XI. STOCKHOLDERS AND MEMBERS
1. Shareholders Not Creditors of Corporation (Garcia v. Lim Chu Sing, 59 Phil. 562 [1934]).
2. Subscription Contracts (Sec. 60 and 72; Trillana v. Quezon Colegialla, 93 Phil. 383 [1953]).
(a) Purchase Agreement (Bayla v. Silang Traffic Co., Inc., 73 Phil. 557 [1942]).
(b) Pre-Incorporation Subscription (Sec. 61)
(c) Release from Subscription Obligation (Velasco v. Poizat, 37 Phil. 802 [1918]; PNB v. Bitulok Sawmill, Inc., 23 SCRA 1968 [1968]; National Exchange Co. v. Dexter, 51 Phil. 601 [1928]) (d) When condition of payment provided for in the by-laws (De Silva v. Aboitiz & Co., 44 Phil. 755 [1923]).
3. Consideration (Sec. 62).
(a) Cash
(b) Property
(c) Service
(d) Retained Earnings
(e) Share - 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. xLincoln Philippine Life v. Court of Appeals, G.R No. 118043, 23 July 1998.
4. Watered Stocks (Sec. 65)
5. Payment of Balance of Subscription (Secs. 66 and 67; Lingayen Gulf Electric Power Co. v. Baltazar, 93 Phil. 404 [1953]).
6. Delinquency on Subscription (Secs. 68, 69, 70 and 71; xPhilippine Trust Co. v. Rivera, 44 Phil. 469 [1923]; xMiranda v. Tarlac Rice Mill Co., 57 Phil. 619 [1932])
The prescriptive period to recover on unpaid subscription does not commence from the time of subscription but from the time of demand by the corporation through it board of directors for the stockholder to pay the balance of his subscription (xGarcia v. Suarez, 67 Phil. 441[1939]). (a) Who May Question a Delinquency Sale (Sec. 68 and 69).
7. Certificate of Stock (Sec. 63)
(a) Nature of Certificate (Tan v. SEC, 206 SCRA 740 [1992]; De los Santos v. Republic, 96 Phil. 577 [1955]; xC.N. Hodges v. Lezama, 14 SCRA 1030 [1965]). A stock certificate is merely evidence of a share of stock and not the share itself. xLincoln Philippine Life v. Court of Appeals, 293 SCRA 92 (1998). A formal certificate of stock could not be considered issued in contemplation of law unless signed by the president or vice-president and countersigned by the secretary or assistance secretary. Bitong v. Court of Appeals, 292 SCRA 503 (1998).
(b) Quasi-negotiable Character of the Certificate of Stock (Bachrach Motor Co. v. Lacson Ledesma, 64 Phil. 681 [1937]).
In order for a transfer of stock certificate 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 of stock. Indorsement of the certificate of stock is a mandatory requirement of law for an effective transfer of a certificate of stock. Razon v. IAC, 207 SCRA 234 (1992). The rule is that the endorsement of the certificate of stock by the owner or his attorney-in-fact or any other person legally authorized to make the transfer shall be sufficient to effect the transfer of shares only if the same is couple with delivery. The delivery of the stock certificate duly endorsed by the owner is the operative act of transfer of shares from the lawful owner to the new transferee.
Thus, for a valid transfer of stocks, the requirements are as follows:
(a) There must be delivery of the stock certificate;
(b) The certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make the transfer; and
(c) to be valid against third parties, the transfer must be recorded in the books of the corporation. Bitong v. Court of Appeals, 292 SCRA 503 (1998).
(c) Right to Issuance (Sec. 64; Baltazar v. Lingayen Gulf Elect. Power Co., Inc., 14 SCRA 522 [1965]).
(d) Lost or Destroyed Certificates (Sec. 63 and 73) While Section 73 of the Corporation Code appears to be mandatory, the same admits exceptions, such that a corporation may voluntarily issue a new certificate in lieu of the original certificate of stock which has been lost without complying with the requirements under Section 73 of the Corporation Code, provided that the corporation is certain as to the real owner of the shares to whom the new certificate shall be issued. . . . It would be an internal matter for the corporation to find measures in ascertaining who are the real owners of stock for purposes of liquidation. It is well-settled that unless proven otherwise, the “stock and transfer book” of the corporation is the best evidence to establish stock ownership. (SEC Opinion, dated 28 January 1999, addressed to Ms. Ma. Cecilia Salazar-Santos).
(e) Forged and Unauthorized Transfers (J. Santamaria v. HongKong and Shanghai Banking Corp., 89 Phil. 780 [1951]; Neugene Marketing, Inc. v. Court of Appeals, 303 SCRA 295 [1999]).
8. Stock and Transfer Book (Secs. 63, 72 and 74; Fua Cun v. Summers, 44 Phil. 704 [1923]; Monserrat v. Ceran, 58 Phil. 469 [1933]; Chua Guan v. Samahang Magsasaka, Inc., 62 Phil. 472 [1935]; Uson v. Diosomito, 61 Phil. 535 [1935]; Escaño v. Filipinas Mining Corporation, 74 Phil. 71 [1944]; Bachrach Motors v. Lacson-Ledesma, 64 Phil. 681 [1937]; Nava v. Peers Marketing Corp., 74 SCRA 65 [1976]).
In Garcia v. Jomouad, 323 SCRA 424 (2000), the Supreme Court directly resolved the issue “Whether a bona fide transfer of the shares of a corporation, not registered or noted in the books of the corporation, is valid as against a subsequent lawful attachment of said shares, regardless of whether the attaching creditor had actual notice of said transfer or not.” The Court quoted from Uson v. Diosomito, which held that all transfers of shares not entered in the stock and transfer book of the corporation are invalid as to attaching or execution creditors of the assignors, as well as to the corporation and to subsequent purchasers in good faith and to all persons interested, except the parties to such transfers: “All transfers not so entered on the books of the corporation are absolutely void; bot because they are without notice or fraudulent in law or fact, but because they are made so void by statute. The Supreme Court held that “the transfer of the subject certificate made by Dico to petitioner was not valid as to the spouses Atinon, the judgment creditors, as the same still stood in the name of Dico, the judgment debtor, at the time of the levy on execution. In addition, as correctly ruled by the CA, the entry in the minutes of the meeting of the Club’s board of directors noting the resignation of Dico as proprietary member does not constitute compliance with Section 63 of the Corporation Code. Said provision of law strictly requires the recording of the transfer in the books of the corporation, and not elsewhere, to be valid as against third parties.”
Attachments of shares of stock are not included in the term "transfer" as provided in Section 63 of the Corporation Code. Both the Revised Rules of Court and the Corporation Code do not require annotation in the corporation's stock and transfer books for the attachment of shares to be valid and binding on the corporation and third parties. Chemphil Export & Import Corporation v Court of Appeals, 251 SCRA 257 (1995). Until registration is accomplished, the transfer, though valid between the parties, cannot be effective as against the corporation. Thus, the unrecorded transferee cannot vote nor be voted for. The purpose of registration, therefore, is two-fold: to enable the transferee to exercise all the rights of a stockholder, including the right to vote and to be voted for, and 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. Until challenged in a proper proceeding, a stockholder of record has a right to participate in any meeting; his vote can be properly counted to determine whether a stockholders’ resolution was approved, despite the claim of the alleged transferee. On the other hand, 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 Company, Inc. v. Bitanga, G.R. No. 137934, 10 August 2001.
Section 63 of the Corporation Code which provides that “no share of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation” cannot be utilized by the corporation to refuse to recognize ownership over pledged shares purchased at public auction. The term “unpaid claims” refers to “any unpaid claims arising from unpaid subscription, and not to any indebtedness which a subscriber or stockholder may owe the corporation arising from any other transactions. Obligations arising from unpaid monthly dues do not fall within the coverage of Section 63. China Banking Corp. v. Court of Appeals, 270 SCRA 503 (1997).
Entries made on the stock and transfer book by any person other than the corporate secretary, such as those made by the President and Chairman, cannot be given any valid effect. xTorres, Jr. v. Court of Appeals, 278 SCRA 793 (1997). A person cannot claim a right to intervene as a stockholder in corporate issue on the strength of the transfer of shares allegedly executed by a registered stockholder. The transfer must be registered in the books of the corporation to affect third persons. The law on corporation is explicit on this under Sec. 63 of the Corporation Code. xMagsaysay-Labrador v. CA, 180 SCRA 266 (1989)
Section 63 of the Corporation Code envisions a formal certificate of stock which can be issued only upon compliance with certain requisites. First, the certificate must be signed by the president or vice-president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation. A mere typewritten statement advising a stockholder of the extent of his ownership is a corporation without qualification and/or authentication cannot be considered as a formal certificate of stock. Second, delivery of the certificate is an essential element of its issuance. Hence, there is no issuance of a stock certificate 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 company. Third, the par value, as to par value shares, or the full subscription as to no par value shares, must first be fully paid. Fourth, the original certificate must be surrendered where the person requesting the issuance of a certificate is a transferee from a stockholder. Bitong v. Court of Appeals, 292 SCRA 503 (1998).
Situs of Shares of Stocks (Sec. 55)
The situs of shares of stock would be the place of domicile of the corporation to which they pertain to. xWells Fargo Bank and Union v. Collector, 70 Phil. 325 (1940); xTayag v. Benguet Consolidated, Inc., 26 SCRA 242 (1968); cf. xPerkins v. Dizon, 69 Phil. 186 (1939).
XII. RIGHTS OF STOCKHOLDERS AND MEMBERS
1. What does “Share” represent?
While shares of stock constitute personal property, they do not represent property of the corporation [i.e., they are properties of the stockholders who own them]. Share of stock only typifies an aliquot part of the corporation’s property, or the right to share in its proceeds to that extent when distributed according to law and equity, but the holder is not the owner of any part of the capital [properties] of the corporation, nor is he entitled to the possession of any definite portion of its property or assets. The stockholder is not a co-owner or tenant in common of the corporate property. xStockholders of F. Guanson and Sons, Inc. v. Register of Deeds of Manila, 6 SCRA 373 (1962).
2. Right to Certificate of Stock for Fully Paid Shares (Sec. 64; Tan v. SEC, 206 SCRA 740 [1992])
3. Preemptive Rights (Sec. 39; Datu Tagoranao Benito v. SEC, 123 SCRA 722 [1983]; Dee v. SEC, 199 SCRA 238 [1991]).
4. Right to Transfer of Shareholdings (Sec. 63)
Authority of a corporation to regulate the transfer of its stock does not empower the corporation 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 followed in effecting transfer. xThomson v. Court of Appeals, 298 SCRA 280 (1998). (a) Non-transferability of Membership in Non-Stock Corporation (Secs. 90 and 91). (b) Restriction on Transfers (Lambert v. Fox, 26 Phil. 588 [1914])
Right of Refusal
(Padgett v. Babcock & Templeton, Inc., 59 Phil. 232 [1933]).
Section 63 of the Corporation Code contemplates no restriction as to whom the stocks may be transferred. It does not suggest that any discrimination may be created by the corporation in favor of, or against a certain purchaser. The owner of shares, as owner of personal property, is at liberty, under said section to dispose them in favor of whomever he pleases, without limitation in this respect, than the general provisions of law. Fleishcher v. Botica Nolasco, 47 Phil. 583 (1925).
The only limitation imposed by Section 63 of the Corporation Code is when the corporation holds any unpaid claim against the shares intended to be transferred. A corporation, either by its board, its by-laws, or the act of its officers, cannot create restrictions in stock transfers, because "Restrictions in the traffic of stock must have their source in legislative enactment, as the corporation itself cannot create such impediment. By-laws are intended merely for the protection of the corporation, and prescribe relation, not restriction; they are always subject to the charter of the corporation. Rural Bank of Salinas v. CA, 210 SCRA 510 (1992).
Restraint of Trade — An agreement by which a person obliges himself not to engage in competitive trade for five years is valid and reasonable and not an undue or unreasonable restraint of trade and is obligatory on the parties who voluntarily enter into such agreement. xOllendorf v. Abrahamson, 38 Phil. 585 (1918).
Remedy If Registration Is Refused
(Hager v. Bryan, 19 Phil. 138 [1911])
A stipulation on stock certificate that assignment thereof would not be binding on the corporation unless such assignment is registered in the books of the club as required under the by-laws, which does not provide when the registration should be made, would mean that the cause of action and the determination of the prescription period would begin only upon demand for registration is made and not at the time of the assignment of the certificate. xWon v. Wack Wack Golf & Country Club, 104 Phil. 466 (1958).
The claim for damages of what the shares could have sold had the demand been complied with is deemed to be speculative damage and non-recoverable xBatong Buhay Gold Mines v. CA, 147 SCRA 4 (1987).
5. Rights to Dividends (Sec. 43)
Although the certificates of stock granted the stockholder the right to receive 1% quarterly dividends, cumulative and participating, the stockholders do not become entitled to the payment thereof as a matter of right without necessity of a prior declaration of dividends. . . Both Sec. 16 of the Corporation Law and Sec. 43 of the present Corporation Code prohibit the issuance of any stock dividend 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. These provisions underscore the fact that payment of dividends to a stockholder is not a matter of right but a matter of consensus. Furthermore, “interest bearing stocks” on which the corporation agrees absolutely to pay interest before dividends are paid to the common stockholders, is legal only when construed as requiring payment of interest as dividends from net earnings or surplus only. xRepublic Planters Bank v. Agana, 269 SCRA 1 (1997).
6. Rights to Attend Meetings and Vote (Sec. 6, Sec. 89)
Until challenged successfully in the proper proceedings, a stockholder according to the books of the corporation has a right to participate in any meeting, and in the absence of fraud the action of the stockholders’ meeting cannot be collaterally attacked on account of such participation, even if it be shown later on that the shares had been previously sold (but not recorded). xPrice and Sulu Dev. Co. v. Martin, 58 Phil. 707 (1933)
Sequestration of shares does not entitle the government to exercise acts of ownership over the shares; consequently, even sequestered shares may be voted upon by the registered stockholder of record. xCojuangco Jr. v. Roxas, 195 SCRA 797 (1991).
Instances When Stockholders Entitled to Vote:
- Election of directors and trustees (Sec. 24)
- Amendment of articles of incorporation (Sec. 16)
- Investment in another business or corporation (Secs. 36 and 42)
- Merger and consolidation (Sec. 72)
- Increase and Decrease of capital stock (Sec. 38)
- Adoption, amendment and repeal of by-laws (Sec. 48)
- Declaration of stock dividends (Sec. 43) - Management contracts (Sec. 44)
- Fixing of consideration of no par value shares (Sec. 62)
(b)Joint Ownership (Sec. 56)
(c) Treasury Share No Voting Rights (Sec. 57)
(d) Pledgor, Mortgagors and Administrators (Sec. 55)
When shares of stocks are pledged by means of endorsement in blank and delivery of the covering certificates to secure a mortgage loan, the pledgee does not become the owner of the shares simply by the failure of the registered stockholder to pay his loan. Consequently, without proper foreclosure, the lender cannot demand that the shares be registered in his name. A contract of pledge of shares does not make the pledgee the owners of the shares pledged. xLim Tay v. Court of Appeals, 293 SCRA 634 (1998).
(e) Conduct of Stockholders' or Members' Meetings:
Kinds and Requirements of Meetings (Secs. 49 and 50)
Place and Time of Meeting (Secs. 51 and 93)
Quorum (Sec. 52)
7. Rights to Inspect and Copy Corporate Records
(a) Basis of Right (Gokongwei, Jr. v. SEC, 89 SCRA 336 [1979]). Right to inspect covers controlled subsidiaries. xGokongwei v. SEC, 89 SCRA 336 (1979).
(b) Limitations on Right - The only express limitations on the right of inspection under Sec. 74 of the Corporation Code are:
(a) the right of inspections should be exercised at reasonable hours on business days;
(b) the person demanding the right to examine and copy excerpts from the corporate records and minutes has not improperly used any information secured through any previous examination of records of the corporation; and
(c) the demand is made in good faith or for a legitimate purpose. xAfrica v. PCGG, 205 SCRA 39 (1992). The right is exercisable through agents and representatives, otherwise it would often be useless to the stockholder who does not know corporate intricacies. xW.G. Philpotts v. Philippine
Manufacturing Co., 40 Phil. 471 (1919).
A director has the unqualified right to inspect the books and records of the corporation at all reasonable times, and cannot be denied on the ground that the director or shareholder is on unfriendly terms with the officers of the corporation whose records are sought to be inspected. xVeraguth v. Isabela Sugar Co., 57 Phil. 266 (1932)
The right to inspect, although it includes the right to make copies, does not authorize bringing the books or records outside of the corporate premises. xVeraguth v. Isabela Sugar Co., 57 Phil. 266 (1932) The right to inspect does not include the right of access to minutes until such minutes have been written up and approved by the directors. xVeraguth v. Isabela Sugar Co., 57 Phil. 266 (1932) A board resolution limiting the right to inspect to a period of ten days shortly prior to the annual stockholders’ meeting is an unreasonable restriction and violates the legal provision granting the exercise of such right “at reasonable hours.” xPardo v. Hercules Lumber Co., 47 Phil. 964 (1924) (c) Specified Records (Secs. 74, 75 and 141) (d) Remedies If Inspection Denied: Mandamus (Gonzales v. PNB, 122 SCRA, 489 [1983]; Republic v. Sandiganbayan, 199 SCRA 39 [1991]). (e) Confidential Nature of SEC Examinations (Sec. 142)
8. Appraisal Right (Secs. 81 to 86 and 105)
9. Derivative Suits (San Miguel Corp. v. Kahn, 176 SCRA 447 [1989]).
(a) Who May Bring Suit ((Pascual v. Orozco, 19 Phil. 83 [1911]).
(b) Exhaustion of Intra-Corporate Remedies (Everett v. Asia Banking Corp., 49 Phil. 512 [1927]; Angeles v. Sanmtos, 64 Phil. 697 [1937]).
(c) Nature of Relief (Evangelista v. Santos, 86 Phil. 387 [1950]; Republic Bank v. Cuaderno, 19 SCRA 671 [1967]; Reyes v. Tan, 3 SCRA 198 [1961]; Commart (Phils.) Inc. v. SEC, 198 SCRA 73 [1991]). Appointment of receiver can be an ancillary remedy in a derivative suit xChase v. CFI of Manila, 18 SCRA 602 (1966).
A derivative suit is an action brought by minority shareholders in the name of the corporation to redress wrongs committed against the corporation, for which the directors refuse to sue. It is a remedy designed by equity and has been the principal defense of the minority shareholders against abuses by the majority. xWestern Institute of Technology, Inc. v. Salas, 278 SCRA 216 (1997).
For a derivative suit to prosper, it is required that the minority shareholder who is suing for and on behalf of the corporation must allege in his complaint before the proper forum that he is suing on a derivative cause of action on behalf of the corporation and all other shareholders similarly situated who wish to join. xWestern Institute of Technology, Inc. v. Salas, 278 SCRA 216 (1997).
In the absence of a special authority from the board of directors to institute a derivative suit for and in behalf of the corporation, the president or managing director is disqualified by law to sue in her own name. The power to sue and be sued in any court by a corporation even as a stockholder is lodged in the board of directors that exercises its corporate powers and not in the president or officer thereof. xBitong v. Court of Appeals, 292 SCRA 503 (1998).
For a derivative suit to prosper, it is required that the minority stockholder suing for and on behalf of the corporation must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated who may wish to join him in the suit. There is now showing that petitioner has complied with the foregoing requisites. Tam Wing Tak v. Makasiar, G.R. 122452, 29 January 2001. The allegations of injury to the spouses-relators can co-exist with those pertaining to the corporation. The personal injury suffered by the spouses cannot disqualify them from filing a derivative suit on behalf of the corporation. It merely gives rise to an additional cause of action for damages against the erring directors. This cause of action is also included in the Complaint filed before the SEC. Gochan v. Young, G.R. No. 131889, 12 March 2001.
10. Right to Proportionate Share of Remaining Assets Upon Dissolution
(a) Different rules apply to non-stock corporations and foundations (Secs. 94 and 95; Section 34(H)(2)(c), NIRC of 1997).
11. Contracts and Agreement Affecting Shareholdings
(a) Proxy (Sec. 58)
(b) Voting Trust Agreements (Sec. 59; Lee v. CA, 205 SCRA 752 [1992]). The trustor has a right to terminate the VTA for breach thereof. xEverett v. Asia Banking Corporation, 49 Phil. 512 (1926). Voting trust agreement as part of a loan arrangement. NIDC v. Aquino, 163 SCRA 153 (1988).
(c) Pooling Agreements or Shareholders’ Agreements (Sec. 100)
XIII. CAPITAL STRUCTURE: SHARES OF STOCK
Concept of "Capital Stock"
Central Textile Mills v. National Wage and Productivity Commission, 260 SCRA 368 [1996]).
By express provision of Section 13 [of the Corporation Code], paid-up capital is that portion of the authorized capital stock which has been both subscribed and paid. Not all funds or assets received by the corporation can be considered paid-up capital, for this term has a technical signification in Corporation Law. Such must form part of the authorized capital stock of the corporation, subscribed and then actually paid up. xMSCI-NACUSIP Local Chapter v. National Wages and Productivity Commission, 269 SCRA 173 (1997). The term “capital” and other terms used to describe the capital structure of a corporation are of universal acceptance, and their usages have long been established in jurisprudence. Briefly, capital refers to the value of the property or assets of a corporation. The capital subscribed is the total amount of the capital that persons (subscribers or shareholders) have agreed to take and pay for, which need not necessarily be, and can be more than, the par value of the shares. In fine, it is the amount that the corporation receives, inclusive of the premium if any, in consideration of the original issuance of the shares. xNational Telecommunications Commission v. Court of Appeals, 311 SCRA 508, 514-515 (1999).
Classification of Shares (Sec. 6)
(a) Common Shares - “A common stock represents the residual ownership interest in the corporation. It is a basic class of stock ordinarily and usually issued without extraordinary rights or privileges and entitles the shareholder to a pro rata division of profits.” xCommissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999).
(b) Preferred Shares (Republic Planters Bank v. Agana, 269 SCRA 1 [1997]).
Participating and Non-participating
Cumulative and Non-cumulative Preferred stocks are those which entitle the shareholder to some priority on dividends and asset distribution. xCommissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999).
“A preferred share of stock, on one hand, is one which entitles the holder thereof to certain preferences over the holders of common stock. The preferences are designed to induce persons to subscribe for shares of a corporation. Preferred shares take a multiplicity of forms.
The most common forms may be classified into two: (1) preferred shares as to assets; and (2) preferred shares as to dividends. The former is a share which gives the holder thereof preference in the distribution of the assets of the corporation in case of liquidation; the latter is a share the holder of which entitled to receive dividends on said shares to the extent agreed upon before any dividends at all are paid to the holders of common stock. There is no guaranty, however, that the share will receive any dividends. . . Similarly, the present Corporation Code provides that the board of directors of a stock corporation may declare dividends only out of unrestricted retained earnings. The Code, in Section 43, adopting the change made in accounting terminology, substituted the phrase “unrestricted retained earnings,” which may be a more precise term, in place of “surplus profits arising from its business” in the former law. Thus, the declaration of dividends is dependent upon the availability of surplus profit or unrestricted retained earnings, as the case may be. Preferences granted to preferred stockholders, moreover, do not give them a lien upon the property of the corporation nor make them creditors of the corporation, the right of the former being always subordinate to the latter. Dividends are thus payable only when there are profits earned by the corporation and as a general rule, even if there are existing profits, the board of directors has the discretion to determine whether or not dividends are to be declared. Shareholders, both common and preferred, are considered 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. Republic Planters Bank v. Agana, 269 SCRA 1 (1997).
(b) Redeemable shares (Sec. 8)
Redeemable shares are shares usually preferred, which by their terms are redeemable at a fixed date, or at the option of either issuing corporation, or the stockholder, or both at a certain redemption price. A redemption by the corporation of its stock is, in a sense, a repurchase of it for cancellation. The present Code allows redemption of shares even if there are no unrestricted retained earnings on the books of the corporation. This is a new provision which in effect qualifies the general rule that the corporation cannot purchase its own shares except out of current retained earnings. However, while redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings, this is subject to the condition that the corporation has, after such redemption, assets in its books to cover debts and liabilities inclusive of capital stock. Redemption, therefore, may not be made where the corporation is insolvent or if such redemption will cause insolvency or inability of the corporation to meet its debts as they mature. Republic Planters Bank v. Agana, 269 SCRA 1 (1997).
“Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock in exchange for property, whether or not the acquired stock is cancelled, retired or held in the treasury. Essentially, the corporation gets back some of its stock, distributes cash or property to the shareholder in payment for the stock, and continues in business as before. The redemption of stock dividends previously issued is used as a veil for the constructive distribution of cash dividends. xCommissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999).
(c) Founder Shares (Sec. 7)
(d) Treasury Shares (Sec. 9; Commissioner v. Manning, 66 SCRA 14 [1975]). When a treasury share which has not been retired by the corporation may be sold again; but so long as it remains a treasury share, it does not participate in dividends (since a corporation cannot pay dividends to itself) and cannot vote in stockholders’ meeting. San Miguel Corp. v. Sandiganbayan, 340 SCRA 289 (2000).
(e) Stock Warrants
(f) Stock Options
(g) Re-Classification of Shares
“Reclassification of shares does not always bring any substantial alteration in the subscriber’s proportional interest. But the exchange is different—there would be a shifting of the balance of stock features like priority in dividend declarations or absence of voting rights. Yet neither the reclassification nor exchange per se yields income for tax purposes. . . In this case, the exchange of shares, without more, produces no realized income to the subscriber. There is only a modification of the subscriber’s rights and privileges—which is not a flow of wealth for tax purposes. The issue of taxable dividend may arise only once a subscriber disposes of his entire interests and not when there is still maintenance of proprietary interest.” xCommissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152 (1999).
3. Hybrid Securities (Government v. Phil. Sugar Estates, 38 Phil. 15 [1918]; John Keley Co. v. Comm. of Internal Revenue, 326 U.S. 521, 66 S. Ct. 299, 90 L. Ed., 278 [1945])
4. Quasi-Reorganization
(a) Reduction of Capital Stock (Sec. 38; xMadrigal & Co. v. Zamora, 151 SCRA 355 [1987]);
(b) Stock Splits (c) Stock Consolidations
XIV. ACQUISITIONS, MERGERS AND CONSOLIDATIONS
A. Acquisitions and Transfers
1. Concept of "Enterprise" or "Economic unit" or "Going concern" (Villa Rey Transit, Inc. v. Ferrer, 25 SCRA 845 [1968]).
2. Types of Acquisitions\Transfers (Edward J. Nell Co. v. Pacific, 15 SCRA 415 [1965]): (a) In a pure "Assets only" Transfer, the transferee is not liable for the debts and liabilities of the transferor, except where the transferee expressly or impliedly agrees to assume such debts; (b) In a “Business Enterprise” Transfer, the transferee is liable for the debts and liabilities of the transferor; and (c) In an Equity Transfer, the transferee is not liable for the debts and liabilities of the transferor, except where the transferee expressly or impliedly agrees to assume such debts.
3. Business Enterprise Transfers (A.D. Santos v. Vasquez, 22 SCRA 1156 [1968]; Laguna Transportation Co., Inc. v. SSS, 107 Phil. 833 [1960]). Although the business enterprise was held under a partnership scheme and latter the business was transferred to a corporation, the business enterprise is deemed to have been in operation for the required two-year period as to come under the coverage of the SSS Law. xSan Teodoro Dev. Ent. Inc. v. SSS, 8 SCRA 96 (1963). Although a corporation may have ceased business operations and an entirely new company has been organized to take over the same type of operations, it does not necessarily follow that no one may now be held liable for illegal acts committed by the earlier firm. Pepsi-Cola Bottling Co., v. NLRC, 210 SCRA 277 (1992).
4. Equity Transfers (Philippine Veterans Investment Development Corp. v. CA, 181 SCRA 669 [1990]). The fact that instead on foreclosing on the mortgaged assets, DBP converted its loans to equity, making it the controlling stockholder of a bank, and although the majority of the members of the board of directors of the bank are from DBP, the same does not make DBP an employer of the bank employees, nor does it make DBP liable for the wage claims of the bank's employees. xDBP v. NLRC, 186 SCRA 841 (1990).
B. Merger and Consolidation
Procedure: (a) Plan of Merger or Consolidation (Sec. 76); (b) Stockholders' or Members' Approval (Sec. 77); (c) Articles of Merger or Consolidation (Sec. 78); (d) Approval by SEC (Sec. 79).
Effects of Merger or Consolidation (Sec. 80)
It is settled that in the merger of two existing corporations, one of the corporations survives and continues the business, while the other is dissolved and all its rights, properties and liabilities are acquired by the surviving corporation. xBabst v. Court of Appeals, G.R. No. 99398, 26 January 2001. Ordinarily, in the merger of two or more existing corporations, one of the combining corporations survives and continues the combined business, while the rest are dissolved and all their rights, properties and liabilities are acquired by the surviving corporation. Although there is dissolution of the absorbed corporations, there is no winding up of their affairs or liquidation of their assets, because the surviving corporation automatically acquires all their rights, privileges and powers, as well as their liabilities. xAssociated Bank v. Court of Appeals, 291 SCRA 511 (1998)
The merger, however, does not become effective upon the mere agreement of the constituent corporations. The procedure to be followed is prescribed under the Corporation Code. Section 79 of said Code requires the approval by the Securities and Exchange Commission (SEC) of the articles of merger which, in turn, must have been duly approved by a majority of the respective stockholders of the constituent corporations. The same provision further states that the merger shall be effective only upon the issuance by the SEC of a certificate of merger. The effectivity date of the merger is crucial for determining when the merged or absorbed corporation ceases to exist: and when its rights, privileges, properties as well as liabilities pass on to the surviving corporation. xAssociated Bank v. Court of Appeals, 291 SCRA 511 (1998).
Effects on Employees of Corporation
(Complex Electronics Employees Association v. NLRC, 310 SCRA 403 [1999]).
1. Assets Only Transfers (Sundowner Dev. Corp. v. Drilon, 180 SCRA 14 [1989]) There is no law requiring that the purchaser of MDII’s assets should absorb its employees. As there is no such law, the most that the NLRC could do, for reasons of public policy and social justice, was to direct [the buyer] to give preference to the qualified separated employees of MDII in the filling up of vacancies in the facilities. xMDII Supervisors & Confidential Employees Asso. V. Pres. Assistance on Legal Affairs, 79 SCRA 40 (1977).
2. Business-Enterprise Transfers (Yu v. NLRC, 245 SCRA 134 [1995]; Sunio v. NLRC, 127 SCRA 390 [1984]; Central Azucarera del Danao v. Court of Appeals, 137 SCRA 295 [1985]; xSan Felipe Neri School of Mandaluyong, Inc. v. NLRC, 201 SCRA 478 (1991).
3. Equity Transfers (Manlimos v. NLRC, 242 SCRA 145 [1995]; Robledo v. NLRC, 238 SCRA 52 [1994]; Pepsi-Cola Bottling Co. v. NLRC, 210 SCRA 277 (1992); xDevelopment Bank of the Philippines v. NLRC, 186 SCRA 841[1990]; Pepsi Cola Distributors of the Philippines, Inc. v. NLRC, 247 SCRA 386 (1995); xCoral v. NLRC, 258 SCRA 704 [1996]; xAvon Dale Garments, Inc. v. NLRC, 246 SCRA 733 [1995]; Electronics Employees Association v. NLRC, 310 SCRA 403 [1999]).
4. Mergers and Consolidations (Filipinas Port Services, Inc. v. NLRC, 177 SCRA 203 [1989]; Filipinas Port Services, Inc. v. NLRC, 200 SCRA 773 [1991]; National Union Bank Employees v. Lazaro, 156 SCRA 123 [1988]); xFirst General Marketing Corp. v. NLRC, 223 SCRA 337 (1993).
5. Spin-Offs (San Miguel Corp. Employees Union-PTGWO v. Confessor, 262 SCRA 81 [1996]) XV. REHABILITATION AND INSOLVENCY 1. Corporate Bankruptcy Laws in General
(a) Governing Laws (The Insolvency Act, PD 902-A, and Securities Regulation Code [RA 8799]; Interim Rules of Procedure for Corporate Rehabilitation of 2000)
(b) Types of bankruptcy proceedings in the Philippines
(c) Resolution on jurisdiction issues on bankruptcy proceedings (Ching v. Land Bank of the Philippines, 201 SCRA 190 [1991]).
2. Suspension of Payments
(a) Insolvency Law (Secs. 2 to 13) - Situation of the corporate debtor - Nature of petition - Required vote of creditors - Consequences of approval/non-approval (b) Pres. Decree 902-A (Sec. 5[d]), and Section 5.10 of Securities Regulation Code. (c) Supreme Court Interim Rules of Procedure on Corporation Rehabilitation (2000).
3. Corporate Rehabilitation
(a) Nature of “Rehabilitation” (Ruby Industrial Corp. v. Court of Appeals, 284 SCRA 445 (1998). Liquidation, in Corporation Law, connotes a winding up or setting with creditors and debtors. It is the winding up of a corporation so that assets are distributed to those entitled to receive them. It is the process of reducing assets to cash, discharging liabilities and dividing surplus or loss. On the opposite end of the spectrum is rehabilitation which connotes a reopening or reorganization. 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. It is crystal clear that the concept of liquidation is diametrically opposed or contrary to the concept of rehabilitation, such that both cannot be undertaken at the same time. To allow the liquidation proceedings to continue would seriously hinder the rehabilitation of the subject bank. Philippine Veterans Bank Employees Union – N.U.B.E., G.R. No. 105364, 28 June 2001.
(b) Basis of RTC Power to Undertake Corporate Rehabilitation (Secs. 5[d] and 6, Pres. Decree 902-A, in relation to Sec. 5.10, Securities Regulation Code)
(c) Appointment of Management Committee or a Rehabilitation Receiver
(d) Automatic Stay and its Legal Effects; When it becomes effective The appointment of a management committee or rehabilitation receiver may only take place after the filing with the SEC of an appropriate petition for suspension of payments. The conclusion is inevitable that pursuant to Section 6(c), taken together with Sections 5(d) and (d), a court action is ipso jure suspended only upon the appointment of a management committee or a rehabilitation receiver. (Barotac Sugar Mills v. Court of Appeals, 275 SCRA 497 [1997]; reiterated in Union Bank v. Court of Appeals, 290 SCRA 198 [1998]) - Duration (B.F. Homes, Inc. v. Court of Appeals, 190 SCRA 262 [1990])
Effect on Individual Petitioners Joining the Petition (Union Bank of the Philippines v. Court of Appeals, 290 SCRA 198 (1998); xModern Paper Products, Inc. v. Court of Appeals, 286 SCRA 749 (1998); xTraders Royal Bank v. Court of Appeals, 177 SCRA 788 [1989]; xChung Ka Bio v. Intermediate Appellate Court, 163 SCRA 534 (1988))
- Claims Covered by the Automatic Stay (xPCIB v. Court of Appeals, 172 SCRA 436 [1989]; Alemar’s Sibal & Sons, Inc. v. Elbinias, 186 SCRA 94 [1990]; xRizal Commercial Banking Corp. v. IAC, 213 SCRA 830 [1992]; xBank of PI v. Court of Appeals, 229 SCRA 223 [1994]).
- Types of “claims” Covered (Finasia Investments v. Court of Appeals, 237 SCRA 446 [1994]) Labor claims are not exempted from the automatic stay under Pres. Decree No. 902-A.
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 extra-judicial interference that migh unduly hinder or prevent the “rescue” of the debtor company. To allow such other actions for labor claims to continue would only add to the burden of the management committee or rehabilitation receiver, whose time, effort and resources would be wasted defending claims against the corporation instead of being directed toward its restructuring and rehabilitation. xRubberworld [Phils.], Inc. v. NLRC, 305 SCRA 721 (1999); G.R. No. 128003, 26 July 2000.
(e) Rationale for Suspensive Effect of Appointment on Existing Suits and Causes of Action
(f) Powers of Management Committee or the Rehabilitation Receiver (Sec. 6, PD 902-A)
(g) SEC Power to Liquidate Corporation (h) Basic Differences Between Suspension of Payments Proceedings under the Insolvency Law and Under Pres. Decree No. 902-A
4. Insolvency Proceedings
A liquidation proceeding is a proceeding in rem so that all other interested persons whether known to the parties or not may be bound by such proceedings. xChua v. NLRC, 190 SCRA 558 (1990). (a) Governing Law and Jurisdiction (b) General Effect of Corporate Insolvency Proceedings (c) Voluntary Insolvency (d) Filing of Petition (Sec. 14, TIL) (e) Effect of Order of Insolvency (Sec. 18; De Amuzategui v. Macleod, 33 Phil. 80 [1915]). Section 18 on the automatic stay is no self-executory; applications for suspension of proceedings must be made in the various courts where actions in pending (xUnson v. Abeto, 47 Phil. 42 [1924]). (f) Involuntary Insolvency (Sec. 20 to 33) (g) Qualifications of Petitioning Creditors A foreign corporation whichs shows that it is a resident of the Philippines has legal standing to petition for involuntary insolvency of a corporate debtor xState Investment House, Inc. v. Citibank, N.A., 203 SCRA 9 (1991). (h) Order to Show Cause (Sec. 21); Hearing of petition (Sec. 24) (i) Acts of Insolvency and Order of Adjudication (Sec. 20) (j) Meeting of Creditors to Elect Assignee (Secs. 29 and 30) (k) Effects of Order of Insolvency and Appointment of Receiver (Secs. 32, 34 and 35; xRadiola-Toshiba Phil. v. IAC, 199 SCRA 373 [1991]) (l) Liquidation of assets and payment of debts (Sec. 33) (m) Remedies of Secured Creditors (Sec. 29, 43 and 59) (n) Composition (Sec. 63) (o) Discharge (Secs. 52, 64, and 66) (p) Appeal in certain cases (Sec. 82)
XVI. DISSOLUTION
1. No Vested Rights to Corporation Fiction (Gonzales v. Sugar Regulatory Administration, 174 SCRA 377 [1989]).
2. Voluntary Dissolution (Sec. 117)
(a) No Creditors Affected (Sec. 118)
(b) There Are Creditors Affected (Secs. 119 and 122).
3. Involuntary Dissolution (Sec. 121; Sec. 6(l), P.D. 902-A; Sec. 2, Rule 66; Rules of Court)
(a) Quo Warranto (Republic v. Bisaya Land Transportation Co., 81 SCRA 9 [1978]; Republic v. Security Credit & Acceptance Corp., 19 SCRA 58 [1967]; xGovernment v. El Hogar Filipino, 50 Phil. 399 [1927]).
(b) Expiration of Term
(c) Shortening of Corporate Term (Sec. 120)
(d) Non-user of Corporate Charter and Continuous Inoperation of a Corporation (Sec. 22) "Organize" when used in reference of a corporation involves the election of officers, providing for the subscription and payment of the capital stock, the adoption of by-laws, and such other steps as are necessary to endow the legal entity with the capacity to transact the legitimate business for which it was created. The term "organization" relates merely to the systematization and orderly arrangement of the internal and managerial affairs and organs of the corporation. xBenguet Consolidated Mining Co. v. Pineda, 98 Phil. 711 (1956). The failure to file the by-laws does not automatically operate to dissolve a corporation but is now considered only a ground for such dissolution. xChung Ka Bio v. Intermediate Appellate Court, 163 SCRA 534 (1988). (f) Demand of Minority Stockholders for Dissolution (Financing Corp. of the Phil. v. Teodoro, 93 Phil. 404 [1953]).
4. Legal Effects of Dissolution
A corporation cannot extend its life by amendment of its articles of incorporation effected during the three-year statutory period for liquidation when its original term of existence had already expired, as the same would constitute new business. xAlhambra Cigar & Cigarette Manufacturing Company, Inc. v. SEC, 24 SCRA 269 (1968). When the period of corporate life expires, the corporation ceases to be a body corporate for the purpose of continuing the business for which it was organized xPhilippine National Bank v. Court of First Instance of Rizal, Pasig, Br. XXI, 209 SCRA 294 (1992).
5. Methods of Liquidation
(Sec. 122; Board of Liquidators v. Kalaw, 20 SCRA 987 [1967]; Sumera v. Valencia, 67 Phil. 721 [1939]; Buenaflor v. Camarines Industry, 108 Phil. 472 [1960]).
“Liquidation” is “the settlement of the affairs of a corporation [which] consists of adjusting the debts and claims, that is, of collecting all that is due the corporation, the settlement and adjustment of claims against it and the payment of its just debts.” xChina Banking Ciorp. V. M. Michelin & Cie, 58 Phil. 261 (1933).
There can be no doubt that under Sections 77 and 78 of the Corporation Law, the Legislature intended to let the shareholders have the control of the assets of the corporation upon dissolution in winding up its affairs. The normal method of procedure is for the directors and executive officers to have charge of the winding up operations, though there is the alternative method of assigning the property of the corporation to the trustees for the benefit of its creditors and shareholders. “While the appointment of a receiver rests within the sound judicial discretion of the court, such discretion must, however, always be exercised with caution and governed by legal and equitable principles, the violation of which will amount to its abuse, and in making such appointment the court should take into consideration all the facts and weigh the relative advantages and disadvantages of appointing a receiver to wind up the corporate business.” xChina Banking Ciorp. V. M. Michelin & Cie, 58 Phil. 261 (1933).
“The appointment of a receiver by the court to wind up the affairs of the corporation upon petition for voluntary dissolution does not empower the court to hear and pass on the claims of the creditors of the corporation at first hand. . . all claims must be presented for allowance to the receiver or trustee or other proper persons during the winding up proceedings which in this jurisdiction would be within the three years provided by sections 77 and 78 of the Corporation Law as the term for the corporate existence of the corporation, and if a claim is disputed or unliquidated so that the receiver cannot safely allow the same, it should be transferred to the proper court for trial and allowance, and the amount so allowed then presented to the receiver or trustee for payment. The rulings of the receiver on the validity of claims submitted are subject to review by the court appointing such receiver though no appeal is taken to the latter’s ruling.” xChina Banking Corp. V. M. Michelin & Cie, 58 Phil. 261 (1933).
While Section 77 of the Corporation Law [now section 122 of the Corporation Code] provides for a three year period for the continuation of the corporate existence of the corporation for purposes of liquidation, there is nothing in said provision which bars an action for the recovery of the debts of the corporation against the liquidator thereof, after the lapse of the said three-year period. “It immaterial that the present action was filed after the expiration of the three years . . . for at the very least, and assuming that judicial enforcement of taxes may not be initiated after said three years despite the fact that actual liquidation has not terminated and the one in charge thereof is still holding the assets of the corporation, obviously for the benefit of all the creditors thereof, the assessment aforementioned, made within the three years, definitely established the Government as a creditor of the corporation for whom the liquidator is supposed to hold assets of the corporation.” xRepublic v. Marsman Development Company, 44 SCRA 418 (1972).
6. Who Are Liable After Dissolution and Winding-Up?
(National Abaca Corp. v. Pore, 2 SCRA 989 [1961]; Tan Tiong Bio v. Commissioner, 100 Phil. 86 [1956]; Gelano v. CA, 103 SCRA 90 [1981]).
Although a corporate officer, such as a general manager is not liable for corporate obligations, such as claims for wages, however, when such corporate officer ceases corporate property to apply to his own claims against the corporation, he shall be liable to the extent thereof to corporate liabilities, since knowing fully well that certain creditors had similarly valid claims, he took advantage of his position as general manager and applied the corporation's assets in payment exclusively to his own claims. xDe Guzman v. NLRC, 211 SCRA 723 (1992).
The corporation continues to be a body corporate for three (3) years after its dissolution for purposes of prosecuting and defending suits by and against it and for enabling it to settle and close its affairs, culminating in the disposition and distribution of its remaining assets. It may, during the three-year term, appointing a trustee or a receiver who may act beyond that period. The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and liabilities of such entity nor those of its owners and creditor. If the three-year extended life has expired without a trustee or receiver having been expressly designated by the corporation within that period, the board of directors (or trustee) itself, following the rationale of the Supreme Court's decision in Gelano v. court of Appeals (103 SCRA 90) may be permitted to so continue as "trustees" by legal implication to complete the corporate liquidation. Still in the absence of a board of directors or trustees, those having any pecuniary interest in the assets, including not only the shareholders but likewise the creditors of the corporation, acting for and in its behalf, might make proper representations with the Securities and Exchange Commission, which has primary and sufficient broad jurisdiction in matters of this nature, for working out a final settlement of the corporate concerns. Clemente v. Court of Appeals, 242 SCRA 717, 723 (1995).
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, repeal of the law, or any other fact of similar nature, would not serve as an effective bar to the enforcement of such right. xReburiano v. Court of Appeals, 301 SCRA 342 (1999). In Gelano case, the counsel of the dissolved corporation was considered a trustee. In the later case of Clemente v. Court of Appeals [242 SCRA 717 (1995)], we held that the board of directors may be permitted to complete the corporate liquidation by continuing as “trustees” by legal implication. Under Section 145 of the Corporation Code, “No right of remedy in favor or against any corporation . . . 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.” This provision safeguards the rights of a corporation which is dissolved pending litigation. xReburiano v. Court of Appeals, 301 SCRA 342 (1999)
7. Reincorporation (Chung Ka Bio v. Intermediate Appellate Court, 163 SCRA 534 [1988]).
XVII. CLOSE CORPORATION
1. Definition (Sec. 96; Manuel R. Dulay Enterprises v. Court of Appeals, 225 SCRA 678 [1993]; San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, 296 SCRA 631, 645 (1998).
2. Articles of Incorporation Requirements (Sec. 97) (a) Pre-Emptive Rights (Sec. 102); (b) Amendment (Sec. 103)
3. Restriction on Transfer of Shares (Secs. 98 and 99)
4. Agreements by Stockholder (Sec. 100) 5. No Necessity of Board (Sec. 101; Sergio F. Naguiat v. NLRC, 269 SCRA 564 [1997]). 6. Deadlocks (Sec. 104) 7. Withdrawal and Dissolution (Sec. 105) - Even prior to the passage of the Corporation Code which recognized close corporation, the Supreme Court had on limited instances recognized the common law rights of minority stockholders to seek dissolution of the corporation. Financing Corp. of the Phil. v. Teodoro, 93 Phil. 404 (1953).
XVIII. NON-STOCK CORPORATIONS AND FOUNDATIONS
1. Theory on Non-Stock Corporation
(Secs. 14(2), 43, 87, 88 and 94(5); Collector of Internal Revenue v. Club Filipino Inc. de Cebu, 5 SCRA 321 [1962]; Collector of Internal Revenue v. University of Visayas, 1 SCRA 669 [1961]).
A non-stock corporation may only be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic or other similar purposes. It may not engage in undertakings such as the investment business where profit is the main or underlying purpose. Although the non-stock corporation may obtain profits as an incident to its operation such profits are not to be distributed among its members but must be used for the furtherance of its purposes. People v. Menil, G.R. 115054-66, 12 September 1999. The incurring of profit or losses does not determine whether an activity is for profit or non-profit, and the courts will consider whether dividends have been declared or its members or that is property, effects or profit was ever used for personal or individual gain, and not for the purpose of carrying out the objectives of the enterprise. xManila Sanitarium and Hospital v. Gabuco, 7 SCRA 14 (1963).
2. What is a Foundation?
(Secs. 30 and 34(H), NIRC of 1997; Sec. 24, Revenue Regulations No. 2; BIR-NEDA Regulations No. 1-81, as amended)
The formal requirements of Revenue Regulations No. 2 are not mandatory and that an entity may, in the absence of compliance with such requirements, still show that it falls under the provisions of Section 26 of the NIRC. xCollector v. V.G. Sinco Educational Corp., 100 Phil. 127 (1956).
3. Dissolution (Secs. 94 and 95)
XIX. FOREIGN CORPORATION
1. Definition (Sec. 123).
A foreign corporation owes its existence to the laws of another state, and generally, has no legal existence within the state in which it is foreign. xAvon Insurance PLC v. Court of Appeals, 278 SCRA 312 (1997). A fundamental rule of international jurisdiction is that no state can by its laws, and no court which is only a creature of the state, can by its judgments and decrees, directly bind or affect property or persons beyond the limits of that state. xTimes, Inc. v. Reyes, 39 SCRA 303 (1971).
2. Statutory Concept of "Doing Business" (Art. 44, Executive Order No. 226, Omnibus Investment Code; Sec. 3(d), R.A. No. 7042, Foreign Investment Act of 1991). (a) Application for License (Secs. 124 and 125; also Art. 48, Omnibus Investment Code) (b) Issuance of License (Sec. 126; Art. 49, Omnibus Investment Code) (c) Amendment of License (Sec. 131) (d) Rationale for Requiring License to Do Business
The purpose of the law in requiring that foreign corporations doing business in the country be licensed to do so, it to subject the foreign corporations doing business in the Philippines to the jurisdiction of the courts, otherwise, a foreign corporation illegally doing business here because of its refusal or neglect to obtain the required 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. Avon Insurance PLC v. Court of Appeals, 278 SCRA 312 (1997).
The same danger does not exist among foreign corporations that are indubitably not doing business in the Philippines. Indeed, if a foreign corporation does not do business here, there would be no reason for it to be subject to the State’s regulation. As we observed, in so far as the State is concerned, such foreign corporation has no legal existence. Therefore, to subject such foreign corporation to the courts’ jurisdiction would violate the essence of sovereignty. xAvon Insurance PLC v. Court of Appeals, 278 SCRA 312 (1997).
A foreign corporation licensed to do business in the Philippines should be subjected to no harsher rules that is required of domestic corporation and should not generally be subject to attachment on the pretense that such foreign corporation is not residing in the Philippines. xClaude Neon Lights v. Phil. Advertising Corp., 57 Phil. 607 (1932).
3. Jurisprudential Concepts of "Doing Business":
(a) "Doing business" implies a continuity of commercial dealings and arrangements and the performance of acts or works or the exercise of some of the functions normally incident to the purpose or object of its organization. Mentholatum v. Mangaliman, 72 Phil. 525 (1941). Where a single act or transaction, however, is not merely incidental or casual but indicates the foreign corporation's intention to do other business in the Philippines, said single act or transaction constitutes doing business. xFar East Int'l. v. Nankai Kogyo, 6 SCRA 725 (1962). A foreign corporation with a settling agent in the Philippines which issues twelve marine policies covering different shipments to the Philippines is doing business in the Philippines. xGeneral Corp. of the Phil. v. Union Insurance Society of Canton, Ltd., 87 Phil. 313 (1950). A foreign corporation which had been collecting premiums on outstanding policies was regarded as doing business in the Philippines. xManufacturing Life Ins. v. Meer, 89 Phil. 351 (1951) Solicitation of business contracts constitutes doing business in the Philippines. xMarubeni Nederland B.V. v. Tensuan, 190 SCRA 105 (1990).
It is not really the fact that there is only a single act done that is material for determining whether a corporation is engaged in business in the Philippines, since other circumstances must be considered. Where a single act or transaction of a foreign corporation is not merely incidental or casual 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, such act will be considered as constituting business. xLitton Mills, Inc. v. Court of Appeals, 256 SCRA 696 (1996). Participating in bidding process shows an intention to engage in business in the Philippines. xHutchison Philippines Ltd. v. Subic Bay Metropolitan Authority, 339 SCRA 434 (2000).
(b) Unrelated or Isolated Transactions (Eastboard Navigation, Ltd. v. Juan Ysmael and Co., Inc., 102 Phil. 1 [1957]; Antam Consolidated v. CA, 143 SCRA 288 [1986]). The following were all held not to be engaged in business in the Philippines: · The collision of two vessels at the Manila Harbor (xDampfschieffs Rhederei Union v. La Campañia Transatlantica, 8 Phil. 766 [1907]); · Loss of goods bound for Hongkong but erroneously discharged in Manila (xThe Swedish East Asia Co., Ltd. v. Manila Port Service, 25 SCRA 633 [1968]); · Infringement of trade name (xGeneral Garments Corp. v. Director of Patens, 41 SCRA 50 [1971]; xUniversal Rubber Products, Inc. v. Court of Appeals, 130 SCRA 104 [1988]); · Recovery of damages sustained by cargo shipped to the Philippines (xBulakhidas v. Navarro, 142 SCRA 1 [1986]); · Sale to the Government of road construction equipment and spare parts with no intent of continuity of transaction (xGonzales v. Raquiza, 180 SCRA 254 [1989]); and · Recovery on a Hongkong judgment against a Manila resident (xHang Lung Bak v. Saulog, 201 SCRA 137 [1991]). In the case of foreign movie companies who have registered intellectual property rights over their movies in the Philippines, it was held that the appointment of local lawyer to protect such rights for piracy is not deemed to be doing business: "We fail to see how exercising one's legal and property rights and taking steps for the vigilant protection of said rights, particularly the appointment of an attorney-in-fact, can be deemed by and of themselves to be doing business here." xColumbia Pictures Inc. v. Court of Appeals, 261 SCRA 144 (1996).
(c) The "Contract Test" of Doing Business (Pacific Vegetable Oil Corp. v. Singson, Advanced Decision Supreme Court, April 1955 Vol., p. 100-A; Aetna Casualty & Surety Co. v. Pacific Star Line, 80 SCRA 635 [1977]; Universal Shipping Lines, Inc. v. IAC, 188 SCRA 170 [1990]). (d) Transactions with Agents and Brokers (Granger Associates v. Microwave Systems, Inc., 189 SCRA 631 [199 ]; La Chemise Lacoste, S.A. v. Fernandez, 129 SCRA 373 [1984]; xSchmid & Oberly v. RJL, 166 SCRA 493 [1988]; xWang Laboratories, Inc. v. Mendoza, 156 SCRA 44 [1974];
4. Different Rules on Trademark and Tradenames
(Western Equipment & Supply Co. v. Reyes, 51 Phil. 115 [1927]; xLeviton Industries v. Salvador, 114 SCRA 420 [1982]; xConverse Rubber v. Universal Rubber, 147 SCRA 154 [1987]; xConverse Rubber Corp. v. Jacinto Rubber & Plastic Co., 97 SCRA 158 [1980]; xUniversal Rubber Products, Inc. v. CA, 130 SCRA 104 [1984]; xPuma Sportschunhfabriken Rudolf Dassler, K.G. v. IAC, 158 SCRA 233 [1988]; xPhilips Export B.V. v. CA, 206 SCRA 457 [1992]).
5. Effects of Failure to Obtain License:
(a) On the contract entered into by such foreign corporation (Home Insurance Company v. Eastern Shipping Lines, 123 SCRA 424 [1983]). Section 69 of the then Corporation Law was intended to subject the foreign corporation doing business in the Philippines to the jurisdiction of our courts and not to prevent the foreign corporation from performing single acts, but to prevent it from acquiring domicile for the purpose of business without taking the necessary steps to render it amenable to suit in the local courts. Marshall-Wells Co., v. Elser, 46 Phil. 70 (1924).
(b) Standing of such foreign corporation to sue in Philippine courts (Sec. 133; Marshall-Wells v. Elser, 46 Phil. 71 [1924])
(c) Criminal liability under Sect. 144 of the Corporation Code. Home Insurance Company v. Eastern Shipping Lines, 123 SCRA 424 (1983).
(d) Pari Delicto Doctrine: The local party to a contract with a foreign corporation that does business in the Philippines without license cannot maintain suit against the foreign corporation just as the foreign corporation cannot maintain suit, under the principle of pari delicto. (Top-Weld Mfg. v. ECED, 119 SCRA 118 [1985]) But Now See Communication Materials and Design, Inc. v. Court of Appeals, 260 SCRA 673 (1996).
(e) Estoppel Doctrine: A foreign corporation doing business in the Philippines may sue in Philippine courts although it is without license to do business here against a Philippine citizen who had contracted with and been benefitted by said corporation and knew it to be without the necessary license to do business, under the principle of estoppel. Merrill Lynch Futures, Inc. v. CA, 211 SCRA 824 (1992); xGeorg Grotjahn GMBH & C. v. Isnani, 235 SCRA 216 (1994). (f) Proper Doctrine: Ericks Ltd. v. Court of Appeals, 267 SCRA 567 (1997). But see lately: Subic Bay Metropolitan Authority v. Universal International Group of Taiwan, 340 SCRA 359 (2000). 6. Suits Against Foreign Corporations:
(a) Jurisdiction Over the "Person" of Foreign Corporations (Sec. 14, Rule 14, Rules of Court; General Corp. of the Phil. v. Union Insurance Society of Canton, Ltd., 87 Phil. 313 [1950]; Johnlo Trading Co., v Flores, 88 Phil. 741 [1951]; xJohnlo Trading Co. v. Zulueta, 88 Phil. 750 [1951]; xPacific Micronisian Line, Inc. v. Del rosario, 96 Phil. 23 [1954]; xFar East International Import and Export Corp. v. Nankai Kogyo Co., Ltd., 6 SCRA 725 [1962]).
If the appearance of a foreign corporation to a suit is precisely to question the jurisdiction of the said tribunal over the person of the defendant, then this appearance is not equivalent to service of summons, nor does it constitute an acquiescence to the court’s jurisdiction. xAvon Insurance PLC v. Court of Appeals, 278 SCRA 312, 327 (1997). For the purpose of having summons served on a foreign corporation in accordance with Rule 14, Section 14, it is sufficient that it be alleged in the complaint that the foreign corporation is doing business in the Philippines. xHahn v. Court of Appeals, 266 SCRA 537 (1997).
When it is shown that a foreign corporation is doing business in the Philippines, summons may be served on (a) its resident agent designated in accordance with law; (b) if there is no resident agent, the government official designated by law to that effect; or (c) any of its officers or agent within the Philippines. The mere allegation in the complaint that a local company is the agent of the foreign corporation is not sufficient to allow proper service to such alleged agent. Although there is no requirement to first substantiate the allegation of agency, yet it is necessary that there must be specific allegations in the complaint that establishes the connection between the principal foreign corporation and its alleged agent with respect to the transaction in question. Nowhere in the case of Signetics Corporation v. Court of Appeals, did the Court state that if the “complaint alleges that defendant has an agent in the Philippines, summons can validly be served thereto even without prior evidence of the truth of such factual allegation; it is only in the headnote of the reporter which is not part of the decision. xFrench Oil Mills Machinery Co., Inc. v. Court of Appeals, 295 SCRA 462 (1998).
(b) The Odd Doctrine (Facilities Management Corp. v. De la Osa, 89 SCRA 131 [1979]; xFBA Aircraft v. Zosa, 110 SCRA 1 [1981]; xRoyal Crown International v. NLRC, 178 SCRA 569 [1989]; xWang Laboratories, Inc. v. Mendoza, 156 SCRA 44 [1987]). Contra: The sine qua non requirement for service of summons and other legal processes or any such agent or representative is that the foreign corporation is doing business in the Philippines. xHyopsung Maritime Co., Ltd. v. CA, 165 SCRA 258 1988); Signetics Corp. v. CA, 225 SCRA 737 (1993). But Now See Avon Insurance PLC v. Court of Appeals, 278 SCRA 312 (1997)
(c) Stipulation on Venue When the contract sued upon has a venue clause within the Philippines, it is deemed a confirmation by the foreign corporation, even though not doing business in the Philippines, to be sued in local courts. xLinger & Fisher GMBH v. IAC, 125 SCRA 522 (1983).
7. Pleading "Doing" and "Not Doing" of Business
The fact that a foreign corporation is not doing business in the Philippines must be alleged if a foreign corporation desires to sue in Philippines courts under the "isolated transactions rule." Atlantic Mutual Inc. Co. v. Cebu Stevedoring Co., 17 SCRA 1037 (1966); xCommissioner of Customs v. K.M.K. Gani, 182 SCRA 591 (1990). This overturned the previous doctrine in xMarshall-Wells (as well as in xIn re Liquidation of the Mercantile Bank of China, etc., 65 Phil. 385 (1938), that the lack of authority of foreign corporation to sue in Philippine courts for failure to obtain the license is a matter of affirmative defense. A complaint filed by a foreign corporation is fatally defective for failing to allege its duly authorized representative or resident agent in Philippine jurisdiction. xNew York Marine Managers, Inv. c. Court of Appeals, 249 SCRA 416 (1995). For the purpose of having summons served on a foreign corporation in accordance with Rule 14, Section 14, it is sufficient that it be alleged in the complaint that the foreign corporation is doing business in the Philippines. xHahn v. Court of Appeals, 266 SCRA 537 (1997).
8. Resident Agent (Sec. 127 and 128)
(a) Concept of "residence" (State Investment House v. Citibank, 203 SCRA 9 [1991]).
(b) When a corporation has designated a person to receive service of summon pursuant to the Corporation Code, the designation is exclusive and service of summons on any other person is inefficacious. xH.B. Zachry Company International v. CA, 232 SCRA 329 (1994).
9. Applicable Laws to Foreign Corporations (Sec. 129; Grey v. Insular Lumber Co., 67 Phil. 139 [1938])
10. Amendment of Articles of Incorporation (Sec. 130)
11. Merger and Consolidation (Sec. 132; Art. 51, Omnibus Code) 12. Revocation of License (Secs. 134 and 135; Art. 50, Omnibus Investment Code) 13. Withdrawal of Foreign Corporation (Sec. 136)
XX. PENALTY PROVISIONS OF THE CODE
1. Penalty Clause for Violations of the Provisions of the Code (Sec. 144).
2. Cross-reference (Sec. 27).
3. Specific application (Sec. 74).
4. Strict Principles in Criminal Law; the issue of malice.
5. Historical Background of Sec. 144 (Sec. 190 1/7 of the Corporation Law) Sec. 190 was not intended to make every casual violation of one of the Corporation Law provisions ground for involuntary dissolution of the corporation and that the court was entitled to exercise discretion in such matters. xGovernment of the Philippine Islands v. El Hogar Filipino, 50 Phil. 399 (1927). The penalties imposed in Sec. 190(A) of the Corporation Law for the violation of the prohibition in question are of such nature that they can be enforced only by a criminal prosecution or by an action of quo warranto. But these proceedings can be maintained only by the Attorney-General in representation of the Government." xHarden v. Benguet Consolidated Mining Co., 58 Phil. 141 (1933).
6. Violation of Section 133 by Foreign Corporations Section 133 of the present Corporation Code, which unlike its counterpart Section 69 of the Corporation Law provided specifically for penal sanctions for foreign corporations engaging in business in the Philippines without obtaining the requisite license, should be deemed to have a penal sanction by virtue of Section 144 of the Corporation Code. Home Insurance Company v. Eastern Shipping Lines, 123 SCRA 424 (1983). Home may therefore provides the second instance of violation of the Code (under Section 133), when the criminal penalties of Sec. 144 are applicable.
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