPIES

Registration F o r m / A m e n d m e n t F o r m for Clear-

2

ing A g e n c i e s SEC Form 42-FS SEC Form MCG-2002

Annual A u d i t e d Financial Statements

2

Certificate of C o m p l i a n c e with the Revised C o d e

2

of Corporate Governance Certificate of A t t e n d a n c e of Directors in meetings of the Board of Directors

2

Clearing Agency's report on Breaches of Rules or Difficulties of Participants

2


1058

E. INVESTMENTS HOUSES/UNDER WRITERS OF SECURITIES Form Type

COPIES

DESCRIPTION

SEC Form IH-14 QPR

Quarterly Progress Report

2

SEC Form IH-14 AR

Annual Report

2

SEC Form I H / U - I A

Report on any c h a n g e / s in the information contained in SEC Form I H / U - I A

2

SEC Form MCC-2002

Certificate of C o m p l i a n c e w i t h the R e v i s e d Code of Corporate G o v e r n a n ce

2

Certificate of A t t e n d a n c e of Directors in meetings of Board of Directors

2

Risk Based Capital A d e q u a c y Report

2

Notice of Termination of Salesman a n d / o r

2

SEC Form 28-T

Associated Person SEC F o r m BD — 30.2 Q C R

Associated Person's Quarterly Compliance Report

2

SEC F o r m 28-S

A m e n d m e n t / C h a n g e s in the Information contained in SEC F o r m 28-S

2

SEC Form 2 8 - C O / A P

A m e n d m e n t / C h a n g e s in the Information contained in SEC — F o r m 2 3 - C O / A P

2

F. INVESTMENT COMPANY ADVISERS Form Type

copres

DESCRIPTION

SEC Form ICA-IA

Registration F o r m / A m e n d m e n t F o r m for Investment Company Advisers

2

SEC F o r m ICA-CIS

A m e n d m e n t / C h a n g e s in the information contained in SEC F o r m ICA-CIS

2

SEC Form I C A - C O / A P

A m e n d m e n t / C h a n g e s in the Information contained in SEC Form C O / A P

2

SEC Form ICA-T

Notice of Termination of Salesman a n d / o r Associated Person

2

SEC Form MCC-2002

Certificate o f C o m p l i a n c e w i t h the R e v i s e d Code of Corporate Governance

2

Certificate of A t t e n d a n c e of Directors in m e e t i n g s of the B o a r d of D i r e c t o r s

2

G. MUTUAL FUND DISTRIBUTORS Form Type

DESCRIPTION

SEC F o r m M F D

Registration Form/Amendment Mutual Fund Distributors

SEC Form ICA-T

Notice of Termination Associated Person

of

COPIES Form

Salesman

for

2

and/or

2

COPIES OF REPORTS AND OTHER FILINGS WITH THE SECURITIES & EXCHANGE COMMISSION Appendix L

1059

H. GOVERNMENT SECURITIES ELIGIBLE DEALERS Form Type

DESCRIPTION

SEC Form MCC-2002

COPIES

Certificate of Compliance with the Revised Code of Corporate Governance

2

Certificate of Attendance of Directors in meetings of the Board of Directors

2

Risk Based Capital Adequacy Report

2

SEC Form 28 — BDA

Amendment Form for Government Securities Eligible Dealer

2

SEC Form 28-T

Notice of Termination of Salesman and/or Associated Person

2

SEC Form 1313 — 30.2 OCR


2

SEC Form 28-S

Amendment/Changes in the Information contained in SEC Form 28-S

2

SEC Form 28-CO/AP

Amendment/Changes in the Information contained in SEC Form 28-CO/AP

2

I.

BROKER/DEALER(S) IN SECURITIES

Form Type

DESCRIPTION

SEC Form MCC-2002

COPIES

Certificate of Compliance with the Revised Code of Corporate Governance

2

Certificate of Attendance of Directors in meetings of the Board of Directors

2

Risk Based Capital Adequacy Report

2

SEC Form 30.1

Report on Monitoring of Affiliated Transactions of Brokers and Dealers

2

SEC Form BD — 30.2 QCR


2

SEC Form 28-S

Amendment /Changes in the Information contained in SEC Form 28-S

2

SEC Form 28-CO/AP

Amendment/Changes in the Information contained in SEC Form 28-CO/AP

2

4. Filings and pleadings filed with the Office of the General Counsel: a)

Request for Opinion

1 copy

b)

En B a n c cases

2 copies

c)

Complaints and other cases •

O n e respondent

2 copies

•

Two or m o r e respondents

2 copies per respondent

All other reports a n d filings with the Commission that are not included in the e n u m e r a t i o n a b o v e shall b e i n the s a m e n u m b e r o f c o p i e s a s p r e s e n t l y in effect. March 5, 2010, Mandaluyon g City, Metro Manila.

Appendix M REVISED CODE OF CORPORATE GOVERNANCE SEC CIRCULAR NO. 6 SERIES OF 2009 Pursuant to its mandate under the Securities Regulation Code and the Corporation Code, the Securities and Exchange Commission (the "Commission"), in a meeting held on June 18,2009, approved the promulgation of this Revised Code of Corporate Governance (the "Code") w h i c h shall apply to registered corporations and to branches or subsidiaries of foreign corporations operating in the Philippines that (a) sell equity a n d / o r debt securities to the public that are required to be registered w i t h the Commission, or (b) have assets in excess of Fifty M i l l i o n Pesos and at least t w o h u n d r e d (200) stockholders w h o o w n at least one h u n d r e d (100) shares each of equity securities, or (c) whose equity securities are listed on an Exchange, or (d) are grantees of secondary licenses f r o m the Commission. Article 1: D e f i n i t i o n of Terms a)

Corporate Governance — the f r a m e w o r k of rules, systems and processes in the corporation that governs the performance by the Board of Directors and M a n a g e m e n t of their respective duties a n d responsibilities to the stockholders;

b)

Board of Directors — the governing b o d y elected by the stockholders that exercises the corporate powers of a corporation, conducts all its business and controls its properties;

c)

Exchange — an organized market place or facility that brings together buyers and sellers, a n d executes trades of securities a n d / o r commodities;

d)

Management — the body given the authority by the Board of Directors to implement the policies it has laid d o w n in the conduct of the business of the corporation;

e)

Independent director — a person w h o , apart from his 'fees and share holdings, is independent of management and free f r o m any business or other relationship w h i c h could, or could reasonably be perceived to: materially interfere w i t h his exercise of independent judgment in carrying out his responsibilities as a director;

1060

REVISED CODE OF CORPORATE GOVERNANCE SEC CIRCULAR NO. 6 Appendix M

1061

f)

Executive director — a director w h o is also the head of a department -or unit of the corporation or performs any w o r k related to its operation;

g)

Non-executive director — a director w h o is not the head of a department or unit of the corporation nor performs any w o r k related to its operation;

h)

Non-audit work — the other services offered by an external auditor to a corporation that are not directly related and relevant to its statutory audit functions, such as, accounting, payroll, bookkeeping, reconciliation, computer project management, data processing, or information technology outsourcing services, internal audit, and other services that m a y compromise the independence and objectivity of an external auditor;

i)

Internal control — the system established by the Board of Directors and M a n a g e m e n t for the accomplishment of the corporation's objectives, the efficient operation of its business, the reliability of its financial reporting, and faithful compliance w i t h applicable laws, regulations and internal rules;

j)

Internal control system — the f r a m e w o r k under w h i c h internal controls are developed and implemente d (alone or in concert w i t h other policies or procedures) to manage and control a particular risk or business activity, or combination of risks or business activities, to w h i c h the corporation is exposed;

k)

Internal audit — an independent and objective assurance activity designed to a d d value to and improve the corporation's operations, and help it accomplish its objectives by providing a systematic and disciplined approach in the evaluation and improvement of the effectiveness of risk management, control and governance processes;

1)

Internal audit department — a department or unit of the corporation and its consultants, if any, that provide independent and objective assurance services in order to add value to and improve the corporation's operations;

m)

Internal Auditor — the highest position in the corporation responsible for internal audit activities. If internal audit activities are performed by outside service providers, he is the person responsible for overseeing the service contract, the overall quality of these activities, and followup of engagement results.

Article 2: Rules of Interpretation A)

A l l references to the masculine gender in the salient provisions of this Code shall likewise cover the feminine gender.

B)

A l l doubts or questions that may arise in the interpretation or application of this Code shall be resolved in favor of promoting transparency, accountability and fairness to the stockholders and investors of the corporation.


1062

Article 3: Board Governance The Board of Directors (the "Board") is primarily responsible for the governance of the corporation. Corollary to setting the policies for the accomplishment of the corporate objectives, it shall provide an independent check on Management. A)

Composition of the Board The Board shall be composed of at least five (5), but not more than fifteen (15), members w h o are elected by the stockholders. A l l companies covered by this Code shall have at least t w o (2) independent directors or such number of independent directors that constitutes twenty percent (20%) of the members of the Board, whichever is lesser, but in no case less than t w o (2). A l l other companies are encouraged to have independent directors in their boards. The membership of the Board m a y be a combination of executive and non-executive directors (which include independent directors) in order that no director or small group of directors can dominate the decision-making process. The non-executive directors should possess such qualifications and stature that w o u l d enable t h e m to effectively participate in the deliberations of the Board.

B)

M u l t i p l e Board Seats The Board m a y consider the adoption of guidelines on the number of directorships that its members can h o l d in stock a n d non-stock corporations. The o p t i m u m numbe r should take into consideration the capacity of a director to diligently and efficiently p e r f o r m his duties and responsibilities. The Chief Executive Officer ( " C E O " ) and other executive directors may be covered by a lower indicative limit for membership in other boards. A similar limit m a y apply to independent or non-executive directors w h o , at the same time, serve as full-time executives in other corporations. In any case, the capacity of the directors to diligently and efficiently perform their duties and responsibilities to the boards they serve should not be compromised.

C)

T h e Chair and C h i e f Executive Officer The roles of Chair and C E O should, as m u c h as practicable, be separate to foster an appropriate balance of power, increased accountability and better capacity for independent decision-making by the Board. A clear delineation of functions should be m a d e between the Chair and C E O u p o n their election. If the positions of Chair and C E O are unified, the proper checks and balances should be laid d o w n to ensure that the Board gets the benefit of independent views and perspectives.


1 0 6 3

The duties and responsibilities of the Chair in relation to the Board m a y include, among others, the following: (i)

Ensure that the meetings of the Board are held in accordance with the by-laws or as the Chair m a y deem necessary;

(ii) Supervise the preparation of the agenda of the meeting in coordination w i t h the Corporate Secretary, taking into consideration the suggestions of the C E O , Management and the directors; a n d (iii) M a i n t a i n qualitative and timely lines of communication and information between the Board and Management.

D) Qualifications of Directors In addition to the qualifications for membership in the Board p r o v i d e d for in the Corporation Code, Securities Regulation Code a n d other relevant laws, the Board m a y provide for additional qualifications w h i c h include, among others, the following: (i)

College education or equivalent academic degree;

(ii) Practical understanding of the business of the corporation; (iii) M e m b e r s h i p in good standing in relevant industry, business or professional organizations; and (iv) Previous business experience.

E) Disqualification of Directors 1.

Permanent Disqualification The following shall be disqualification of a director: (i)

grounds

for

the

permanent

A n y person convicted by final judgment or order by a competent judicial or administrative body of any crime that (a) involves the purchase or sale of securities, as defined in the Securities Regulation Code; (b) arises out of the person's conduct as an underwriter, broker, dealer, investment adviser, principal, distributor, mutual fund dealer, futures commission merchant, commodity trading advisor, or floor broker; or (c) arises out of his fiduciary relationship with a bank, quasi-bank, trust company, investment house or as an affiliated person of any of them;

(ii) A n y person who, by reason of misconduct, after hearinq, is permanently enjoined by a final judgment or order of the Commission or any court or administrative body of competent jurisdiction from: (a) acting as underwriter, broker, dealer, investment adviser, principal distributor, mutual fund dealer, futures commission merchant, commodity trading advisor, or floor broker; (b) acting as director or officer of a bank, quasi-bank, trust company, investment house, or investment company; (c) engaging in or continuing


any conduct or practice in any of the capacities mentioned in sub-paragraphs (a) and (b) above, or willfully violating the laws that govern securities and banking activities. The disqualification shall also apply if such person is currently the subject of an order of the Commission or any court or administrative body denying, revoking or suspending any registration, license or permit issued to h i m under the Corporation Code, Securities Regulation Code or any other law administered by the Commission or Bangko Sentral ng Pilipinas (BSP), or under any rule or regulation issued by the Commission or BSP, or has otherwise been restrained to engage in any activity involving securities and banking; or such person is currently the subject of an effective order of a self-regulatory organization suspending or expelling h i m from membership, participation or association w i t h a member or participant of the organization; (iii) A n y person convicted by final judgment or order by a court or competent administrative body of an offense involving moral turpitude, fraud, embezzlement, theft, estafa, counterfeiting, misappropriation, forgery, bribery, false affirmation, perjury or other fraudulent acts; (iv) A n y person w h o has been adjudged by final judgment or order of the Commission, court, or competent administrative body to have w i l l f u l l y violated, or w i l l f u l ly aided, abetted, counseled, induced or procured the violation of any provision of the Corporation Code, Securities Regulation Code or any other la w administered by the Commission or BSP, or any of its rule, regulation or order; (v) A n y person earlier elected as independent director w h o becomes an officer, employee or consultant of the same corporation; (vi)

A n y person judicially declared as insolvent;

(vii)

A n y person found guilty by final judgment, or order of a foreign court or equivalent financial regulatory authority of acts, violations or misconduct similar to any of the acts, violations or misconduct enumerated in sub-paragraphs (i) to (v) above;

(viii) Conviction by final j u d g m e nt of an offense punishable by imprisonment for more than six (6) years, or a violation of the Corporation Code committed w i t h i n five (5) years prior to the date of his election or appointment.

Temporary

Disqualification

The Board m a y provide for the temporary disqualification of a director for any of the following reasons:


1065

(i)

Refusal to comply w i t h the disclosure requirements of the Securities Regulation Code and its Implementing Rules and Regulations. The disqualification shall be in effect as long as the refusal persists.

(ii)

Absence in more than fifty (50) percent of all regular and special meetings of the Board d u r i n g his incumbency, or any twelv e (12) m o n t h period d u r i n g the said incumbency, unless the absence is due to illness, death in the immediate family or serious accident. The disqualification shall apply for purposes of the succeeding election.

(iii) Dismissal or termination for cause as director of any corporation covered by this Code. The disqualification shall be in effect until he has cleared himself from any involvement in the cause that gave rise to his dismissal or termination. (iv) If the beneficial equity ownership of an independent director in the corporation or its subsidiaries and affiliates exceeds t w o percent of its subscribed capital stock. The disqualification shall be lifted if the limit is later complied w i t h . (v)

If any of the judgments or orders cited in the grounds for permanent disqualification has not yet become final. A temporarily disqualified director shall, w i t h i n sixty (60) business days f r o m such disqualification, take the appropriate action to remedy or correct the disqualification. If he fails or refuses to do so for unjustified reasons, the disqualification shall become permanent.

Responsibilities, Duties and Functions of the Board 1.

General Responsibility It is the Board's responsibility to foster the long-term success of the corporation, and to sustain its competitiveness and profitability in a manner consistent w i t h its corporate objectives and the best interests of its stockholders. The Board should formulate the corporation's vision, mission, strategic objectives, policies and procedures that shall guide its activities, including the means to effectively monitor Management's performance.

2.

Duties and Functions To ensure a high standard of best practice for the corporation and its stockholders, the Board should conduct itself with honesty and integrity in the performance of, among others, the following duties and functions: a)

Implement a process for the selection of directors who can add value and contribute independent judgment to the formulation of sound corporate strategies and policies. Appoint


competent, professional, honest and highly-motivated m a n agement officers. A d o pt an effective succession planning program for Management. b)

Provide sound strategic policies and guidelines to the corporation on major capital expenditures. Establish programs that can sustain its long-term viability and strength. Periodically evaluate and monitor the implementation of such policies and strategies, including the business plans, operating budgets and Management's overall performance.

c)

Ensure the corporation's faithful compliance w i t h all applicable laws, regulations and best business practices.

d)

Establish and maintain an investor relations program that w i l l keep the stockholders informed of important developments in the corporation. If feasible, the corporation's C E O or chief financial officer shall exercise oversight responsibility over this program.

e)

Identify the sectors in the community in w h i c h the corporation operates or are directly affected by its operations, and formulate a clear policy of accurate, timely and effective communication w i t h them.

f)

A d o p t a system of check and balance w i t h i n the Board. A regular review of the effectiveness of such system should be conducted to ensure the integrity of the decision-making and reporting processes at all times. There should be a continuing review of the corporation's internal control system in order to maintain its adequacy and effectiveness.

g)

Identify key risk areas and performance indicators and monitor these factors w i t h due diligence to enable the corporation to anticipate and prepare for possible threats to its operational and financial viability.

h)

Formulate and implement policies and procedures that w o u l d ensure the integrity and transparency of related party transactions between and amon g the corporation and its parent company, joint ventures, subsidiaries, associates, affiliates, major stockholders, officers and directors, including their spouses, children and dependent siblings and parents, and of interlocking director relationships by members of the Board.

i)

Constitute an A u d i t Committee and such other committees it deems necessary to assist the Board in the performance of its duties and responsibilities.

j)

Establish and maintain an alternative dispute resolution system in the corporation that can amicably settle conflicts or differences between the corporation and its stockholders, and


1 0 6 7

the corporation and third parties, including the regulatory authorities. k)

M e e t at such times or frequency as m a y be needed. The minutes of such meetings should be duly recorded. Independent views d u r i n g Board meetings should be encouraged and given due consideration.

1)

Keep the activities and decisions of the Board w i t h i n its authority under the articles of incorporation and by-laws, and in accordance w i t h existing laws, rules and regulations.

m)

A p p o i n t a Compliance Officer w h o shall have the rank of at least vice president. In the absence of such appointment, the Corporate Secretary, preferably a lawyer, shall act as Compliance Officer.

G) Specific Duties and Responsibilities of a Director A director's office is one of trust and confidence. A director should act in the best interest of the corporation in a manner characterized by transparency, accountability and fairness. He should also exercise leadership, prudence and integrity in directing the corporation towards sustained progress. A director should observe the following norms of conduct: (i)

Conduct fair business transactions w i t h the corporation, and ensure that his personal interest does not conflict w i t h the interests of the corporation. The basic principle to be observed is that a director should not use his position to profit or gain some benefit or advantage for himself a n d / o r his related interests. He should avoid situations that m a y compromise his impartiality. If an actual or potential conflict of interest m a y arise on the part of a director, he should fully and immediately disclose it and should not participate in the decision-making process. A director w h o has a continuing material conflict of interest should seriously consider resigning from his position. A conflict of interest shall be considered material if the director's personal or business interest is antagonistic to that of the corporation, or stands to acquire or gain financial advantage at the expense of the corporation.

(ii) Devote the time and attention necessary to properly and effectively perform his duties and responsibilities. A director should devote sufficient time to familiarize himself w i t h the corporation's business. He should be constantly aware of and knowledgeable w i t h the corporation's operations to enable h i m to meaningfully contribute to the Board's work. He should attend and actively participate in Board and committee meetings,


1068

review meeting materials and, if called' for, ask questions or seek explanation. (iii) Act judiciously. Before deciding on any matter brought before the Board, a director should carefully evaluate the issues and, if necessary, make inquiries and request clarification. (iv) Exercise independent judgment. A director should v i e w each problem or situation objectively. If a disagreement w i t h other directors arises, he should carefully evaluate and explain his position. He should not be afraid to take an unpopular position. Corollarily, he should support plans and ideas that he thinks are beneficial to the corporation. (v)

H a v e a w o r k i n g knowledge of the statutory and regulatory requirements that affect the corporation, including its articles of incorporation and by-laws, the rules and regulations of the Commission and, where applicable, the requirements of relevant regulatory agencies. A director should also keep abreast w i t h industry developments and business trends in order to promote the corporation's competitiveness.

(vi) Observe confidentiality. A director should keep secure and confidential all non-public information he m a y acquire or l e a m by reason of his position as director. He should not reveal confidential information to unauthorized persons w i t h o u t the authority of the Board.

H) Internal Control Responsibilities of the Board The control environment of the corporation consists of (a) the Board which ensures that the corporation is properly and effectively managed and supervised; (b) a M a n a g e m e n t that actively manages and operates the corporation in a sound and p r u d e n t manner; (c) the organizational and procedural controls supported by effective management information and risk management reporting systems; and (d) an independent audit mechanism to monitor the adequacy and effectiveness of the corporation's governance, operations, and information systems, including the reliability and integrity of financial and operational information, the effectiveness a n d efficiency of operations, the safeguarding of assets, and compliance w i t h laws, rules, regulations and contracts. (i)

The m i n i m u m internal control mechanisms for the performance of the Board's oversight responsibility m a y include: a)

Definition of the duties and responsibilities of the C E O w h o is ultimately accountable for the corporation's organizational and operational controls;


(ii)

1069

b)

Selection of the person w h o possesses the ability, integrity and expertise essential for the position of C E O ;

c)

Evaluation of proposed senior management appointments;

d)

Selection a n d appointment of qualified and competent management officers; and

e)

Review of the corporation's h u m a n resource policies, conflict of interest situations, compensation program for employees, a n d management succession plan.

The scope and particulars of the systems of effective organizational and operational controls m a y differ among corporations depending on, among others, the following factors: nature and complexity of the business and the business culture; volume, size and complexity of transactions; degree of risks involved; degree of centralization a n d delegation of authority; extent and effectiveness of information technology; and extent of regulatory compliance.

(iii) A corporation m a y establish an internal audit system that can reasonably assure the Board, Managemen t and stockholders that its key organizational and operational controls are faithfully complied w i t h . The Board m a y appoint an Internal A u d i t or to perform the audit function, and m a y require h i m to report to a level in the organization that allows the internal audit activity to fulfill its mandate. The Internal A u d i t or shall be guided by the International Standards on Professional Practice of Internal Auditing.

Board Meetings and Quorum Requirement The members of the Board should attend its regular and special meetings in person or through teleconferencing conducted in accordance w i t h the rules and regulations of the Commission. Independent directors should always attend Board meetings. Unless otherwise provided in the by-laws, their absence shall not affect the q u o r u m requirement. However, the Board may, to promote transparency, require the presence of at least one independent director in all its meetings. To monitor the directors' compliance w i t h the attendance requirements, corporations shall submit to the Commission, on or before January 30 of the following year, a sworn certification about the directors' record of attendance in Board meetings. The certification may be submitted through SEC Form 17-C or in a separate filing.

Remuneration of Directors and Officers The levels of remuneration of the corporation should be sufficient to be able to attract and retain the services of qualified and competent directors and officers. A portion of the remuneration of executive


1070

directors may be structured or be based on corporate and individual performance. Corporations may establish formal and transparent procedures for the development of a policy on executive remuneration or determination of remuneration levels for individual directors and officers depending on the particular needs of the corporation. No director should participate in deciding on his remuneration. The corporation's annual reports and information and proxy statements shall include a clear, concise and understandable disclosure of all fixed and variable compensation that m a y be paid, directly or indirectly, to its directors and top four (4) management officers during the preceding fiscal year. To protect the funds of a corporation, the Commission may, in exceptional cases, e.g., w h e n a corporation is under receivership or rehabilitation, regulate the payment of the compensation, allowances, fees and fringe benefits to its directors and officers. K)

Board Committees The Board shall constitute the proper committees to assist it in good corporate governance. (i)

The A u d i t Committee shall consist of at least three (3) directors, w h o shall preferably have accounting and finance backgrounds, one of w h o m shall be an independent director a n d another w i t h audit experience. The chair of the A u d i t Committee should be an independent director. The committee shall have the following functions: a)

Assist the Board in the performance of its oversight responsibility for the financial reporting process, system of internal control, audit process, and monitoring of compliance w i t h applicable laws, rules and regulations;

b)

Provide oversight over Management's activities in managing credit, market, liquidity, operational, legal and other risks of the corporation. This function shall include regular receipt from Managemen t of information on risk exposures and risk management activities;

c)

Perform oversight functions over the corporation's internal and external auditors. It should ensure that the internal and external auditors act independently from each other, and that both auditors are given unrestricted access to all records, properties and personnel to enable them to perform their respective audit functions;

d)

Review the annual internal audit p l a n to ensure its conformity w i t h the objectives of the corporation. The plan shall include the audit scope, resources and budget necessary to implement it;


1071

e)

Prior to the commencement of the audit, discuss w i t h the external auditor the nature, scope and expenses of the audit, a n d ensure proper coordination if more than one audit firm is involve d in the activity to secure proper coverage and m i n i m i z e duplication of efforts;

f)

Organize an internal audit department, and consider the appointment of an independent internal auditor and the terms and conditions of its engagement and removal;

g)

M o n i t o r and evaluate the adequacy and effectiveness of the corporation's internal control system, including financial reporting control and information technology security;

h)

Review the reports submitted by the internal and external auditors;

i)

R e v i e w the quarterly, half-year and annual financial statements before their submission to the Board, w i t h particular focus on the following matters: •

A n y change / s in accounting policies and practices

•

M a j o r judgmental areas

•

Significant adjustments resulting from the audit

•

G o i n g concern assumptions

•

Compliance w i t h accounting standards

•

Compliance w i t h tax, legal and regulatory requirements.

j)

Coordinate, monitor and facilitate compliance w i t h laws, rules and regulations;

k)

Evaluate and determine the non-audit work, if any, of the external auditor, and review periodically the non-audit fees paid to the external auditor in relation to their significance to the total annual income of the external auditor and to the corporation's overall consultancy expenses. The committee shall disallow any non-audit w o r k that w i l l conflict with his duties as an external auditor or may pose a threat to his independence. The non-audit work, if allowed, should be disclosed in the corporation's annual report;

1)

Establish and identify the reporting line of the Internal Auditor to enable h i m to properly fulfill his duties and responsibilities. He shall functionally report directly to the A u d i t Committee. The A u d i t Committee shall ensure that, in the performance of the w o r k of the Internal Auditor, he shall be free from interference by outside parties. For Philippine branches or subsidiaries of foreign corporations covered by this Code, their Internal Auditor


1072

should be independent of the Philippine operations and should report to the regional or corporate headquarters. (ii)

L)

The Board may also organize the following committees: a)

A Nomination Committee, which m a y be composed of at least three (3) members and one of w h o m should be an independent director, to review and evaluate the qualifications of all persons nominated to the Board and other appointments that require Board approval, and to assess the effectiveness of the Board's processes and procedures in the election or replacement of directors;

b)

A Compensation or Remuneration Committee, w h i c h may be composed of at least three (3) members and one of w h o m should be an independent director, to establish a formal and transparent procedure for developing a policy on remuneration of directors and officers to ensure that their compensation is consistent w i t h the corporation's culture, strategy and the business environment in w h i c h it operates.

T h e Corporate Secretary The Corporate Secretary, w h o should be a Filipino citizen and a resident of the Philippines, is an officer of the corporation. He should — (i)

Be responsible for the safekeeping and preservation of the integrity of the minutes of the meetings of the Board and its committees, as w e l l as the other official records of the corporation;

(ii) Be loyal to the mission, vision and objectives of the corporation; (iii) W o r k fairly and objectively w i t h the Board, Management and stockholders; (iv) H a v e appropriate administrative and interpersonal skills; (v)

If he is not at the same time the corporation's legal counsel, be aware of the laws, rules and regulations necessary in the performance of his duties and responsibilities;

(vi) H a v e a w o r k i n g knowledge of the operations of the corporation; (vii) Inform the members of the Board, in accordance w i t h the by-laws, of the agenda of their meetings and ensure that the members have before them accurate information that w i l l enable them to arrive at intelligent decisions on matters that require their approval; (viii) Attend all Board meetings, except w h e n justifiable causes, such as, illness, death in the immediate family and serious accidents, prevent h i m from doing so; (ix) Ensure that all Board procedures, rules and regulations are strictly followed by the members; and

REVISED CODE OF CORPORATE GOVERNANCE SEC CIRCULAR NO. 6 Appendix M (x)

1073

If he is also the Compliance Officer, perform all the duties and responsibilities of the said officer as provided for in this Code.

M) The Compliance Officer The Board shall appoint a Compliance Officer w h o shall report directly to the Chair of the Board. He shall perform the following duties: (i)

M o n i t o r compliance by the corporation w i t h this Code and the rules and regulations of regulatory agencies and, if any violations . are f o u n d , report the matter to the Board and recommend the imposition of appropriate disciplinary action on the responsible parties and the adoption of measures to prevent a repetition of the violation;

(ii)

A p p e a r before the Commission w h e n summoned in relation to compliance w i t h this Code; and

(iii) Issue a certification every January 30th of the year on the extent of the corporation's compliance w i t h this Code for the completed year a n d , if there are any deviations, explain the reason for such deviation.

Article 4: Adequate and Timely Information To enable the members of the Board to properly fulfill their duties and responsibilities, M a n a g e m e n t should provide them w i t h complete, adequate and timely information about the matters to be taken in their meetings. Reliance on information volunteered by Management w o u l d not be sufficient in all circumstances and further inquiries m a y have to be made by a member of the Board to enable h i m to properly perform his duties and responsibilities. Hence, the members should be given independent access to Management and the Corporate Secretary. The information m a y include the background or explanation on matters brought before the Board, disclosures, budgets, forecasts and internal financial documents. The members, either individually or as a Board, and in furtherance of their duties and responsibilities, should have access to independent professional advice at the corporation's expense.

Article 5: Accountability and Audit A)

The Board is primarily accountable to the stockholders. It should provide them w i t h a balanced and comprehensible assessment of the corporation's performance, position and prospects on a quarterly basis, including interim and other reports that could adversely affect its business, as well as reports to regulators that are required by law. Thus, it is essential that Management provide all members of the Board wit h accurate and timely information that would enable the Board to comply w i th its responsibilities to the stockholders.


Management should formulate, under the supervision of the A u d i t Committee, the rules and procedures on financial reporting and internal control in accordance w i t h the following guidelines: (i)

The extent of its responsibility in the preparation of the financial statements of the corporation, w i t h the corresponding delineation of the responsibilities that pertain to the external auditor, should be clearly explained;

(ii) An effective system of internal control that w i l l ensure the integrity of the financial reports and protection of the assets of the corporation should be maintained; (iii) On the basis of the approved audit plans, internal audit examinations should cover, at the m i n i m u m , the evaluation of the adequacy and effectiveness of controls that cover the corporation's governance, operations and information systems, including the reliability and integrity of financial and operational information, effectiveness and efficiency of operations, protection of assets, and compliance w i t h contracts, laws, rules and regulations; (iv) The corporation should consistently comply w i t h the financial reporting requirements of the Commission; (v) The external auditor should be rotated or changed every five (5) years or earlier, or the signing partner of the external auditing firm assigned to the corporation, should be changed w i t h the same frequency. The Internal A u d i t o r should submit to the A u d i t Committee a n d M a n a g e m e n t an annual report on the internal audit department's activities, responsibilities a n d performance relative to the audit plans and strategies as approved by the A u d i t Committee. The annual report should include significant risk exposures, control issues and such other matters as m a y be needed or requested by the Board a n d Management. The Internal A u d i t o r should certify that he conducts his activities in accordance w i t h the International Standards on the Professional Practice of Internal A u d i t i n g . If he does not, he shall disclose to the Board and M a n a g e m e n t the reasons w h y he has not fully complied w i t h the said standards. The Board, after consultations w i t h the A u d i t Committee, shall recommend to the stockholders an external auditor d u l y accredited by the Commission w h o shall undertake an independent audit of the corporation, and shall provide an objective assurance on the manner by which the financial statements shall be prepared and presented to the stockholders. The external auditor shall not, at the same time, provide internal audit services to the corporation. N o n - a u d i t w o r k may be given to the external auditor, provided it does not conflict w i t h his duties as an independent auditor, or does not pose a threat to his independence.


1075

If the external auditor resigns, is dismissed or ceases to perform his services, the reason/s for and the date of effectivity of such action shall be reported in the corporation's annual and current reports. The report shall include a discussion of any disagreement between h i m and the corporation on accounting principles or practices, financial disclosures or audit procedures w h i c h the former auditor and the corporation failed to resolve satisfactorily. A preliminary copy of the said report shall be given by the corporation to the external auditor before its submission. If the external auditor believes that any statement made in an annual report, information statement or any report filed w i t h the Commission or any regulatory b o d y durin g the period of his engagement is incorrect or incomplete, he shall give his comments or views on the matter in the said reports.

Article 6: Stockholders' Rights and Protection of Minority Stockholders' Interests A)

The Board shall respect the rights of the stockholders as provided for in the Corporation Code, namely: (i)

Right to vote on all matters that require their consent or approval;

(ii)

Pre-emptive right to all stock issuances of the corporation;

(iii) Right to inspect corporate books and records; (iv) Right to information; (v)

Right to dividends; and

(vi) Appraisal right. B)

The Board should be transparent and fair in the conduct of the annual and special stockholders' meetings of the corporation. The stockholders should be encouraged to personally attend such meetings. If they cannot attend, they should be apprised ahead of time of their right to appoint a proxy. Subject to the requirements of the by-laws, the exercise of that right shall not be unduly restricted and any doubt about the validity of a proxy should be resolved in the stockholder's favor. It is the duty of the Board to promote the rights of the stockholders, remove impediments to the exercise of those rights and provide an adequate avenue for them to seek timely redress for breach of their rights. The Board should take the appropriate steps to remove excessive or unnecessary costs and other administrative impediments to the stockholders' meaningful participation in meetings, whether in person or by proxy. Accurate and timely information should be made available to the stockholders to enable them to make a sound judgment on all matters brought to their attention for consideration or approval.


1076

Although all stockholders should be treated equally or without discrimination, the Board should give minority stockholders the right to propose the holding of meetings and the items for discussion in the agenda that relate directly to the business of the corporation.

Article 7: Governance Self-Rating System The Board may create an internal self-rating system that can measure the performance of the Board and Management in accordance w i t h the criteria provided for in this Code. The creation and implementation of such self-rating system, including its salient features, may be disclosed in the corporation's annual report.

Article 8:

Disclosure

and Transparency

The essence of corporate governance is transparency. The more transparent the internal workings of the corporation are, the more difficult it w i l l be for Management and dominant stockholders to mismanage the corporation or misappropriate its assets. It is therefore essential that all material information about the corporation which could adversely affect its viability or the interests of the stockholders should be publicly and timely disclosed. Such information should include, among others, earnings results, acquisition or disposition of assets, off balance sheet transactions, related party transactions, and direct and indirect remuneration of members of the Board and Management . A l l such information should be disclosed through the appropriate Exchange mechanisms and submissions to the Commission.

Article 9: C o m m i t m e n t to Good Corporate Governance A l l covered corporations shall establish a n d i m p l e m e n t their corporate governance rules in accordance w i t h this Code. The rules shall be embodied in a m a n u a l that can be used as reference by the members of the Board and Management. The m a n u al should be submitted to the Commission for its evaluation w i t h i n one hundre d eighty (180) business days from the date this Code becomes effective to enable the Commission to determine its compliance with this Code taking into consideration the nature, size and scope of the business of the corporation; provided, however, that corporations that have earlier submitted their manual may, at their option, continue to use the said manual as long it complies w i t h the provisions of this Code. The manual shall be made available for inspection by any shareholder at reasonable hours on business days.

Article 10: Regular Review of the Code and the Scorecard To monitor the compliance by covered corporations w i t h this Code, the Commission may require them to accomplish annually a scorecard on the scope, nature and extent of the actions they have taken to meet the objectives of this Code.


1077

The Commission shall periodically review this Code to ensure that it meets its objectives.

Article 11: Administrative Sanctions A fine of not more than T w o H u n d r e d Thousand Pesos (P200,000) shall, after due notice and hearing, be imposed for every year that a covered corporation violates the provisions of this Code, w i t h o u t prejudice to other sanctions that the Commission m a y be authorized to impose under the law; provided, however, that any violation of the Securities Regulation Code punishable by a specific penalty shall be assessed separately and shall not be covered by the abovementioned fine.

Article 12: Effective Date This M e m o r a n d u m Circular shall take effect on July 15, 2009. Signed this 22nd day of June 2009 at M a n d a l u y o n g City, Philippines.

— oO —

Appendix N THE 2006 RULES OF PROCEDURE OF THE SECURITIES AND EXCHANGE COMMISSION Pursuant to the Securities Regulation Code (R.A. 8799), Corporation Code of the Philippines (B.P 68), Presidential Decree N o . 902-A, as amended, and other related laws, and in the interest of a just, speedy and inexpensive resolution of disputes and complaints over w h i c h the SEC has jurisdiction, the Commission hereby promulgates the following rules of procedure to govern actions and proceedings before it. RULE I G e n e r a l Provisions SEC. 1-1. Title. — These Rules shall be k n o w n as the "The 2006 Rules of Procedure of the Securities and Exchange Commission." SEC. 1-2. Definitions . — For purposes of these Rules, the following terms shall mean: a.

Commission the Securities and Exchange Commission (SEC).

b. The Code, The SRC — the Securities Regulation Code or Republic Act (R.A.) 8799. c.

Commissioner — the Chairperson or any of the Commissioners.

d. Commission En Banc — the Commissioners appointed pursuant to the Securities Regulation Code acting as a collegial body; it is the highest governing body of the Commission. e. Operating Department — refers to the C o m p a n y Registrsation and Monitoring Department ( C R M D ) , Compliance a n d Enforcement Department (CED), Corporation Finance Departmen t ( C F D ) , M a r k e t Regulation Departmen t ( M R D ) , Non-Traditional Securities and Instruments D e p a r t m e nt ( N T D ) , a n d Extension Offices (EOs). f. Hearing Panel or Officer — any officer, b o d y or panel d u l y designated or created through the pertinent office order by the Director (or Officer-inCharge) of an Operating Department, or by the Commission pursuant to these Rules or by Resolution of the En Banc, to hear and decide a case or complaint. At least one member of the hearing panel shall be a member of the Philippine Bar.

1078

THE 2006 RULES OF PROCEDURE OF THE SECURITIES AND EXCHANGE COMMISSION Appendix N g. Officer.

1079

Order — any directive, other than a Decision of a Hearing Panel or

h. Decision — means the w h o l e or any part of the final disposition issued by a H e a r i n g Panel or Officer, Operating D e p a r t m e nt or the Commission En Banc pertaining to any matter w i t h i n its jurisdiction. i. Corporation also refers to a partnership, association or any other entity registered or licensed by the Commission. j. Office of the General Accountant ( O G A ) — the office that advises, assists and provides technical support to the Commission and SEC Operating Departments on issues relating to accounting and auditing. k. Office of the General Counsel ( O G C ) — the office that advises and assists the Commission and its Directors on legal issues that m a y be brought before them, a n d it m a y be assigned such other functions as m a y be delegated by the Commission En Banc. SEC. 1-3. Construction. — These rules shall be liberally construed in order to promote public interest a n d assist the parties in obtaining a just, prompt, expeditious, and inexpensive resolution, settlement, and / o r disposition of all actions brought before the Commission and to carry out the objectives of the laws it is mandated to implement. The following rules shall be used in the interpretation of certain words and phrases f o u n d in these Rules: (a) "Action " shall include any case, complaint or petition filed by a party before the Commission; (b)

"Complaint" or "complainant" shall have the same meaning as

"petition" or "petitioner", respectively; (c) Unless otherwise specified, the duties and responsibilities of a Director of an Operating Department as provided for in these Rules shall likewise devolve u p o n the Officer-in-Charge of the said department; (d) The words "he" and "his" shall be construed as a collective reference to persons and not meant to give preferential treatment to the male gender. SEC. 1-4. N a t u r e of Proceedings. — Subject to the requirements of due process, the proceedings before the Commission shall be summary in nature and the technical rules of evidence used in the regular courts shall, whenever practicable, be suppletory to these Rules. SEC. 1-5. Venue of Hearings. — As a general rule, all actions brought under these Rules shall be commenced and heard at the principal office of the Commission in Metro Manila. In cases where it involves a corporation, the principal office of which is located in a place where the Commission has an extension office, the action or complaint may be filed in the said extension office, provided that unless specified in the next following section or when the Commission en banc orders otherwise, the hearing of the action shall be held at the principal office of the Commission in Metro Manila.

1080


SEC. 1-6. Jurisdiction of Operating Departments, Extension Offices and Special Offices over cases filed before the Commission. The Operating Departments, Extension Offices and Special Offices shall take jurisdiction over cases in accordance with their respective core functions.

SEC. 1-7. Assignment of Cases. — A l l actions filed w i t h the Commission shall be assigned to a hearing panel or officer duly designated by the Director or Officer in Charge of the Operational Department which has jurisdiction over them, as the case may be, unless otherwise determined by the Commission En Banc. RULE II PARTIES SEC. 2-1. Who may be Parties. — O n l y natural or juridical persons or entities authorized by l a w or a party in interest acting through an attorneyin-fact, where applicable, may be parties to any action before the Commission. SEC. 2-2. Parties in Interest. — A l l actions filed w i t h the Commission must be pursued and defended in the name of the real party in interest. A l l persons w h o have an interest in the subject of an action and in obtaining the relief demanded shall be joined as complainants. A l l persons w h o claim an interest in the controversy, or the subject thereof w h i c h is adverse to that of the complainant, or is necessary for a complete resolution or settlement of the action shall be joined as respondents. SEC. 2-3. Intervention. — A natural or juridical person may, at any stage of the proceedings, be permitted by the H e a r i n g Panel or Officer to intervene in an action or complaint if he has a legal interest therein or w h e n he is so situated as to be adversely affected by the decision of the Commission. The said party m a y file a motio n to intervene or oppose the subject action before the H e a r i n g Panel or Officer stating therein the reason for his intervention or opposition. The motion should contain all the relevant supporting documents and, if allowed, shall be treated as a complaint-in-intervention. The H e a r i n g Panel or Officer may require the original parties to the action to answer or comment on the intervention as the case m a y w a r r a n t or require the m to submit their arguments against it in their position papers or m e m o r a n d a prior to the submission of the action for resolution. An answer to the intervention, w h e n required by the H e a r i n g Panel or Officer, should be filed w i t h i n five (5) days f r o m receipt of the corresponding order.

RULE III COMMENCEMENT OF ACTION SEC. 3-1. Commencement of Actions. — A n action filed under these Rules shall be commenced by filing a verified complaint w i t h supporting documents w i t h the Operating Department that has jurisdiction over the subject matter.

THE 2006 RULES OF PROCEDURE OF THE SECURITIES AND EXCHANGE COMMISSION Appendix N

1081

SEC. 3-2. Definition of Action. — A n action refers to the right of a party to avail of the procedures provided in these Rules to protect his interests and to expect a resolution based on the facts of the case and applicable laws. SEC. 3-3. Pleadings Allowed. — T h e only pleadings that m a y be filed in any action are the complaint, answer, reply and rejoinder, if necessary, and motions in intervention. SEC. 3-4. Verification. — T h e complaint a n d answer shall be verified by an affidavit that states that the affiant has read the complaint or answer and that the allegations therein are true and correct of his o w n personal knowledge a n d / o r based on authentic records. A verification based on "information and belief," or w h i c h lacks the proper f o r m of verification, shall be considered as improper a n d m a y cause the s u m m a r y dismissal of the complaint or the expunging of the answer. SEC. 3-5. Non-Forum Shopping. — T h e complainant shall certify under oath that: (a) he has not commenced any action or filed any complaint involving the same subject matter or issues in any court, tribunal or agency and, to the best of his knowledge, no such other action is pending therein; (b) if there is such other pending action, a complete statement of its present status; and (c) if he should thereafter learn that the same or similar action has been filed or is pending, he shall report that fact w i t h i n five (5) days from such knowledge to the Operating D e p a r t m e nt concerned. Failure to comply w i t h any of the foregoing requirements shall result in the dismissal w i t h o u t prejudice of the complaint. The submission of a false certification or non-compliance w i t h any of the undertakings enumerated in the preceding paragraph shall constitute indirect contempt of the Commission and may give rise to the imposition of administrative and criminal sanctions. If the acts of the party or his counsel constitute w i l l f u l forum shopping, the same shall be considered a justifiable ground for the summary dismissal w i t h prejudice of the action and constitute direct contempt of the Commission w i t h the attendant administrative and criminal consequences.

SEC. 3-6. Prohibited Pleadings. — The following pleadings or any submission that is filed or made under a similar guise or title shall not be allowed: a)

M o t i o n to Dismiss

b)

M o t i o n for a Bill of Particulars

c) Motion for N e w Trial, Reconsideration of Judgment or Order, or Reopening of Trial; d)

Petition for relief from judgment;

e) M o t i o n for extension of time to file pleadings, affidavits, or any other submission of similar intent; f)

Motion to declare a party in default;

g)

Motion for postponement and any other motions of similar intent; and


1082

h)

Motion for leave to amend pleadings.

Should one be filed, said prohibited pleadings or submissions shall be automatically expunged from the records of the case. Notwithstanding sub-paragraph " g " above, the Hearing Panel or Officer may, for a compelling and valid reason, reset a hearing or conference not later than ten (10) business days thereafter. SEC. 3-7. D u t y of the Director of the O p e r a t i n g D e p a r t m e n t . The Director shall, from an initial examination of the allegations or averments in the complaint and such evidence that may be attached to it, dismiss the complaint if he finds that it is insufficient in f o r m and substance. Otherwise, he shall refer it to a Hearing Panel or Officer for investigation or examination. If the complaint has a valid and legal basis, he shall issue the appropriate summons to the parties concerned. A l l orders emanating from an Operating Department under this section shall be under the signature of its Director or Officer-inCharge, as the case may be. SEC. 3-8. F o r m of Pleadings. — A l l pleadings filed shall be written, printed or typed on bond paper in English or Pilipino. Each pleading shall contain a caption stating the name of the Commission, the Operating Department that has jurisdiction over the action, the title of the case, the case number, if any, and a description of the pleading. The original and three (3) signed copies of the pleading shall be filed with the Commission. A l l respondents shall be furnished w i t h copies of the pleadings, except the complaint w h i c h shall be furnished by the Commission to the respondent as an attachment to the summons. Except for the initiatory pleading, there shall be filed as m a n y additional signed copies of the said pleadings as there m a y be respondents. No pleading shall be accepted by the Commission unless it conforms to the formal requirements provided for in these Rules. SEC. 3-9. Verified C o m p l a i n t . — The complaint shall contain the following information: (a) the names and residences of the parties; (b) a concise statement of the ultimate facts constituting the complainant's cause(s) of action; (c) a brief statement of the right(s) sought to be enforced; (d) the law, rule or regulation on which the complaint is based; (e) a s u m m a r y of the complainant's claims; (f) a statement of the issues to be resolved; (g) the affidavits of witnesses, copies of documentary and other pieces of evidence; and (h) the relief(s) sought. This rule notwithstanding, the Commission may, motu yrovrio, accept and take cognizance of a complaint filed under a different f o r m in the interest of public service and social justice, or to protect the investing public. SEC. 3-10. Capacity. — The facts showing the capacity of a party to sue or be sued, or the authority of a party to sue or be sued in a representative capacity, or the legal existence of an organized association of persons that is made a party to an action must be averred. A party desiring to raise an issue on the legal existence of any party or the capacity of any party to sue or be sued in a representative capacity shall do so by specific denial and shall be

THE 2006 RULES OF PROCEDURE OF THE SECURTTTES AND EXCHANGE COMMISSION Appendix N

1083

supported by evidence that is w i t h i n his knowledge. Failure to comply w i t h this requirement shall be deemed a waiver of the right to question the capacity or authority of a party to sue or be sued. SEC. 3-11. A n s w e r . — W i t h i n fifteen (15) days from the service of summons, the respondent shall file his answer to the complaint and serve a copy thereof to the complainant. The answer shall contain the affidavits of witnesses and copies of documentary evidence, if any. SEC. 3-12. Effect of Failure to Answer. — If the respondent fails to answer the complaint w i t h i n the abovestated period, he shall be considered as in default. The H e a r i n g Panel or Officer shall, motu proprio, proceed to render judgment granting the complainant such relief as the complaint m a y warrant, unless the H e a r i n g Panel or Officer determines that the complainant should be required to submit ex parte additional evidence. SEC. 3-13. R e p l y a n d Rejoinder. — W i t h i n ten (10) days from the service of the answer, the complainant m a y rebut any n e w matter raised in the answer by w a y of a reply. A rejoinder to the reply m a y be submitted by the respondent w i t h i n five (5) days f r o m receipt of the reply. The reply and rejoinder shall likewise contain the affidavits of witnesses and supporting documentary evidence, if any. The H e a r i n g Panel or Officer m a y disallow the filing of a reply and rejoinder if in i t s / h i s opinion the same are not necessary under the circumstances. SEC. 3-14. A f f i d a v i t s , D o c u m e n t s a n d O t h e r Evidence. — The affidavits of the parties' respective witnesses, documents, and other supporting evidence shall be attached to the appropriate pleading. Supporting affidavits shall be m a d e on personal knowledge, shall set forth such facts as w i l l be admissible in evidence, and shall show affirmatively that the affiant is competent to testify on the matters stated therein. SEC. 3-15. D o c k e t Fee. — A docket fee shall be assessed by the Operating Department concerned for any pleading filed under these Rules in accordance w i t h the Schedule of Fees that shall f o r m part of these Rules, and which fee shall be paid upo n the filing of the subject pleading. 1

SEC. 3-16. Proof of Service. — Proof of service shall consist of a written admission of the party served, or the official return of the server, or the affidavit of the party serving, containing a full statement of the date, place and manner of service. If the service is by ordinary mail, proof thereof shall consist of an affidavit of the person w h o undertook the mailing of facts showing compliance w i t h Section 7, Rule 13 of the Rules of Court. If service is made by registered mail, proof shall be made by such affidavit and the registry receipt issued by the mailing office. The registry return card shall be filed immediately upon its receipt by the sender, or in lieu thereof the unclaimed letter together with the certified or sworn copy of the notice given by the postmaster to the addressee.

'See p. 1094.


1084

If the service is by facsimile or by any other electronic means in accordance with existing laws, proof of service shall be made in writin g by the designated server setting forth the manner, place and date of service, or a written admission of the party served. RULE IV SUMMONS SEC. 4-1. Summons. — U p o n the filing of the complaint and payment of filing fees, and determination by the Director of the Operating Department's jurisdiction over it and its sufficiency in f o r m and substance, the proper summons to the respondent shall be issued by the Director not later than ten (10) days from the date of filing of the complaint. SEC. 4-2. Contents. — The summons shall be directed to the respondent under the seal of the Commission and shall contain: a.

The names of the parties to the action;

b.

An order to the respondent to answer w i t h i n the time fixed by these

Rules; and c. A notice that if the respondent fails to file its answer w i t h i n the prescribed period, a judgment by default m a y be rendered in favor of the complainant and the relief(s) applied for m a y be granted. SEC. 4-3. Alias S u m m o n s . — If the summons is returned unserved on any or all of the respondents or is lost, the Director at the instance of the complainant, may issue one (1) alias summons in the same f o r m as the original summons. SEC. 4-4. By W h o m S u m m o n s M a y Be Served. — The summons m a y be served by the designated server of the Commission. SEC. 4-5. R e t u r n of S u m m o n s . — W h e n the service has been completed, the designated server shall return the summons, together w i t h the proof of service, to the originating Operating Department. SEC. 4-6. Personal Service of S u m m o n s . — The summons shall be served by handing a copy thereof to the respondent in person or, if he refuses to receive it, by tendering it to h i m . If the respondent is a corporation, partnership or association, service shall be m a d e on its president, managing partner, general manager, corporate secretary, treasurer, or in-house counsel. SEC. 4-7. Substituted Service. — If, for justifiable reasons, the respondent cannot be served personally w i t h the summons as provided in the preceding section, service m a y be effected either (a) by leaving a copy of the summons at the respondent's dwelling house or residence where some person of suitable age and discretion is residing, or (b) by leaving a copy at the respondent's principal office or regular place of business where some competent person is in charge. SEC. 4-8. Service U p o n Private Foreign Entities. — If the respondent is a foreign corporation doing business in the Philippines, service m a y be m a d e


1085

on its resident agent designated in accordance w i t h existing l aw for that purpose, or, if there is no such agent, the Commission shall transmit a copy of the summons to the home office of said foreign entity by registered mail, by facsimile or by any other electronic means in accordance w i t h existing laws. The period to answer shall be thirty (30) days f r o m receipt of the summons by the home office, w i t h the expenses that m a y be incurred by the Commission for such service paid in advance by the parties at whose instance the service was made. SEC. 4-9. Service by Publication . — If the address of a respondent is u n k n o w n or, even if k n o w n , his whereabouts cannot be ascertained by diligent inquiry, service of summons may, by leave of the Director of the Operating Department concerned, be effected on h i m by publication of the complaint once in a newspaper of general circulation and in such places, including the Commission's website (www.sec.gov.ph). and for such time as the Director m a y order. The publication expenses shall be for the complainanf s account. If the respondent does not reside or is not found in the Philippines, service may, by leave of the Director be effected out of the Philippines by personal service in the manner provided for in Section 4-8 of these Rules; or by publication of the complaint once in a newspaper of general circulation in the Philippines a n d / o r the country where respondent m a y be found and in such places as the Director m a y order such as but not limited to, the Commission's website. A copy of the complaint and the order granting such leave shall be sent by registered m a i l to the last k n o w n address of the respondent. A n y order granting such leave shall specify a reasonable time w i t h i n which the respondent must answer, which shall not be less than thirty (30) days from the date of last publication, in the case of a resident respondent whose address is u n k n o w n or whose whereabouts cannot be ascertained; and not less than sixty (60) days from the date of the last publication, in the case of a nonresident respondent. A n y application for leave to effect service of summons by publication shall be made by motion in writin g and supported by an affidavit of the complainant or some person on his behalf, setting forth the grounds for the application. SEC. 4-10. Proof of Service. — The proof of service of a summons shall be made in writing by the designated server setting forth the manner, place and date of service. It shall specify the papers served w i t h the summons and the name of the person w h o received them, and shall be sworn to when made by a person other than the server of the Commission. Service by publication on a resident respondent whose address is unknown or whose whereabouts cannot be ascertained may be proven by the affidavit of the newspaper editor, or business/advertising manager or SEC website administrator and to which affidavit a copy of the publication shall be attached. Service by publication on a non-resident respondent may be proven, aside from the affidavit of the editor, business/advertising manager, or SEC website administrator, by the affidavit of the server stating that a copy of the complaint


1086

and the order of the Commission was sent by registered mail to the last k n o w n address of the respondent. The respondent's voluntary appearance before the Commission shall be equivalent to service of summons for purposes of acquiring jurisdiction over his person, unless he makes an express reservation regarding on the nature of his appearance therein. RULE V P R O C E E D I N G S BEFORE T H E H E A R I N G P A N E L O R O F F I C E R SEC. 5-1. Preliminary Conference. — In any action and u p o n assignment by the Director of the Operating Department concerned, the H e a r i ng Panel or Officer shall, in compliance w i t h the existing rules on alternative dispute resolution, set the case for conference w i t h i n ten (10) days after the last pleading allowed under Section 3-13 is filed or u p o n expiration of the period w i t h i n which to file the reply or rejoinder mentioned therein. The parties a n d / o r their counsels, the latter w i t h the requisite special power-ofattorney in the absence of his client, shall be directed to appear before the H e a r i n g Panel or Officer on the date set in the notice to consider the following actions: a. The possibility of an amicable settlement w h i c h includes referral to mediation and other forms of Alternative Dispute Resolution ( A D R ) ; b.

The simplification of the issues; and

c. Such other matters that m a y aid in the just and speedy disposition of the case. The Hearing Panel or Officer shall terminate the conference stage if after t w o (2) conferences, the parties fail to settle their differences. SEC. 5-2. A m i c a b l e Settlement. — D u r i n g the conference, the H e a r i n g Panel or Officer shall ensure that the parties exhaust all available means to arrive at a fair and reasonable settlement of the case. The parties, w i t h or without the assistance of counsel, shall submit durin g the conference specific proposals or counter-proposals to arrive at an amicable settlement of the case. Amicable settlement shall be encouraged at any stage of the proceedings, provided it is not prejudicial to the public interest or third parties, or contrary to law, rules or regulations of the Commission, or against good morals or public policy. The amicable settlement shall be reduced into w r i t i n g , d u l y signed by the parties a n d / o r their counsels, and shall be the basis of the appropriate Order or Decision of the H e a r i n g Panel or Officer. SEC. 5-3. Failure to A p p e a r at the Conference. — The failure of the complainant to appear at the conference shall result in the dismissal of the complaint, unless it involves public interest whereby the H e a r i n g Panel or Officer may, motu proprio, reset the case for conference w i t h i n five (5) days from receipt of proof of service of new summons. The respondent w h o appears in the absence of the complainant shall be entitled to judgment based on the facts alleged and relief(s) prayed for in the answer.


1087

If the sole respondent fails to appear, the complainant shall be entitled to judgment in accordance w i t h the immediately preceding paragraph. However, this rule shall not apply if one or more respondents w h o have been sued under a commo n cause of action and w h o have pleaded a common defense appear at the conference. No other conferences, other than the circumstance mentioned in the first paragraph of this section, shall be called in the event any of the parties to the action is absent or fails to attend the first conference called for this purpose, except for valid reasons as determined by the H e a r i n g Panel or Officer.

SEC. 5-4. Conference Order. — After the conference, the Hearing Panel or Officer shall issue an Order stating the action taken d u r i n g the conference, the stipulations m a d e by the parties on any of the matters considered, and the evidence the parties have agreed u p o n . RULE VI DECISION SEC. 6-1. Decision. — The H e a r i n g Panel or Officer shall decide the complaint w i t h i n thirty (30) days f r o m its submission for resolution. The Decision shall contain a clear statement of the facts proven or admitted by the parties and the l a w on w h i c h the resolution is based. The Decision shall be signed by the Director of the Operating Department concerned and be served on the parties not later than ten (10) days after its promulgation. SEC. 6-2. Finality of Decision. — The Decision of the Hearing Panel or Officer, in the absence of a timely appeal, shall become final and executory u p o n entry in the Book of Entry of Judgment. SEC. 6-3. Clarificatory Conference. Notwithstanding the immediately preceding section, at any time after the case has been submitted for resolution, the hearing panel/officer may, in his discretion, require a further clarificatory examination of documents, or submission of additional documentation to ascertain factual issues pertinent and necessary to the resolution/decision of the case. N o t h i n g herein shall be construed to extend the period for decision stated in Sec. 6-1 above.

RULE VII CONTEMPT SEC. 7-1. Direct Contempt. — The Commission or the Hearing Panel or any authorized officer may summarily pass judgment on acts of direct contempt committed in the presence of, or so near, the Chairman or any Commissioner or Hearing Panel or Officer as to obstruct or interrupt the proceedings, including disrespect towards the Hearing Panel or Officer, offensive acts towards others, and other contumacious acts. Those found to be in direct contempt shall be punished in accordance w i th the penalties prescribed by the Rules of Court. The Hearing Panel or Officer may, through the O G C , request the law enforcement

1088


agencies of the locality where the hearing or investigation is being conducted to assist in the exercise of this disciplinary authority. SEC. 7-2. Indirect Contempt. — The Commission or the Hearing Panel or Officer may, after observance of due process, cite or punish any person for indirect contempt on any of the grounds prescribed under the Revised Rules of Court.

RULE VIII SUBPOENA AND SUBPOENA DUCES TECUM SEC. 8-1. When Issued. — If the attendance of a witness or the production of specified documents is necessary, any Operating Department or any party can request the issuance of a subpoena or subpoena duces tecum in the course of any investigation or in any proceeding of the Commission. Provided, however, that the C E D may, motu proyrio, issue a subpoena pursuant to an investigation. RULE IX PRODUCTION OR INSPECTION OF DOCUMENTS OR THINGS SEC. 9-1. Motion for Production or Inspection Order. — U p o n motion of any party showing good cause therefor, the H e a r i n g Panel or Officer m a y (a) order any party to produce and permi t the inspection and copying or photographing, by or on behalf of the requesting party, of any designated documents, papers, books, accounts, letters, photographs, objects or tangible things, not otherwise privileged, w h i c h constitute or contain evidence material to any matter involved in the complaint and are in his possession, custody or control; or (b) order any party to permit entry into a designated place or other property in his possession or control for the purpose of inspecting, measuring, surveying, or photographing the property or any designated relevant object of operation in the premises. The order shall specify the time, place and manner of the inspection and taking of copies and photographs, and m a y prescribe other terms and conditions that are justified by the circumstances; Provided, however, That the request for production or inspection of documents or things shall be m a d e before or during the conference and only for documents and things previously referred to in the complaint, answer or other pertinent pleadings.

RULEX CEASE AND DESIST ORDER SEC. 10-1. Who May Apply. — A verified complaint m a y be filed by the aggrieved party w i t h the Commission, through the C E O , for the issuance of a Cease and Desist Order ( C O O ) pursuant to the provisions of Section 64 of the SRC. SEC. 10-2. Issuance of a C O O . — T h e Commission, through the O G C , • proper investigation or verification by the C E O , motu proprio, or u p o n


1089

verified complaint, m a y issue a C D O w i t h o u t the necessity of a prior hearing if in its j u d g m e nt the act or practice, unless restrained, w i l l operate as a fraud on investors or is otherwise likely to cause grave or irreparable injury or prejudice to the investing public. For other cases however, the Commission En Bane m a y issue an order for the grant of a C D O as it m a y d e e m necessary and warranted in accordance w i t h its powers under existing laws. The C D O shall also be available in the case of anonymous complaints or based on information that has come to its attention w h i c h requires immediate action to protect the interests of the public.

SEC. 10-3. Lifting of coo. — A party against w h o m a C D O was issued may, w i t h i n a non-extendible period of five (5) business days from receipt of the order, file a forma l request or motion for the lifting thereof w i t h the O G C . Said motion or request shall be set for hearing by the O G C not later that fifteen (15) days f r o m its filing and the resolution thereof shall be m a d e not later than ten (10) days f r o m the termination of the hearing. SEC. 10-4. Who May Issue a Provisional Remedy.—A provisional remedy m a y be issued by the Director of the C E O on the basis of his initial evaluation of the issue, or u p o n the recommendation of the H e a r i n g Panel or Officer, as the case m a y be. The Commission En Banc, however, m a y issue an order for the grant of a C D O as it m a y d e e m necessary and warranted in accordance w i t h its powers under existing laws. The C O O shall also be available in the case of anonymous complaints or based on information that has come to its attention which requires immediate action to protect the interests of the public.

SEC. 10-5. Failure to File Motion to Lift. — (a) If the respondent fails to file a motion to lift C O O w i t h i n the prescribed period, the Director of the C E O m a y file w i t h the Commission a motion to make the C O O permanent, attaching thereto a draft Order m a k i n g the C O O permanent. The Order shall contain the following: i.

a brief and procedural history of the case;

ii.

a statement declaring the C D O as permanent;

iii. a statement ordering the respondent to appear before the Commission w i t h i n fifteen (15) days to file its Comment and to show cause w h y the stated penalty should not be imposed. (b) The Commission may conduct hearing within fifteen (15) business days from the filing of the motion to make the C D O permanent. After the termination of the hearing, the Commission shall resolve the motion within ten (10) business days.

SEC. 10-6. Dissemination of the coo. — U p o n the issuance of a C D O , the C E O shall (a) serve it on the respondent/s or any of its authorized representatives; (b) post copies of the order at the entrance of the main office and / or branches, if any, of the respondent / s; and (c) post it in the Commission's Internet website. The C D O may, as determined by the Director of the CEO and


1090

at the discretion of the Commission, be published in newspapers of general circulation or other media outlets.

SEC. 10-7. Automatic Lifting of the coo. — (a) I n the event that the motion or request to lift the C D O is not resolved w i t h i n the prescribed period, the C O O shall be automatically lifted. SEC. 10-8. Prohibitions. — N o pleading, motion or submission in any form that may prevent the resolution of an application for a C D O by the Commission shall be entertained except under Rule X I I herein. A C D O , w h e n issued, shall not be the subject of an appeal and no appeal from it w i l l be entertained; Provided, however, that an order by the Director of the Operating Department denying the motion to lift a C D O m a y be appealed to the Commission En Banc through the O G C . SEC. 10-9. Settlement Offers. — A settlement offer i n accordance w i t h Sec. 55 of the SRC and SRC Rule 55.1, shall be made in w r i t i n g and signed by the party making the offer at any stage of the proceedings, provided, that no settlement offer shall be accepted after an (3rder shall have become final and executory, provided further, that if the respondent is a juridical person, the necessary board resolution shall also be attached to the offer. SEC. 10-10. Criteria for Settlement Offer. — (a) I n recommending the approval or if the Operating Department's recommendation is unfavorable b u t the proposer so requests that the offer be presented to the Commission En Banc, the Director of the C E O , after consultation w i t h the handling l a w y e r / t e a m , shall prepare a m e m o r a n d u m for the Commission, taking into consideration the following: i.

The gravity of the offense;

ii.

The amount and time spent by the Commission;

iii.

The chances of a favorable decision if the case were to go to trial;

iv. Whether the respondent has previously violated any provision of any la w being administered by the Commission; v.

The total imposable penalty;

vi.

The damage caused, if any;

vii. Whether the settlement is in the public interest. viii. Other pertinent matters. (b) No settlement offer that is less than fifteen (15%) percent of the total imposable penalty or damage caused shall be accepted.

RULE XI APPEALS FROM DECISIONS OR ORDERS OF OPERATING DEPARTMENTS SEC. 11-1. O r d i n a r y A p p e a l . — An appeal to the Commission En Banc may be taken from a decision, order, or resolution issued by an Operating

THE 2006 RULES OF PROCEDURE OF THE SECURITIES A N D EXCHANGE COMMISSION Appendix N

1091

Department if there are questions of fact, of law, or mixed questions of fact and law. SEC. 11-2. H o w A p p e a l is T a k e n . — A p p e a l m a y be taken by serving u p o n the adverse party a n d filing w i t h the Commission En Banc w i t h i n fifteen (15) days f r o m notice of Decision, O r d e r or Ruling, a Notice of Appeal and a M e m o r a n d u m on A p p e a l and paying the corresponding docket fee therefor. Provided, that no appeal shall be given due course unless it includes a certification of non-filing of multiple petitions and complaints provided for in Section 3-5 hereof. SEC. 11-3. Perfection of A p p e a l . — The appeal shall be deemed perfected u p o n the filing of the M e m o r a n d u m on A p p e a l and payment of the required docket fee w i t h i n the period provide d for in these Rules. SEC. 11-4. M e m o r a n d u m on A p p e a l ; F o r m a n d Contents of A p p e a l . The M e m o r a n d u m on A p p e a l shall specify the parties to the appeal; designate the Decision, Order or Rulin g or part thereof appealed from; and shall indicate the material dates to show that the appeal was seasonably filed. The full names of all the parties to the proceedings shall be stated in the caption of the M e m o r a n d u m on A p p e a l and shall include the decision, order or ruling f r o m w h i c h the appeal is taken, and, in chronological order, copies of any such pleadings, petition, motions and all interlocutory orders as are related to the appealed decision, order or ruling and necessary for the proper understanding of the issues involved, together w i t h such date as w i l l show that the appeal was perfected on time. The M e m o r a n d u m on Appeal in seven (7) copies shall contain a concise statement of facts and issues involved, the errors assigned, the grounds relied upo n for the appeal and the arguments in support thereof. SEC. 11-5. R e p l y M e m o r a n d u m . — The appellee shall file seven (7) copies of the reply m e m o r a n d u m w i t h the Commission En Banc, furnishing copies thereof to the appellant w i t h i n ten (10) days from receipt of the Order to file reply m e m o r a n d u m . Failure to file the reply memorandum within the prescribed period in the Order shall be construed as a waiver to file the same. SEC. 11-6. Dismissal of A p p e a l for Non-Compliance . — The appeal may be dismissed by the Commission En Banc for failure to comply with these Rules, or failure to perfect the appeal w i t h i n the prescribed period. SEC. 11-7. W h e n A p p e a l D e e m e d Submitted for Decision. — Upon the filing of the reply m e m o r a n d um w i t h the Commission En Banc, or after the expiration of the period to file the same and no such memorandum has been filed, the appeal shall be deemed submitted for decision, unless the Commission En Banc motu proprio, or upon motion and for special reason, sets the case for oral arguments. SEC. 11-8. Review Standard. — Findings of fact by the Operating Department shall not be disturbed by the Commission En Banc unless serious errors of fact have been committed.

1092


SEC. 11-9. Disposition of the A p p e a l . — The Commission En Banc may affirm, reverse or modify the Decision, Order or ruling appealed from, or direct further proceedings to be taken thereon. No motion for reconsideration of the Decision of the Commission En Banc shall be entertained. RULE XII P E T I T I O N FOR REVIEW O N CERTIORAR I SEC. 12-1. Petition for R e v i e w on C e r t i o r a r i . — W h e n any H e a r i n g Officer / Panel of the Commission, has acted w i t h o u t or in excess of its jurisdiction, or with grave abuse of discretion and there is no appeal, nor any plain, speedy and adequate remedy in the ordinary course of law, a person aggrieved thereby may file a verified petition w i t h the Commission En Banc alleging the facts w i t h certainty and praying that judgment be rendered annulling or m o d i f y i ng the proceedings, order or ruling of such H e a r i n g Officer or Panel and granting such relief as the applicable laws m a y require. The Petition shall be accompanied by a certified true copy of the Judgment, Order or Ruling subject thereof, together w i t h the copies of all pleadings and documents relevant thereto. Provided that no petition for review on certiorari shall be given due course unless it includes a certification of non-filing of multiple petitions and complaints provided for in Section 3-5 hereof. SEC. 12-2. W h e r e p e t i t i o n filed. The petition shall be filed w i t h the Commission En Banc in seven (7) copies, w i t h i n ten (10) days f r o m receipt of the order or ruling subject of the petition, furnishing a copy thereof to the party interested in sustaining the order and the H e a r i n g Officer / P a n e l w h o issued the same. SEC. 12-3. Parties Respondent. W h e n the Petition filed relates to the acts or omission of a H e a r i ng Officer of the Commission, the petitioner shall join, as parties respondent, the person or persons interested in sustaining the order; and it shall be the duty of such person or persons to defend the questioned order or ruling. SEC. 12-4. O r d e r to Answer. If the Petition is sufficient in f o r m a n d substance to justify such process, the Commission En Banc shall issue an order requiring the respondent/s to answer the petition w i t h i n ten (10) days f r o m receipt of a copy thereof. Such order shall be served to the respondent in such manner as the Commission En Banc m a y direct. SEC. 12-5. Expediting Proceedings. The Commission En Banc m a y issue any and all orders that shall expedite the proceedings. SEC. 12-6. S u m m a r y Proceedings. The proceedings before the Commission En Banc shall be summary in nature. U p o n receipt of the verified petition, the Commission En Banc may either dismiss the petition if it is not sufficient in form and substance or if it is filed manifestly for delay or if from its face there is no showing that in issuing the questioned O r d e r or Ruling, the H e a r i n g Officer/Panel acted without or in excess of jurisdiction, or w i t h grave abuse of discretion. It m a y require the party or parties interested in sustaining the


1093

questioned Orde r or Ruling, to C o m m e n t or A n s w e r thereon w i t h i n ten (10) days from notice u p o n the filing of w h i c h the petition is deemed submitted for resolution, unless the Commission En Banc sets the case for oral arguments.

SEC. 12-7. Stay of the Action. N o petition for review or certiorari shall stay the progress of the action in the m a i n case unless the Commission En Banc orders otherwise. The Commission En Banc m a y also issue a status quo Order for the preservation of the rights of the parties d u r i ng the pendency of the proceedings. RULE XIII EFFECTIVITY SEC. 13-1. Transitory Provisions. — A l l matters pending resolution before the Commission under other rules of procedure that have been submitted for resolution at the time of the approval of these Rules shall be decided under the said rules. In all other cases, these Rules shall apply. SEC. 13-2. Repeal and Separability. — A l l existing rules, regulations or orders or any part thereof that are inconsistent w i t h these Rules are hereby repealed, a m e n d ed or modified accordingly. If any part or provision of these Rules is declared unconstitutional or illegal, the other parts or provisions shall remain valid. SEC. 13-3. Effectivity. — These Rules shall take effect fifteen publication in t w o (2) newspapers of general circulation. M a n d a l u y o n g City, December 21,

2006.

— oOo —

(15) days after

Departments

Office of the General Council (OGC)

Complaints/ Petitions (inclusive of U.P. legal research fee) 2,020.00

Complaint (for other than those described above)

2,000.00 or 0.001% of the value of the resulting adjustment (if any), whichever is higher

2,000.00

CO

o 3" (D a c (D O

o o o to

2,020.00

Non-Traditional Securities and Instruments Department (NTD)

310.00

Market Regulation Department (MRD)

2,000.00 or 0.001% of the amount of alleged misstatement, whichever is higher

Complaint (for deviation from the Generally Accepted Accounting Principles in the Philippines

T1

Corporate Finance Department (CFD)

Compliance and Enforcement Department (CED)

5,000.00

Complaint (for misstatement of financial statements)

5,000.00

Office of the General Accountant (OGA)

Company Registration and Monitoring Department (CRMD)

Request for Opinion

(D W

5,000.00

5' Ql O O O

5,000.00

-i

2,000.00

5,000.00

510.00

5,000.00

a ai 3 O

to

0) to o o 3

2,020.00

CJ I

5,000.00

— oOo —

THE CORPORATION C O D E O F THE PHILIPPINES ANNOTATED By HECTOR S. DE LEON LL.B., University of the Philippines Author: Philippine Constitutional Law: Principles and Cases (2 Vols.); Comments and Cases on Succession; Comments and Cases on Sales and Lease; etc. Co-Author: Comments and Cases on Property; Comments and Cases on Obligations and Contracts; The Insurance Code of the Philippines Annotated; etc. Comments and Cases on Torts and Damages; Comments and Cases on Credit Transactions; Administrative Law: Text and Cases; The Law on Public Officers and Election Law; The Insurance Code of the Philippines Annotated; The Philippine Negotiable Instruments Law (and Allied Laws) Annotated; The Fundamentals of Taxation; The Law on Income Taxation; The Law on Transfer and Business Taxation; The National Internal Revenue Code Annotated (2 vols.); etc. and

HECTOR M. DE LEON, JR. A.B., LL.B., University of the Philippines LL.M., University of Michigan Partner, Sycip Salazar Gatmaitan & Hernandez Co-Author: Comments and Cases on Property; Comments and Cases on Obligations and Contracts; Comments and Cases on Torts and Damages Comments and Cases on Credit Transactions; The Insurance Code of the Philippines Annotated; etc. Administrative Law: Text and Cases; The Law on Public Officers and Election Law; The Insurance Code of the Philippines Annotated; The Philippine Negotiable Instruments Law (and Allied Laws) Annotated; The Fundamentals of Taxation; The Law on Income Taxation; The Law on Transfer and Business Taxation; and The National Internal Revenue Code Annotated (2 vols.)

Tenth Edition 2010

Published & Distributed by

^ & R E X Book Store 856 Nlcanor Reyes, Sr. St. Tel. No*. 7364547 • 735-1344 1B77 CM. Recto Avenue Tel. Nos. 735-55-27 • 735-5544 Manila, Philippines www.feKpubll8hlng.corfi.ph

Philippine Copyright 2010

HECTOR S. DE LEON AND H E C T O R M . D E LEON, J R . ISBN

978-971-23-5667-4

No portion of this book may be copied or reproduced in books, pamphlets, outlines or notes, whether printed, mimeographed, typewritten, copied in different electronic devices or in any other form, for distribution or sale, without the written permission of either of the authors except brief passages in books, articles, reviews, legal papers, and judicial or other official proceedings with proper citation. Any copy of this book without the corresponding number and the signature of either of the authors on this page either proceeds from an illegitimate source or is in possession of one who has no authority to dispose of the same. ALL

RIGHTS

B Y

T H E

\°

R E S E R V E D A U T H O R S

0592 ISBN

05-CM-00033 9 Printed by

1

It

REX p W M M q COMDArW iNC 84 P. Florentine) SI., Quezon City Tel. Nos. 712-41-08 • 712-41-01

978-971-23-5667-4

PREFACE

This humble work which is now on its tenth edition, is intended primarily as a textbook for law students in Private Corporations. However, members of the Bench and the Bar will find the book a useful reference. In its preparation, the authors have endeavored to make the discussion comprehensive for our corporation law, which is embodied in the new Corporation Code of the Philippines, covers a very wide field, and yet, brief by avoiding as much as possible repetition and redundancy for the course must be studied in school within the allotted time. The applicable rulings in important and leading cases, as well as commentaries of recognized writers on the subject, including advisory opinions of the Securities and Exchange Commission amplifying and explaining the law involved or supporting directly or by implication statements or conclusions made by the author are cited or quoted under the pertinent sections of the Corporation Code. Whenever necessary, the purpose or rationale of the legal provisions, particularly the new ones, is given and illustrations showing their practical application in specific situations are utilized for such manner of presentation greatly facilitates understanding of the meaning of the law. The authors would like to express their appreciation to former Associate Justice Catalino R. Castafieda, Jr. of the Sandiganbayan; former Dean Jose R. Sundiang (San Beda); former Dean Domingo M. Navarro (San Beda); and Benjamin B. Festin (UP), for their helpful suggestions on some of the materials treated in the book which they gladly accepted. HECTOR S. DE LEON HECTOR M. DE LEON, JR. June 2010 iii

MNU TAS2ILARAK COLLEGlCSSMY

CONTENTS THE CORPORATION CODE OF T H E PHILIPPINES

(BJ.Blg.68.)

INTRODUCTION Different Forms of Business Organization; Theories as to origin of Corporations; Rise and Developmen t of Corporations

Title I GENERAL PROVISIONS Definitions and Classifications Section 1 — Title of the Code — Historical Background of our Corporation Code; Scope of the Code

10-13

Section 2 — Corporation Defined—Statutory Definition of CorporationJudicial Definitions of Corporation; Attributes of a Corporation; Corporation as an Artificial Personality; Corporation as a Person, Resident, or Citizen; Corporation as a Collection of Individuals; Doctrine of Piercing the Veil of Corporate Entity; Instances W h e r e Doctrine A p p l i e d ; Application of the "Instrumentality" or "Alter Ego" rule; Corporation as a Creation of L a w or by Operation of L a w ; Right of Succession of a Corporation; Powers, Attributes, and Properties of a Corporation; Distinctions Between a Partnership and a Corporation; Similarities Between a Partnership and a Corporation; Corporation as a Partner; Advantages of a Business Corporation; Disadvantages of a Business Corporation

13-55

Section 3 — Classes of Corporations — Classification of Corporations under the Code; Other Classifications of Corporations; Important Distinctions Between Public and Private Corporations; Dual Status of Public Corporations

55-64

Section 4 — Corporations Created by Special Laws or Charters — Incorporation of a Private Corporation by a Special Act; Governing Law; Government as a Member of a Corporation ....

64-66

v

Section 5 — Corporators and Incorporators, Stockholders and Members — Components of a Corporation; Three Other Classes; Agreement or Contract with a Corporation

66-69

Section 6 - Classification of Shares - Power to Classify Shares; W h e n Classification of Shares M a y Be M a d e ; Classification to Comply with Constitutional or Legal Requirements; Shares Presumed to be Equal in A l l Respects; Capital Stock and Capital Explained; Capital Stock and Capital Distinguished; Capital Stock and Legal Capital Distinguished; Stock or Share of Stock Defined; Capital Stock and Share of Stock Distinguished; N a t u re of Share of Stock; Certificate of Stock Defined; Share of Stock and Certificate of Stock Distinguished; Situs of Shares of Stock for Certain Purposes; Classes of Shares in General; Par Value Share; No Par Value Share; Voting Share; Non-votin g Share; C o m m o n Share; Preferred Share; Promotion Shares; Share in Escrow; Convertible Share; Convertibility of Shares; N a t u r e of Par Value/Book V a l u e / M a r k e t Value; Presumption as to Value of Corporate Stock; Statutory Restrictions Regarding the Issuance of No Par Value Shares; Consideration for No Par Value Shares; Advantages of Par Value Shares; Disadvantages of Par Value Shares; Advantages of No Par Value Shares; Disadvantages of No Par Value Shares; Kinds of Preferred Shares; Preference A m o n g Preferred Shares; Preferred Stockholders N o t Creditors of Corporation; Limitations Regarding Issuance of Preferred Shares; Authority of Board of Directors to Fix Terms and Conditions of Preferred Shares; Kinds of Preferred Shares as to Dividends

69-102

Section 7 — Founders' Shares — Founders' Shares

102-104

Section 8 — Redeemable Shares — Redeemable Shares

104-108

Section 9 — Treasury Shares — Treasury Shares

108-113

Title II INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS SectionlO — Number and Qualifications of Incorporators — Incorporation of a Private Corporation a M e r e Privilege; Advantages of the Corporate Form; Corporations and Associations Distinguished; Concept of Franchise; Primary Franchise and Secondary Franchise Defined and Distinguished; Transferability of Franchise; Steps in the Creation of a Corporation; Promotion of Corporations; Promoters of Corporation; Stages in Corporate Promotion; Nature of Relations of Promoters; Liability of Corporation for Promotion Fees; Liability of Corporation on Promoter's Contracts; Liability of Promoters for Failure to Organize Corporation; U n d e r w r i t i n g Agreements; Incorpora-

vi

tion Distinguished from Creation; Incorporation Distinguished from Corporation; Steps in Incorporation; Substantial Compliance w i t h Requirements; Incorporators: N u m b e r and Qualifications; Requirement Regarding M i n i m u m N u m b e r of Incorporators M a n d a t o r y Section 11 — Corporate Term — Term of Corporate Existence; Extension of Corporate Term; Period of Corporate Existence a Matter of Public Interest Section 12 — Minimum Capital Stock Required of Stock Corporations — Capital Stock Requirement; Filipino Percentage Ownership Requirement Regarding Corporate Capital Section 13 — Amount of Capital Stock to be Subscribed and Paid for Purposes of Incorporation — M i n i m u m Subscription and Paidup Capital; C o m p u t a t i o n of the 25% Subscription Requirement; Subscription of Corporations Section 14 — Contents of Articles of Incorporation Section 15 — Form of Articles of Incorporation — M e a n i n g of Articles of Incorporation; Contents a n d F o r m of Articles of IncorporationFiling of the Articles of Incorporation; Power of Securities and Exchange Commission to Reject Articles of Incorporation; N a m e of the Corporation; Purpose or Purposes of the CorporationPurpose or Purposes M u s t Be L a w f u l ; Purpose or Purposes M u s t Be Stated W i t h Sufficient Clarity; Primary Purpose M u s t Be Stated; Purposes M u s t Be Capable of Being L a w f u l l y Combined; Reasons for Statement of Purpose or Purposes; Effect Where Primary Purpose/Secondary Purposes Unauthorized; Effect W h e r e Corporation Engages in Its Secondary Instead of Its Primary Purpose; Place W h e r e Principal Office of Corporation Located; Incorporating Directors or Trustees; Capital Stock/ Capital a n d Subscribers /Contributors; W h e r e Shares w i t h Par Value; W h e r e Shares W i t h o u t Par Value; Where Shares w i t h Par Value and W i t h o u t Par Value; W h e r e Business of Corporation Reserved for Filipino Citizens; Acknowledgment, Signature and Verification Section 16 — Amendment of Articles of Incorporation — M e a n i n g of Corporate Charter; Distinguished from Franchise; Components of Corporate Charter; Natur e of Corporate Charter; Reserved Power of State to A m e n d Corporate Charter; Power of Stockholders or Members to A m e n d Articles of Incorporation; Necessity of Stockholders' or Members' Meeting for A m e n d ment; Limitations on Power of Corporation to A m e n d Section 17 — Grounds When Articles of Incorporation or Amendment May Be Rejected or Disapproved — Grounds for Rejection of Articles of Incorporation or Amendment Thereto; Suspension or Revocation of Certificate of Registration of Corporations

vii

Section 18 — Corporate Name — Limitations U p o n Use of Corporate Name; Remedy of Corporation Whose N a m e Has Been Adopted by Another; Change of Corporate N a m e ; Use of Changed or Abandoned Corporate Names; Misnomer of a Corporation

182-195

Section 19 — Commencement of Corporate Existence — Acquisition of Juridical Personality

196-197

Section 20 — De Facto Corporations — De Jure C o r p o r a t i o n / D e Facto Corporation Denned; Requisites of a De Facto Corporation; Existence of Law; Bona Fide Attempt to Incorporate; Colorable Compliance w i t h the Law; User of Corporate Powers in Good Faith; Basis of De Facto Doctrine; Questioning Validity of Corporate Existence; Direct Attack/Collateral Attack of Corporate Existence Defined; Rule Against Collateral AttachWhere Organization N o t Even a De Facto Corporation; Proof of Corporate Existence; Powers and Liabilities of a De Facto Corporation; Liabilities of Officers and Members of a De Facto Corporation

197-208

Section 21 — Corporation by Estoppel — Estoppel to D e n y Corporate Existence; Corporation by Estoppel W i t h o u t De Facto Existence; Estoppel of Persons Dealing w i t h a Corporation; Persons Liable as General Partners

208-215

Section 22 — Effects of Non-use of Corporate Charter and Continuous Inoperation of a Corporation — Statutory Requirements Before and After Incorporation; M a n d a t o r y and Directory Provisions Explained; Conditions Precedent Explained; Conditions Subsequent Explained; Formal Organization and Commencement of business

215-219

Title III BOARD OF DIRECTORS/TRUSTEES/OFFICERS Section 23 — The Board of Directors or Trustees — Structure of the Corporate Organization; Corporate Powers Exercised by Board of Directors or Trustees; Reason for the Rule; N a t u r e of Powers of Board of Directors or Trustees; Limitations on Powers of Board of Directors or Trustees; Powers Exercised by Board of Directors or Trustees as a Board; Reasons for the Rule; Exceptions to the Rule; Power of Directors or Trustees to Delegate Authority; Term of Office of Directors or Trustees; N u m b e r of Directors or Trustees to be Elected; Election of Less T h a n the Required N u m ber; Qualifications of Directors or Trustees; N a t u r a l persons contemplated by law; Citizenship Requirement; Stock O w n ership Requirement; Reason for the Requirement; A d d i t i o n a l Qualifications in the By-Laws; Effect of Want of Eligibility Section 24 - Election of Directors or Trustees - Election of Directors or Trustees; Where Directors or Trustees M e r e l y Designated; viii

220-242

Time of A n n u a l Election; Postponement of the Election; Methods of Voting; Right of Stockholder to Use Cumulative Voting; Situations Involving C u m u l a t i v e Voting; Arguments for C u m u l a t i v e Voting; Arguments Against Cumulative Voting; Voting in a Non-stock Corporation; Separate Voting by Zones or Regions N o t A l l o w e d

242-256

Section 25 — Corporate Officers, Quorum — Corporate Officers; Corporate Employees; Election of Officers by the Board; Compensation, Terms of Office, and Removal; Positions Concurrently H e l d by Same Person; Acceptance of Office and Taking of Oath of Office; Sources of Powers or Authority of Corporate Officers; Extent of Powers or A u t h o r i t y of Corporate Officers; Classification of Powers or A u t h o r i ty of Corporate Officers; Extent of A u t h o r i t y of Particular Officers; Requisites for Board Meeting; Q u o r u m ; Proxy a n d Constructive Presence N o t A l l o w e d ; A n other Corporation as Director or Trustee

256-282

Section 26 — Report of Election of Directors, Trustees and Officers — Report of Elections and Vacancies

282-284

Section 27 — Disqualification of Directors, Trustees or Officers — Disqualification of Directors/Trustees or Officers; De Facto D i rectors/Trustees or Officers; Powers and Rights of De Facto Officers, in General; Validity of Contracts and Acts of De Facto Officers

284-287

Section 28 — Removal of Directors or Trustees — Power of Stockholders or M e m b e r s to Remove Directors or Trustees; Power of the Board to Remove a M e m b e r ; Power of Court to Remove Directors or Trustees; Requisites for Removal of Directors or Trustees; Requirement of Notice of Meeting; Resignation of Directors or Trustees; A b a n d o n m e nt of Office and Failure to Attend Meetings

287-294

Section 29 — Vacancies in the Office of Director or Trustee — Vacancies in the Office of Director or Trustee; Filling of Vacancies

294-297

Section 30 — Compensation of Directors — Compensation of Directors or Tustees; Directors Without Authority to Grant Themselves Compensation; L i m i t to Compensation; Per Diems of Directors; Compensation of Corporate Officers

297-302

Section 31 - Liability of Directors, Trustees or Officers — Nature of Directors'/Trustees' Position; Cases W h e n Directors/Trustees or Officers Liable for Damages; Liability of Directors/Trustees or Officers for Bad Faith or Gross Negligence; Liability of Directors / Trustees or Officers for Secret Profits

302-307

Section 32 — Dealings of Directors, Trustees or Officers with the Corporation — Self-dealing Directors / Trustees or Officers

307-309

Section 33 — Contracts Between Corporations with Interlocking Directors — Contracts Between Corporations w i t h Interlocking Directors; Evils of Interlocking Directorates

309-312

ix

Section 34 - Disloyalty of a Director — Doctrine of "Corporate Opportunity"; W h e n Doctrine N o t Applicable; Ratification by Stockholders of Disloyal Act

312-315

Section 35 — Executive Committee — Executive Committee

316-319

Title I V POWERS OF C O R P O R A T I O N Section 36 — Corporate Powers and Capacity — M e a n i n g of Powers of a Corporation; Distinguished from Its Franchise and Objects; Relative Powers of N a t u r a l Persons/Partnerships and Corporations; Classification of Corporate Powers; Detenruning Whether an Act or Contract W i t h i n Scope of Corporate Powers; Express Powers Explained; I m p l i e d Powers Explained; I m p l i e d Powers Classified; Express Powers Distinguished f r o m I m p l i e d Powers; Incidental or Inherent Powers Explained; Construction of Powers Granted; Ratification of Corporate Acts; Effect of Ratification Retroactive; M o d e of Exercising Powers; Power to Sue and be Sued; Power to A d o p t and Use a Corporate Seal; Power to Acquire and Convey Property; Power to Acquire Shares or Securities; Corporation as Stockholder or M e m b e r ; Power to Contribute to Charity; Power to Establish Pension, Retirement and Other Plans; Power to Act as Guarantor

320-344

Section 37 — Power to Extend or Shorten Corporate Term — Power to Extend or Shorten Corporate Term; Appraisal Right of Dissenting Stockholders

344-346

Section 38 — Power to Increase or Decrease Capital Stock; Incur, Create or Increase Bonded Indebtedness — P o w e r to Increase or Decrease Capital Stock; Limitations on the Power; Necessity for Increasing Capital Stock; Necessity of N e w Subscription for Increase; Effectivity of Increase or Decrease; Over-issue of Shares; Unauthorized Increase of Capital Stock; Subscription Requirement in Case of Increase of Capital Stock; Ways of Increasing (Decreasing) Authorized Capital Stock; Increase by Way of Stock Dividends; Par Value or No Par Value Shares for the Authorized Increase; Reduction of Capital Stock; Effect of Reduction on Liability for U n p a i d Subscription; Distribution of Surplus on Reduction; Persons Entitled to Question Increase or Decrease of Capital Stock; Power to Incur, Create, or Increase Bonded Indebtedness; W h e n Obligations Constitute Bonded Indebtedness; The Corporate Bond Contract; Bond Terminology; Types of Bonds

346-367

Section 39 — Power to Deny Pre-emptive Right — of Stockholders; Reason for the Grant of Pre-emptive Right; Shares to W h i c h Offering of Remaining Unsubscribed

x

Right of Pre-emption Right; Power to D e n y Right N o t Available; Shares; Tune W i t h i n

W h i c h the Right M a y Be Exercised; Pre-emptive Right as to Treasury Shares; Price of N e w Stock Offerings; Availability of Right to A d d i t i o n al Issue of Originally Authorized Shares

367-375

Section 40 — Sale or Other Disposition of Assets — Powers to Sell, Lease, etc. A l l or Substantially A l l Corporate Assets; Authority of the Board; Appraisal Right of Dissenting Stockholder; Liability of purchasing corporation for debts of selling corporation

375-379

Section 41 — Power to Acquire Own Shares — Power to Acquire O w n Shares; Conditions for the Exercise of the Power; Trust Fund Doctrine; Effects of Purchase on Corporate Creditors; Effects of Purchase on Remaining Stockholders

379-387

Section 42 — Power to Invest Corporate Funds in Another Corporation or Business or for Any Other Purpose — Power to Invest Funds in Other Corporations or for Other Purposes; Purpose Other T h a n the Primary Purpose; Ratification of Defective Investment

387-391

Section 43 — Power to Declare Dividends — Concept of Dividends; Concept of Profits; D i v i d e n ds Distinguished from Profits or Earnings; Power to Declare Dividends ; Dividends Payable O u t of Unrestricted Retained Earnings; Reasons for the Rule; Rule as to N o Par Value Stock; D i v i d e n d s from Property in W h i c h Capital Is Invested; Unrestricted Retained Earnings Explained; Items Effecting Unrestricted Retained Earnings; Existence of Actual Profits or Earnings; Deduction of Expenses; Distribution of P a i d - i n Surplus as Cash Dividends; Distribution of Revaluation Surplus as Dividends; Declaration of Dividends; Discretion of the Board of Directors to Declare Dividends; Limit on Retained Earnings; Action to Enforce Declaration of Dividends; Time for Declaration of Dividends; Validity of D i v i d e n d Determined at Time of Declaration; Payment of Subscription from Dividends; Liability of Stockholders and Directors for Illegally Received Dividends; Remedies of Corporate Creditors; Persons Entitled to Dividends; Right of Stockholders After Declaration of Dividends; Time for Payment of Dividends; Equal Participation in the Distribution of Dividends; Total Subscription Basis of Share in Dividends; Other Modes of Division of Dividends; Classes of Dividends; Ordinary and Extraordinary Dividends; Effect of Declaration of Cash D i v i d e n d ; Effect of Declaration of Stock D i v i d e n d ; Tax Treatment of Stock Dividends; Effect of Declaration of Bond or Scrip D i v i d e n d ; Distinctions Between Cash D i v i d e n d and Stock D i v i d e n d ; Stock D i v i d e n d from Issue of Additional Shares; Distribution or Re-issue of Treasury Stocks; Stock Splits; Distinction Between Distribution in Liquidation and Ordinary D i v i d e n d

391-437

Section 44 — Power to Enter into Management Contract — Power to Enter into Management Contract; Limitations on the Power

437-440

Section 45 — Ultra Vires Acts of Corporations — Ultra Vires and Intra Vires Acts Explained; Ultra Vires Acts Distinguished from Other xi

Acts; Ratification of Ultra Vires Acts; Effects of Ultra Vires Acts Which Are N o t Illegal; Contracts Ultra Vires in Part Only; Acts Presumed to be Within Corporate Powers; Ultra Vires Acts as the Acts of the Corporation; W h o M a y Invoke Ultra Vires; Estoppel to Deny Corporate Power to Contract; Corporate Liability for Torts, Crimes, and Other Violations

440-454

Title V BY-LAWS Section 46 — Adoption of By-Laws — M e a n i n g of By-Laws; Power to Adopt By-Laws; Function of By-Laws; Necessity of A d o p t i n g By-Laws; Time and Procedure for the A d o p t i o n of By-Laws; Effect of Failure to File By-Laws; Construction, Application, and Effectivity of By-Laws; Validity of By-Laws; M u s t Be Consistent w i t h Law; Must Be Consistent w i t h Public Policy; Must N o t Impair Obligation of Contracts; M u s t Be General and N o t Directed Against Particular Individuals; M u s t Be Consistent w i t h the Charter or Articles of Incorporation; M u s t Be Reasonable; Binding Effect of By-Laws; Waiver of B y - L a w s . .

455-468

Section 47 — Contents of By-Laws — Contents of B y - L a w s

468-472

Section 48 — Amendments to By-Laws — A m e n d m e n t and Repeal of By-Laws and A d o p t i o n of N e w By-Laws; Revocation of Delegated Power of Board of Directors or Trustees; By-Laws and Resolutions Distinguished; Resolution A d o p t e d as a ByLaw; Articles of Incorporation and By-Laws Distinguished; Filing and Effectivity of A m e n d e d or N e w By-Laws

472-478

Title VI MEETINGS Section

49

—

Kinds

of

Meetings

Section 50 — Regular and Special Meetings of Stockholders or Members — Kinds of Meetings; Necessity of Meetings; Exceptions to the Rule; Requisites for a Valid M e e t i n g of Stockholders o r . Members

479

479-482

Section 51 — Place and Time of Meetings of Stockholders or Members — Place and Tune of Meetings of Stockholders or Members; Proper Person to Call M e e t i n g ; Notice of Every M e e t i n g Required; Statement of Purpose of M e e t i n g ; Requisites of Notice of Meeting; Effect of Failure to C o m p l y w i t h Requisites

482-488

for Meeting Section 52—Quorum in Meetings - Q u o r u m Required in Stockholders' and Members' Meetings; Postponement of Stockholders' or Members' A n n u a l Meeting; Payment of Compensation for Attendance at Stockholders' or Members' Meetings; Matters in xii

W h i c h the L a w Requires M i n i r n u m N u m b e r of Votes; Greater Voting Requirement

488-494

Section 53 — Regular and Special Meetings of Directors or Trustees — Place and Tune of Meetings of Directors or Trustees; Notice of Every M e e t i ng Required

494-495

Section 54 — Who shall Preside at Meetings — Presiding Officer at Meetings

495-496

Section 55 — Right to Vote of Pledgors, Mortgagors, and Administrators — Right to Vote in Stock Corporations; Right to Vote in N o n stock Corporations; M a n n e r of Voting; Representative Voting; Voting Rights for Shares of Stock of a Deceased Stockholder

496-504

Section 56 — Voting in Case of Joint Ownership of Stock—Voting W h e r e Share O w n e d by T w o or M o r e Persons

504-505

Section 57 — Voting Right for Treasury Shares — Voting Right for Treasury Shares

505

Section 58 — Proxies — M e a n i n g of Proxy; Purpose and Use of Proxies; Voting by Proxy; W h o M a y Be a Proxy; Nature of Proxies; Limitations on Proxies of Stockholders or Members; F o r m and Execution of Proxies; Extent of Authority of Proxy; D e n i a l of Right to Vote by Proxy in the By-Laws; Restrictions on Right to Vote by Proxy in the By-Laws; Proxy G i v e n to T w o or M o r e Persons; Revocation of Proxies; D u r a t i o n of Proxy

505-515

Section 59 — Voting Trusts — Corporate Control Devices; Combination and Pooling Agreements A m o n g Stockholders; Voting and Other Rights U n d e r a Voting Trust Agreement; Voting Trust Certificates; Powers or Rights of Voting Trustees; Purpose of Voting Trust Agreement; Limitations on Voting Trust Agreement; Proxy and Voting Trust Distinguished

515-525

Title V I I STOCKS A N D STOCKHOLDERS Section 60 — Subscription Contract — H o w Participation in a Corporation Acquired; Subscription Contract; Kinds of Subscription; Subscription and Purchase of Stock; Stock Option; Rules Governing Grant of Stock Options; Liability of Stockholders on U n p a i d Subscriptions to Corporate Creditors; Release of Subscriber from Liability for U n p a i d Subscription; Refund of Subscription Payments in Excess of That Stated in Call; Refund Where Proposed Increase in Capital Stock Abandoned

526-537

Section 61 — Pre-incorporation Subscription — Pre-incorporation Subscription Mandatory; Revocability of Pre-incorporation Subscription Contract; Effect of Filing of Articles of Incorporation...

xiii

537-539

Section 62 — Consideration for Stocks — Sources of Corporate Capital; Power to Issue Stock; Approval of Stockholders for Issue of Shares; Approval of Securities and Exchange Commission for Issue of Shares; Different Modes by Whic h Shares M a y Be Issued; Original Issue of Stock Contemplated; Consideration for Issue of Stocks; Amount of Consideration; Consideration Other Than Cash; Nature of Property W h i c h M a y Be Taken for Stock; Services as Consideration for Stock; Issuance of Stock to Offset Corporation's Indebtedness; Issuance of Stocks in Consideration of Profits; Fixing of Issued Price of No Par Shares; Consideration for Issue of Bonds; Registration and Sale of Securities

539-557

Section 63 — Certificate of Stock and Transfer of Shares — N a t u r e of a Certificate of Stock; Issuance of Certificate of Stock; Delivery Essential to Issuance of Certificate; Remedies of Stockholders Where Corporation Refuses To Issue Certificate; Effect of Over-issuance of Shares; Unauthorized or Forged Certificates; Requirements for Transfer of Stock; Right to Transfer Fully Paid Shares of Stock; Sale of Subscription Rights; Restrictions on Transfer of Stock; O p t i o n to Purchase Shares Offered for Sale; Modes of Stock Transfer; Validity of Stock Transfer; Reasons for Requiring Registration of Stock Transfer; Right of Corporation to Refuse Registration of Transfer; Basis of Transferee's Right to Registration; Remedy of Stockholder W h e r e Corporation Refuses to Register Transfer; O n l y Absolute Transfers N e e d Be Registered; Effects of an Unregistered Transfer of Shares; N o n transferability of U n p a i d Stock on Corporate Books

557-584

Section 64 — Issuance of Stock Certificates — Full Payment of Subscription Required for Issuance of Certificate of Stock; Purpose of Prohibition in Section 64; N a t u r e of Relation of Stockholder to the Corporation; Rights and Remedies of Stockholders in General; Rights of Heirs Deceased Stockholders; Rights of Stockholders M a y Be Changed or Restricted; Rights of Dissenting M i n o r i t y ; Actions by Stockholders or Members; Derivative Suit Explained; N a t u r e of Derivative Suit; Importance of Derivative Suits; Type of W r o n g Contemplated; Requisites for Bringing Derivative Suit; Exhaustion of Intra-corporate Remedies; Reasons G i v e n for not A l l o w i n g Direct I n d i v i d u a l Suit; Individual Suit Explained; Derivative Suit and I n d i v i d u a l Suit Distinguished; Representative Suit Explained; Derivative Suit and Representative Suit Distinguished; Jurisdiction Over I n t r a c o r p o r a t e Controversies; Liabilities of Stockholder

584-605

Section 65 - Liability of Directors for Watered Stocks — Watered Stock Defined; Issue of Watered Stock Prohibited; Basis or Theory of Liability; Prohibition Refers to Original Issue; Liability for Watered Stock; Suit by the State

605-610

Section 66 - Interest on Unpaid Subscriptions - Liability of holder for Interest on U n p a i d Subscriptions xiv

Stock610

Section 67 — Payment of Balance of Subscription — Remedies to Enforce Payment of Stock Subscription; Statutory Sanctions on Stock Delinquency; Remedies L i m i t e d to Delinquent Subscription; Payment of U n p a i d Subscription or Percentage Thereof; Call and Assessment D e n n e d and Distinguished; Requisites for a V a l i d C a l l ; Power of Board of Directors to M a k e Call; Necessity and Purpose of C a l l ; W h e n Call not Necessary; Payment W i t h o u t Call; Necessity of Notice of Call

610-618

Section 68 — Delinquency Sale — Procedure for the Sale of Delinquent Stocks; M e a n i n g of Highest Bidder; Right of Corporation to Reject Highest Bid; Purchase by Corporation of Delinquent Stock; Forfeiture of Delinquent Stock N o t Authorized; Shares to be Sold in Case of Delinquency

618-623

Section 69 — When Sale May Be Questioned — Recovery of Stock U n l a w f u l l y Sold

623-624

Section 70 — Court Action to Recover Unpaid Subscription — Judicial R e m e d y to Recover U n p a i d Subscription

624-625

Section 71 — Effects of Delinquency — Effects of Stock Delinquency; Denial of Voting Rights

625-627

Section 72 — Rights of Unpaid Shares — Rights of U n p a i d Shares Section 73 — Lost or Destroyed Certificates — Lost, Stolen, or Destroyed Stock Certificates; W h e n Publication Requirement M a y Be Dispensed W i t h

627-628

628-631

Tide VIII CORPORATE BOOKS AND RECORDS Section 74 — Books to be Kept; Stock Transfer Agent — Books a n d Records to be Kept by Corporations; Practical Necessity of Keeping Books; Entries to be M a d e in Stock and Transfer Book; Books and Records, and Entries therein as Evidence; Persons Given the Right to Inspect Corporate Books; Remedies and Sanctions for Enforcement of Right; Basis and Purpose of Right to Inspect Corporate Books; Right to Inspection N o t Absolute; Extent of the Right of Inspection; Right of Stockholder to D e m a n d a List of Stockholders; Right of Stockholder to D e m a n d a Detailed A u d i t i n g of Business Operations; Right of Stockholder to Examine Books of Corporation's Subsidiary

632-648

Section 75 - Rights to Financial Statements — Right of Stockholder or M e m b e r to Financial Statements; D u t y of Board to Present A n n u a l Financial Report

648-651

Title LX MERGER AND CONSOLIDATION Section 76 — Plan of Merger or Consolidation

xv

652

Section 77 — Stockholders' or Members' Approval Section

78

—

Articles

of

Merger

or

Consolidation

653

Section 79 — Securities and Exchange Commission's Approval and Effectivity of Merger or Consolidation — Corporate Combinations in General; C o m m o n Forms of Corporate Combinations; Advantages of Stock Acquisition Over Asset Acquisition; Procedure for Effecting a Plan of Merger or Consolidation

654-665

Section 80 — Effects of Merger or Consolidation — Legal Effects of Merger and Consolidation; Merger and Consolidation Distinguished from Sale of Assets; Reorganization of a Corporation; Quasireorganization of a Corporation

665-674

TideX APPRAISAL RIGHT Section 81 — Instances of Appraisal Right — Appraisal Right of a Stockholder; Instances W h e n Appraisal Right Available; A m e n d m e n t of Articles of Incorporation Changing Stockholders' Rights; Limitations on the Exercise of Appraisal Right

675-677

Section 82 — How Right Is Exercised — Procedure for Exercise of Right; Determination of Fair Value of Shares

678-679

Section 83 — Effect of Demand and Termination of Right — Effect of Exercise of Right; Payment of Shares

680

Section 84 — When Right to Payment Ceases — Extinguishment of Right to Payment

680-681

Section 85 — Who Bears Costs of Appraisal — Liability for Costs a n d Expenses of Appraisal

681-682

Section 86 — Notation on Certificate(s); Right of Transferee — N o t a t i o n on Certificate(s) of Shares of Dissenting Stockholder; Transfer of Dissenting Shares

682-683

Title XI NON-STOCK CORPORATIONS 684

Section 87 - Definition Section 88 — Purposes — Definition of Non-stock Corporation; Power to M a k e Profits and Engage in Business; Applicable Provisions.

684-687

Chapter I — MEMBERS 687

Section 89 - Right to Vote Section Section

90 91

-

Nontransferability -

Termination

xvi

of of

Membership Membership

687 687

Chapter II — TRUSTEES AND OFFICERS 5g7

Section 92 — Election and Term of Trustees Section

93

—

Place

of

Meetings

ggg

Chapter III — DISTRIBUTION OF ASSETS IN NON-STOCK CORPORATIONS 588

Section 94 — Rules for Distribution Section 95 — Plan of Distribution of Assets — Rules Applicable O n l y to Non-stock Corporations; M e m b e r s h i p in a Non-stock Corporation

689-698

Title XII CLOSE CORPORATIONS Section 96 — Definition and Applicability of Title — Definition of Close Corporation; Peculiarity of a Close Corporation; M e a n i n g of Term U n d e r the Code; Applicable Provisions; N e e d for Special Rules for Close Corporations

699-704

Section 97 — Articles of Incorporation — Permissible Provisions in Articles of Incorporation

704-706

Section 98 — Validity of Restrictions on Transfer of Shares — Restrictions on Transfer of Shares; Right of First Refusal; N e e d for Stock Transfer Restrictions in Close Corporations; Scope of Restrictions

706-710

Section 99 — Issuance or Transfer of Stock of a Close Corporation in Breach of Qualifying Conditions — Issuance or Transfer of Stock in Breach of Qualifying Conditions

710-712

Section 100 — Agreements by Stockholders — Valid Agreements by Stockholders

712-713

Section 101 — When Board Meeting is Unnecessary or Improperly Held — Action Taken By Directors Without Meeting or at Improperly Called Meeting

713-714

Section 102 — Pre-emptive Right in Close Corporations — Pre-emptive Right of Stockholders

714-715

Section 103 — Amendment of Articles of Incorporation — Amendmen t of the Articles of Incorporation Section 104 — Deadlocks — Arbitration of Intra-corporate Deadlocks by the Securities and Exchange Commission; Dissolution in the Event of Deadlock Section 105 — Withdrawal of Stockholder or Dissolution of Corporation — Right of Stockholder to W i t h d r a w or to H a v e the Corporation Dissolved

xvii

716-718

Title XIII SPECIAL CORPORATIONS Chapter I — EDUCATIONAL CORPORATIONS Section 106 - Incorporation — Educational Corporation Defined; Laws Applicable

720-721

Section 107 — Prerequisites to Incorporation — Incorporation

721

Section 108 - Board of Trustees — Board of Trustees or Directors

722-723

Chapter II — RELIGIOUS CORPORATIONS Section

109

—

Classes

of

Religious

723

Corporation

723

Section 110 — Corporation Sole Section

111

—

Articles

of

Incorporation

724-725

Section 111 — Submission of the Articles of Incorporation Section

113

—

Acquisition

and

Alienation

723-724

of

Property

725

Section 114 — Filling of Vacancies

725

Section 115 — Dissolution

726

Section 116 — Religious Societies — Definition of Religious Corporation; Applicable Provisions; Classes of Religious Corporations; Corporation Sole

726-734

Tide xrv DISSOLUTION Section 117 — Methods of Dissolution — M e a n i n g of Dissolution; P o w e r to Dissolve Corporation; De Jure and De Facto Dissolution; T w o Legal Steps in Corporate Dissolution; M e t h o d s or Causes of Corporate Dissolution; Methods Exclusive

735-738

Section 118 — Voluntary Dissolution Where No Creditors Are Affected — Voluntary Dissolution of Corporations; Voluntary Dissolution Where No Creditors A r e Affected; Sale of Assets in Anticipation of Voluntary Dissolution; Right of M i n o r i t y Stockholders to Oppose Dissolution

738-742

Section 119 — Voluntary Dissolution Where Creditors Are Affected — Voluntary Dissolution W h e re Creditors A r e Affected

742-743

Section 120 — Dissolution by Shortening Corporate Term — Dissolution by Shortening of Term; Dissolution by Expiration of Term; Dissolution by Legislative Enactment; Dissolution by Failure to Formally Organize and Commence Transaction of Business; Effect of Change of N a m e on Corporate Existence; Effect of Insolvency or Bankruptcy on Corporate Existence; Effect of Alienation of A l l Assets on Corporate Existence; Effect of

zviii

Death, etc. of Stockholders or Members on Corporate Existence; Effect of Want of Officers on Corporate Existence; Effect of Concentration of Stock on Corporate Existence

743-751

Section 121 — Involuntary Dissolution — Dissolution by Order of the Securities and Exchange Commission; Dissolution by Q u o Warranto Proceedings; Right of M i n o r i t y Stockholders to Sue for Dissolution; Effects of Dissolution

751-759

Section 122 — Corporate Liquidation — M e a n i n g of Liquidation; N a t u r e of Liquidation; Methods of Corporate Liquidation; Liquidation by the Corporation Itself; Liquidation by a Receiver; A p p o i n t m e n t of Receiver Discretionary; Liquidation by a Trustee; Effect of Dissolution on Corporate Power to Enter Into Contracts; Distribution of Corporate Assets; Priority of Application of Assets; Refund to Stockholders of Their Investment

759-774

Title X V FOREIGN CORPORATIONS Section 123 — Definition and Rights of Foreign Corporations — Definition of Foreign Corporation; Corporation M a y Operate W i t h i n Jurisdiction of Another State; Objectives of Regulation of Foreign Corporations; License and Certificate of Authority Required of Foreign Corporations; Nationality of Corporations w i t h Foreign Equity

775-784

Section 124 — Application to Existing Foreign Corporations — W h e r e License Issued Before Effectivity of the Code Section

125

Section

126

— —

Application Issuance

for of

784-785 a a

License

785

License

786 788

Section 127 — Who May Be a Resident Agent Section 128 — Resident Agent; Service of Process — Application for and Issuance of License; Conditions Subsequent to Issuance of License; Licensing of Regional or Area Headquarters; Licensing of Regional Operating Headquarters; Resident Agent; Purpose of L a w in Requiring License; M e a n i n g of "Transacting Business"; M e a n i n g of Phrase U n d e r Investment Laws

788-811

Section 129 — Law Applicable - Laws Applicable to Foreign Corporations; Powers of a Foreign Corporation Subject to Philippine Laws

812-813

Section 130 — Amendments to Articles of Incorporation or By-Laws of Foreign Corporations — A m e n d m e n t of Articles of Incorporation and By-Laws

813-815

Section 131 — Required

Amended

License

—

When Amended

License 8 1 5

xix

"

8 1 6

Section 132 — Merger or Consolidation Involving a Foreign Corporation Licensed in the Philippines — Merger or Consolidation Involving a Foreign Corporation

816-817

Section 133 — Doing Business Without a License — Effects of D o i n g Business Without a License; Suit by an Unlicensed Foreign Corporation; Suit Against an Unlicensed Foreign Corporation; Facts Showing Capacity to Sue; Validity of Contracts of Unlicensed Foreign Corporations

817-828

Section

134

—

Revocation

of

License

828

Section 135 — Issuance of Certificate of Revocation — Revocation of License of Foreign Corporation; Effects of Revocation

829-830

Section 136 — Withdrawal of Foreign Corporation — W i t h d r a w a l of a Foreign Corporation; Suits Against a Foreign Corporation That Has Ceased to Do Business

830-832

Title X V I MISCELLANEOUS PROVISIONS Section 137 — Outstanding Capital Stock Defined — Outstandin g Capital Stock Defined; Distinguished f r o m Issued and Subscribed Shares

833-835

Section 138 — Designation of Governing Boards — Designation of Governing Boards

835

Section 139 — Incorporation and Other Fees — Collection of Fees

835-836

Section 140 — Stock Ownership in Certain Corporation — L i m i t a t i o n of Stock Ownership in Corporations Vested w i t h Public Interest; Illegal Monopolies and Combinations in Restraint of Trade

836-841

Section 141 — Annual Report of Corporations — T h e Securities a n d Exchange Commission; Powers and Functions of the C o m m i s sion; Jurisdiction of Commission over Corporations; I n d e m n i fications and Responsibilities of Commissioners; Jurisdiction over Cases Transferred to O r d i n a r y Courts; Submission of Annual Report to the Commission; Corporations Covered by the Requirement -

841-858

Section 142 — Confidential Nature of Examination Results — Visitorial Power in General; Visitorial Power Granted Certain Governmental Agencies; Judicial Supervision, Generally

858-862

Section 143 — Rule-Making Power of the Securities and Exchange Commission — R u l e - M a k i n g Power of the Securities and Exchange Commission.

862-864

Section 144 - Violations of the Code - General Penalty

864-865

Section 145 — Amendment or Repeal — Limitations on Legislative Power to A m e n d or Repeal

865-866

Section 146 — Repealing Clause — Former Corporation L a w Repealed; Repeal of Other Laws

866-867 Provisions

868

Section 148 — Applicability to Existing Corporations — Applicability of Code to Existing Corporations

868-869

Section

147

—

Separability

of

Section 149 — Effectivity — Effectivity of the Code

869

APPENDIX A P P E N D I X A — T H E S E C U R I T I E S R E G U L A T I O N C O D E (R.A. N o . 8799)

870

A P P E N D I X B — RULES OF REHABILITATION

924

PROCEDURE

ON

CORPORATE

A P P E N D I X C — I N T E R I M RULES OF PROCEDURE G O V E R N I N G I N T R A - C O R P O R A T E C O N T R O V E R S I E S U N D E R R.A. N O . 8799

949

APPENDIX D — GUIDELINES I N THE FORMATION A N D O R G A N I Z A T I O N OF A PRIVATE STOCK CORPORATION

968

A P P E N D I X E — GUIDELINES FOR N O N - S T O C K CORPORATIONS

971

A P P E N D I X F — G U I D E L I N E S FOR Q U A S I REORGANIZATION A P P E N D I X G — C O N S O L I D A T E D S C H E D U L E OF FEES A N D CHARGES A P P E N D I X H — C O N S O L I D A T E D S C A L E OF F I N E S A P P E N D I X I — S C A L E OF F I N E S F O R N O N - C O M P L I A N C E W I T H F I N A N C I A L REPORTING REQUIREMENTS OF THE COMMISSION A P P E N D I X J — REVISED G E N E R A L I N F O R M A T I O N 1 0 A P P E N D I X K — PUBLIC F O R M TYPE MASTERLIST S

H

E

E

T

W

4

3

7

8

A P P E N D I X L — COPIES OF REPORTS A N D O T H E R F I L I N G S W I T H T H E SEC

1055

A P P E N D I X M — R E V I S E D C O D E OF C O R P O R A T E GOVERNANCE

1060

A P P E N D I X N — T H E 2006 RULES OF P R O C E D U R E OF T H E SECURITY E X C H A N G E C O M M I S S I O N

1078

— oOo —

xxi

Corporation Code- De Leon

Recommend Documents