Corporation Code

Commercial Law Review
Corporation Code
Maria Zarah Villanueva - Castro
CORPORATION CODE (BP BLG 68)
*Corporation Code is the general law on
Private Corporation regarding to its creation,
formation and powers.
INTRODUCTION:
A. Historical Background
Effectivity: May 1, 1980
Article XII Section 16 of the 1987
Constitution: The Congress shall
not, except by general law, provide for
the
formation,
organization,
or
regulation of private corporations.
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 economic
viability.
*Congress has limited powers in the
formation, creation and regulation of a
private corporation.
Purposes:
1. Uniformity
2. To avoid corruption
General Rule: Congress is prohibited
to enact a law directly forming a
private corporation.
Exception: GOCC may be created by
special charter.
*GOCC is a private corporation with
regard to function and in the
meantime a public corporation with
regard to ownership.
Twin Conditions must be present
in forming a GOCC:
1. Interest in the common good
2. Subject to the test of economic
viability
- Means can survive alone in the
market; can generate income
which they can use for their
operating expenses
CONCEPT AND
CORPORATION:
ATTRIBUTES
OF
A. Statutory definition of a Corporation

Section 2 of the Corporation Code:
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.
B. Attributes of a Corporation
Artificial Being
- It exist by fiction of law only,
hence it is subject to limitations
that are inherent because of its
nature
- A corporation is a juridical
person which exists by process
of legal fiction
Doctrine
of
Corporate
Entity/Doctrine of Separate
Personality - 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 entities to which it may be
connected
Consequences/Implications
of Separate Personality:
1. It
is
entitled
to
own
properties in its own name
and its properties are not the
properties
of
its
stockholders, directors and
officers.
Cases:
MagsaysayLabrador v CA; Sulo ng
Bayan v Araneta
*The
interest
of
the
stockholders
over
the
properties of the corporation
is merely inchoate.
*Merely inchoate because
there are still condition
precedents
before
the
shareholders get their share,
viz, in Asset, there are
dissolution and satisfaction
of claims; in profit-sharing,
there
are
unrestricted
retained
earnings
and
declaration by the Board of
Directors.
2. It can incur obligations and
its obligations are not the
obligations
of
its
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Corporation Code
3.
4.
5.
6.
stockholders, directors and

officers.
Case: Francisco v CA
The rights belonging to the
corporation
cannot
be
invoked by the stockholders,
directors and officers and
vice versa.
Corporations are entitled to
certain constitutional rights,
i.e.,
right
against
unreasonable searches and
seizure, due process clause.
*It is not entitled to certain
constitutional right, i.e., right
against
self-incrimination
particularly production of
corporate documents.
*Right
against
selfincrimination is applicable
only to natural persons.
General
Rule:
Constitutional
guarantees
are
applicable
to
corporations.
Exceptions:
1. Right
against
selfincrimination
2. Freedom to travel
Case: Bataan Shipyard v
PCGG
It is liable for tort. It is liable
when the act was committed
by the officer or agent under
express
direction
or
authority
from
the
stockholders or members
acting as a body or generally
from the directors as the
governing body.
Generally, the corporation is
considered a national of the
country
where
it
was
incorporated
(Place
of
incorporation test)
*Exceptions: 1. In times of
war, the nationality of a
corporation is determined by
the
nationality
of
the
controlling stockholders; 2.
Under
the
Foreign
Investment Act of 1991
7. Corporations are incapable

of intent, hence, they cannot
commit felonies that are
punishable under the RPC.
They cannot commit crimes
that are punishable under
special laws because crimes
are
personal
in
nature
requiring
personal
performance of overt acts. In
addition, the penalty of
imprisonment
cannot
be
imposed.
*Criminal liability falls upon
to responsible officers.
*Responsible officers cannot
invoke
the
doctrine
of
separate personality.
*Corporations
cannot
be
incarcerated.
8. Moral damages cannot be
awarded
in
favor
of
corporations because they
do not have feelings and
mental state.
*Corporations
can
claim
damages such as actual,
compensatory,
exemplary,
loss of earning capacity.
General Rule: Corporation
cannot
claim
moral
damages.
Exception:
If
the
corporation has a good
reputation
and
such
reputation was destroyed.
Case:
Coastal
Pacific
Trading
v
Southern
Rolling Mills, Co.
*In Filipinas Broadcasting
Network Inc. v. Ago Medical
and Educational Center, the
SC ruled that a corporation
can recover moral damages
under Article 2219(7) if it
was
the
victim
of
defamation.
Doctrine of Piercing the Veil of
Corporate Entity The doctrine that a
corporation is a legal entity distinct from the
persons composing it. It is a theory
introduced for the purposes of convenience
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Corporation Code
and to serve the ends of justice. But when
the veil of corporate fiction is used as a
shield to perpetuate fraud, to defeat public
convenience, justify wrong, or defend crime,
this fiction shall be disregarded and the
individuals composing it will be treated
identically.
Cases: Times Transportation Co. v
Santos Sotelo; Concept Builders v NLRC
*The doctrine of piercing the veil of
corporate entity is the exception to the
doctrine of corporate entity.
*The users of this doctrine are: 1.
Stockholder; 2. Group of stockholders; 3.
Another corporation.
Effects: 1. Stockholders, officers and
corporation are in effect jointly liable; 2. In
case of two corporations, they will be treated
as one wherein they will be both solidarily
liable. (Instrumentality rule)
*There is no effect on the existence of each
corporation as long as their separate entity is
used for legitimate purposes.
Instrumentality
Rule
When
one
corporation is so organized and controlled
and its affairs are conducted so that it is in
fact a mere instrumentality or adjunct of the
other, the fiction of the corporate entity to
the instrumentality may be disregarded.
*The user is another corporation.
Keyword: CONTROL
Requisites: 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 in contravention of
plaintiffs legal rights; 3. The aforesaid
control and breach of duty must
proximately cause the injury or unjust
loss complained of.
Three cases of piercing the veil:
1. Fraud Cases when a corporation is
used as a cloak to cover fraud, or to do
wrong;
2. Alter Ego Cases when the corporate
entity is merely a farce since the
corporation is an alter ego, business

conduit or instrumentality of a person or
another corporation;
3. Equity cases when piercing the
corporate fiction is necessary to achieve
justice or equity.
Probative Factors of Identity:
1. Identical shareholders;
2. Same set of officers, directors, or
trustees;
3. Use of same premises, properties, tools
and equipments;
4. Engage practically in the same
business; 5. The same manner of keeping
books and records.
*The probative factors of identity are not
conclusive but may be considered as
strong evidence.
Creature of Law
Article XII Section 16 of the
1987
Constitution:
The
Congress shall not, except by
general law, provide for the
formation,
organization,
or
regulation of private corporations.
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 economic
viability.
Concession Theory It is a
principle
in
the
creation
of
corporations,
under
which
a
corporation is an artificial creature
without any existence until it has
received the imprimatur of the
State acting according to law,
through the SEC. The life of the
corporation is a concession made
by the State.
Right of Succession
- Capacity to have continuity of
existence despite the changes
on the persons who compose it.
Thus, the personality continues
despite
the
change
of
stockholders, members, board
members or officers; death or
disability.
- Also known as Principle of
Perpetual Succession
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Corporation Code
Reason: To make the corporation
more stable
Creature of enumerated powers,

attributes and properties
Doctrine of Limited Capacity
No
corporation
under
the
Corporation Code, shall possess or
exercise any corporate powers,
except those conferred by law, its
Articles of Incorporation, those
implied from express powers and
those
as
are
necessary
or
incidental to the exercise of the
powers
so
conferred.
The
corporations capacity is limited to
such
express,
implied
and
incidental powers.
*Corporation may be restrained
from
engaging
a
particular
transaction because it is beyond
their powers.
*General Capacity a corporation
can perform any act for as long as
it is lawful, moral and not contrary
to public policy or order.
Ultra Vires Doctrine Even if the
act is lawful, moral and not
contrary to public order or policy
but such act is not within the
express, implied and incidental
powers of the corporation such act
shall be void for being ultra vires.
*These doctrines are based on
Section 2 and Section 45 of the
Corporation Code.
C. Classification of Private Corporations:

1. As to existence of Stocks:
Stock Corporation 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.
(Sec. 3)
Non-stock
Corporation
A
corporation 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. (Sec. 87)
Q: Is it correct to say that a Non-stock

corporation cannot generate income
on their own?
A: NO
2. As to function/organizers:
Public Corporation for public
purpose and organized by the State.
Private Corporation for profit
making functions and organized by
private persons alone or with the State
3. As to laws of Incorporation (Place
of Incorporation) :
Domestic Corporation corporation
formed, organized or existing under
the Philippine Laws.
Foreign Corporation corporation
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.
(Sec. 123)
*License
is
necessary
for;
1.
Regulation purposes and 2. Access to
local courts.
4. As to legal status:
De Jure Corporation corporation
created in strict or substantial
compliance
with
the
mandatory
requirements for incorporation 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.
De Facto Corporation the due
incorporation of any corporation
claiming in good faith to be a
corporation under the Corporation
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
Solicitor General in a quo warranto
proceeding. (Sec. 20)
- organized with a colourable
compliance
with
the
requirements of a valid law and
its existence cannot be inquired
collaterally.

Corporation Code
-
There is an irregularity or defect

in
the
constitution
or
organization.
Can be compared to a voidable

contract, i.e., valid until annulled.
*Can be challenged by the State
later on.
Cases: Hall v Piccio; Seventh
Adventist
v
Northeastern
Mindanao Mission
*The filing of the Articles of
Incorporation and the issuance of
the certificate of registration are
the essential requisites for the
existence of a de facto corporation.
Requisites:
1. The existence of a valid law
under
which
it
may
be
incorporated;
2. An attempt in good faith to
incorporate; 3. Use of corporate
powers;
4. Filing of the Articles of
Incorporation;
5. Subsequent compliance with the
requirement of law.
*In both corporations, there must
be a certificate of registration
issued.
Doctrine of 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 an
result thereof: Provided, however, that
when any such ostensible corporation is
sued on any transaction entered into 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 or corporate
personality. (Sec. 21)
- Group of persons which holds
itself out as a corporation and
enters into a contract with a
third person on the strength of
such appearance cannot be
permitted to deny its existence
in an action under said contract.
Case: Lim Tong Lim v CA
*Lim is stopped because he

benefited from the transaction.
Remedy: To ran after those
persons
responsible
for
the
representations
Essence: They are precluded from
denying their existence by their
previous act or conduct
Holding Corporation it is one which
controls another as a subsidiary by the
power to elect management. It is one that
holds stocks in other companies for purposes
of control rather than for mere investment.
Affiliate one related to another by owning
or being owned by common management or
by a long-term lease of its properties or other
control device. It may be the controlled or
controlling corporation, or under common
control.
Subsidiary Corporation 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 always controlled.
Open Corporation one which is open to
any person who may wish to become a
stockholder or member thereto.
Close Corporation those whose shares of
stock are held by limited number of persons
like the family or other closely knit group.
(Sec. 96)
FORMATION AND ORGANIZATION OF A
PRIVATE CORPORATION:
A. Submission
of
Articles
of
Incorporation; contractual significance
*The life of a corporation commences
from the issuance of the Certificate of
Registration by the SEC upon filing of
the Articles of Incorporation and other
documents.
Article of Incorporation is the
charter of the corporation, and the
contractual relationships between the
State and the corporation, the
stockholder and the State, and
between the corporation and its
stockholders.
Contractual Significance:
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Corporation Code
1. The issuance of a certificate of
incorporation signals the birth of the
corporations juridical personality;
2. It is an essential requirement for the
existence of a corporation, even a de
facto one.
B. Contents and Form of the Articles of
Incorporation (Secs. 14 and 15)
Contents
of
Articles
of
Incorporation:
1. Corporate Name;
2. Purpose Clause;
3. Principal office;
4. Term of existence;
5. Incorporators;
6. Directors or trustees;
7. Capitalization;
8. Shares of stock;
9. Treasurers Affidavit.
Corporate Name
Purpose: Identification
*Corporation can not adopt any
name or group of words at its
pleasure because of statutory
limitation, viz., Sec. 18 of the
Corporation Code which provides
that: No corporate name may be
allowed by the SEC 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.
SEC Guideline x x x b. In order to
prevent confusion and difficulties of
administration, supervision and
control, if the proposed name
contains a word already use as a
part of the firm name or style of a
registered entity, the proposed
name must contain two other
words different and distinct from
the name of the company already
registered or protected by law. x x

x
Case: Ang Mga Kaanib Ni Jesus
Cristo
*The phrase Ang Mga Kaanib are
words
merely
descriptive
of
membership while the phrase Sa
Bansang Pilipinas are merely
descriptive of the place.
*Both
parties
are
religious
institutions
*Both use the acronym H.S.K.
As a rule, generic name or
descriptive word may be used as a
corporate name.
Reason: public domain; can be
used by anyone; public use.
Exception:
Doctrine
of
Secondary Meaning 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.
Requisites:
1. Period of use;
2. The use must be exclusive.
Case: Lyceum of the Philippines
*The exclusivity requirement was
not satisfied by Lyceum of the
Philippines.
*In case of change of name, the
corporation is not dissolve nor
create a new corporation; it also
does not extinguish the corporate
liability.
*Change of name can be done by
amending
the
Articles
of
Incorporation.
Procedure:
1. Obtain approval of majority of
the Board and 2/3 stockholders;
2. Submission to the SEC for
approval.
Purpose Clause
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Corporation Code
*Only
one
primary
purpose.
Primary
purpose
defines
the
business
activities
of
the
corporation. It is the ordinary
course
of
business
of
the
corporation.
*Secondary Purpose is for future
expansion. There is no limit on the
secondary purpose.
*In case the primary purpose is not
viable then secondary purpose may
be used.
Principal Office
*The principal place of business
may determine the venue of court
cases involving corporations. It
may also determine if service of
summons and notices was properly
made. It is also important for tax
purposes (local taxation).
*The SEC requires the exact
address to be indicated in the
Articles of Incorporation.
*It is the residence of the
corporation. It is where the
corporation maintains its books
and records and where normally
the bulk of its business is being
conducted or undertaken.
*For personal action, venue is the
residence.
Term of Existence
*A corporation has a maximum
term of 50 years. It may be
extended
for
a
period
not
exceeding 50 years in any single
instance.
As a rule, no extension can be
made earlier than 5 years prior to
the expiration of the term.
*No limitations regarding number
of extension can apply.
Reason:
To
compel
the
stockholders
to
meet
the
corporations term.
Exception:
If
for
compelling
reasons, earlier extension will be
allowed.
*During the three year winding up
period, the corporation still has
personality
but
activities
are
limited to the liquidation of the
corporation affairs and not to

transact further business.
As a rule, after the term has
expired, no more extensions be
allowed or entertained by the SEC.
Reason: No more period to extend.
Exception: Doctrine of Relation
The filing and recording of a
certificate of extension after the
term cannot relate back to the date
of the passage of the resolution of
the stockholders to extend the life
of the corporation. However, the
doctrine of relations applies if the
failure to file the application for
existence within the term of the
corporation is due to neglect of the
officer with whom the certificate is
required to be filed or to wrongful
refusal on is part to receive it.
*The delay in submitting the
application
for
extension
is
justifiable.
Keywords:
1. Excusable delay;
2. Beyond the control of the
corporation
(insuperable
intervening causes)
Incorporators
*Once an incorporator always an
incorporator. (Fait accompli an
accomplished fact which cannot be
altered)
*They are the signatories to the
*They are originally forming the
corporation
Q: What is the reason behind the
phrase that an incorporator is not
always a corporator?
A: To be an incorporator it is not
necessary to own a share unlike as
a corporator.
*Number is limited to 5 to 15.
*They must have a contractual
capacity.
*Juridical person cannot create
another juridical person.
*There is no citizen requirement
but special laws may require
otherwise.
*Majority must be a resident of the
Philippines.
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Corporation Code
Directors and trustees

*The Board of Directors is the
governing
body
in
a
stock
corporation while Board of Trustees
is the governing body in a nonstock corporation.
*They exercise the powers of the
corporation.
Qualifications:
1. Every director must own at least
one (1) share of the capital stock;
2. Majority of the directors or
trustees must be residents of the
Philippines.
*Any director who ceases to be the
owner of at least one 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.
*Initial directors/trustees shall hold
office for one year until their
successors
are
elected
and
qualified.
Capitalization
Section 14(8) states that: 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 share 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.
*It is required that at least 25% of
the subscribed capital must be paid
and in no case may be paid-up
capital be less than P5,000.
Authorized Capital Stock the
amount fixed in the articles of
incorporation to be subscribed and
paid by the stockholders of the
corporation.
*Shows the total number of shares
Subscribed Capital that portion
of the authorized capital stock that
is
covered
by
subscription
agreements whether fully paid or

not.
Paid-Up Capital the portion of
the authorized capital stock which
has been subscribed and actually
paid.
Outstanding Capital Stock the
total shares of stock issued to
subscribers
or
stockholders,
whether or not fully or partially
paid except treasury shares so long
as there is a binding subscription
agreement.
Shares of stock
Q: Why shares of stock?
A: Because there is a share on the
capitalization.
Economic Value:
1. expectancy on the share in the
profits
2. expectancy on the share of
assets
in
case
of
dissolution/liquidation.
Political Value:
1. vote
2. control in the management of
the corporation.
Doctrine of Equality of Shares
Except as otherwise provided in
the articles of incorporation and
stated in the certificate of stock,
each share shall be equal in all
respects to every other share.
- Provides that where the Article of
Incorporation do not provide for
any distinction of the shares of
stock, all shares issued by the
corporation are presumed to be
equal and enjoy the same rights
and privileges and are also subject
to the same liabilities.
Classes of Shares:
1. Par Value Share shares that
have a nominal value in the
certificate of stock.
Contractual Significance: The
minimum price at which the
shares are to be issued.
*The price is fixed. It is stated in
the Articles of Incorporation.
2. No Par Value Share those
shares which do not have
nominal value. However, they
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Corporation Code
have issued value stated in the
certificate
or
articles
of
incorporation.
*There is flexibility in the price.
*The price is determined by the
Board.
Limitations:
1. No par value shares cannot
have an issued price of less
than P5.00;
2. The entire consideration for
its issuance constitutes capital
so that no part of it should be
distributed as dividends;
3. They cannot be used as
preferred stocks;
4. They cannot be issued by
banks,
trust
companies,
insurance companies, public
utilities and building and loan
association (Reason: imbued
with public interest);
5. The articles of incorporation
must state the fact that it
issued no par value shares as
well as the number of said
shares;
6. Once issued, they are
deemed fully paid and nonassessable.
3. Voting Shares shares with
the right to vote. They have the
right to participate in the
management of the corporation
through the exercise of such
right.
4. Non-voting Shares shares
without the right to vote.
*Has only a limited right to
vote.
General
Rule: Shareholder
owning non-voting shares has
no right to vote.
Exceptions:
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.
Incurring,
creating
or
increasing
bonded
indebtedness;
5. Increase or decrease of
capital stock; 6. Merger or
consolidation of the corporation
with another corporation or
other corporations;
7. Investment of corporate
funds in another corporation or
business in accordance with the
Corporation Code; 8. Dissolution
of the corporation.
*The exceptions are exclusive;
the list is a closed list
Statutory Constraint: Sec. 6
of the Corporation Code
*The corporation cannot provide
for shares with no voting right
General
Rule:
Only
redeemable
and
preferred
shares are deprived of voting
right.
Exception: Common shares
may be denied of its voting
right in the following instances:
1. Delinquent in paying the
subscription; 2. If there was a
founders share where it was
given
the
right
to
vote
exclusively for 5 years (Sec. 7).
5. Common Shares the most
common type of shares which
enjoy no preference.
*The basic class of stock
ordinarily and usually issued
without extraordinary rights and
privileges, and the owners
thereof are entitled to a pro rata
share in the profits of the
corporation and in its assets
upon dissolution and, likewise,
in the management of its affairs
without
preference
or
advantage whatsoever.
6. Preferred
Sharesshares
which enjoy preference as to
dividends
or
assets
upon
dissolution as stated in the
Reason: To attract investors.
*Preference does not give them
a lien upon the property nor
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Corporation Code
make them creditors of the
corporation.
*Characterized as redeemable
shares.
Kinds:
1. Preferred shares as to
assets share which gives the
holder thereof preference in the
distribution of the assets of the
corporation
in
case
of
liquidation;
2. Preferred shares as to
dividends share which gives
the holder thereof preference in
the distribution of the dividends
to the extent agreed upon
before any dividends at all are
paid to the holders of common
shares;
3. Participating preferred
shares the holders thereof
are still given the right to
participate with the common
stockholders
in
dividends
beyond their stated preference;
4.
Non-participating
preferred shares where
there is no such participation;
5.
Cumulative
preferred
shares the shareholder is
entitled to recover dividends in
arrears.
While
dividend
declaration
may
not
be
compelled, once it is declared,
the shareholder is entitled to
the said arrears;
6. Non-cumulative preferred
shares not entitled to arrears
only to present dividends.
7. Redeemable Shares are
those which permit the issuing
corporation
to
redeem
or
purchase its own shares.
Limitations:
1. Redeemable shares may be
issued only when expressly
provided for in the Articles of
Incorporation;
2. The terms and conditions
affecting said shares must be
stated both in the certificate of
stock representing such share;
3. Redeemable shares may be

deprived of voting rights in the
Articles of Incorporation, unless
otherwise
provided
in
the
Corporation Code;
4. The corporation is required to
maintain a sinking fund to
answer for redemption price if
the corporation is required to
redeem;
5. The redeemable shares are
deemed
retired
upon
redemption unless otherwise
provided in the Articles of
Incorporation;
6.
Unrestricted
retained
earnings is not necessary before
shares can be redeemed but
there must be sufficient assets
to pay the creditors and to
answer for operations.
8. Treasury Shares shares
which have been earlier issued
as
fully
paid
and
have
thereafter been acquired by the
corporation
by
purchase,
donation,
redemption
or
through some lawful means.
- Shares which are previously
issued by the corporation but
subsequently reacquired by the
corporation.
*Retired thus can no longer be
re-issued.
*They are not entitled to
dividends.
*They are not entitled to voting
rights. Rationale: to prevent
abuse by the management.
*These shares may again be
disposed of for a reasonable
price fixed by the Board of
Directors.
9. 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
10

Corporation Code
for the limited period not to

exceed 5 years subject to the
approval of the SEC. The 5 year
period shall commence from the
date of the approval by the SEC.
Treasurers affidavit
*The SEC 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 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 fully
paid to him in actual cash and/or in
property the fair valuation of which
is equal to at least 25% of the said
subscription, such paid up capital
being not less than P5,000.
*If the Treasurers affidavit is false
such act is tantamount to fraud.
(PD 902-A)
*Fraud on the part of the
corporation is a ground for
revocation or suspension of license
depending upon the extent of the
violation committed.
*If theres no Treasurers Affidavit,
the first ground shall apply, i. e.,
noncompliance with the minimum
requirement.
General Rule: 25% must be
subscribed and 25% must be paid.
Exception: If the law provides
otherwise, i.e., special laws.
C. Grounds for rejection of the Articles of

Incorporation
1. The articles of incorporation or any
amendment
thereto
is
not
substantially in accordance with
the form prescribed herein;
2. The purpose or purposes of the
corporation
are
patently
unconstitutional, illegal, immoral,
or contrary to government rules
and regulations;
3. The
Treasurers
Affidavit
concerning the amount of capital
stock subscribed and/or paid is
false;
4. The 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.
Dual Franchise Requirement: 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
corporations governed by special laws
shall be accepted or approved by the
Commission unless accompanied by a
favourable recommendation of the
appropriate government agency to the
effect that such articles or amendment
is in accordance with law.
D. Commencement
of
Corporate
Existence
Sec. 19 of the Corporation Code
states that A private corporation
formed or organized under this Code
commences
to
have
corporate
existence and juridical personality and
is deemed incorporated from the date
the SEC 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.
*For purposes of determining whether
a corporation enjoys the status of a de
facto corporation, it must have been
at least issued a certificate of
registration.
E. Amendment
of
the
Articles
of
Incorporation
states
that:
Unless
otherwise
11

Corporation Code
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 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
at least 2/3 of the members if it be a
non-stock corporation.
*It is effective upon the approval of
the SEC.
*There may be an amendment by
inaction. Amendment by Inaction
Upon filing with the SEC of the
amendment and the Commission
failed to act on it within 6 months from
the date of filing for a cause not
attributable to the corporation.
F. Effects of Non-Use of Corporate
Charter
states that: If a corporation does not
formally organize and commence the
transaction of its business or the
construction of its work within 2 years
from the date of its incorporation, its
corporate powers cease and the
corporation
shall
be
deemed
dissolved. However, if the corporation
has commenced the transaction of its
business but subsequently becomes
continuously inoperative for a period
of at least 5 years, the same shall be a
ground
for
the
suspension
or
revocation of its corporate franchise or
certificate
of
incorporation.
This
provision shall not apply if the failure
to
organize,
commence
the
transaction of its businesses 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 SEC.
*The period must be counted from the

issuance
of
the
Certificate
of
Incorporation.
*Automatic
dissolution
is
not
contemplated under Section 22. (SEC
Opinion).
*Section 22 must be read in
conjunction with Sec 6(1) of PD 902-A
which requires that the corporation
must be given the opportunity to be
heard
in
compliance
with
the
requirement of due process before the
revocation of its license.
CONTROL AND
CORPORATION:
MANAGEMENT
OF
A. Levels of Corporate Control

1. By Stockholders/Shareholders;
2. By Corporate Officers;
3. By Directors/Trustees
B. Board of Directors/Trustees
General Powers of the Board
Sec. 23 of the Corporation
Code
states
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 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 year until their successors
are elected and qualified.
Powers
of
the
Board
of
Directors:
1. Corporate Powers;
2. Manage the Corporation; and
3. Control over and hold the
properties of the Corporation.
*Board of Directors/Trustees is the
statutory representative of the
corporation.
General
Rule:
All
corporate
powers emanate from the Board of
Directors/Trustees.
12

Corporation Code
Exception:
Unless
otherwise
provided in this Code. (Limiting
Clause)
The limiting clause means that
there are certain corporate matters
that cannot be done by the Board
by reason that such matters fall
upon
the
shareholders;
or
corporate matters that cannot be
resolved by the Board alone, i.e., it
must be done with the approval of
the shareholders.
Business Judgment Rule
Business
Judgment
Rule
questions of policy or management

are left solely to the honest
decision of officers and directors of
a corporation and the courts are
without authority to substitute their
judgment for the judgment of the
board of directors; the board is the
business
manager
of
the
corporation and so long as it acts in
good faith its orders are not
reviewable by the courts or the
SEC.
- A resolution or transaction
pursued within the corporate
powers and business operations of
the corporation, and passed in
good faith by the board of
directors/trustee, is valid and
binding, and generally the courts
have no authority to review the
same and substitute their own
judgment, even when the exercise
of such power may cause losses to
the corporation or decrease the
profits of a department.
*Great respect is accorded to the
decisions
of
the
Board
of
Directors/Trustees.
*The directors are not liable to the
stockholders in performing such
acts.
Qualifications
of
the
Board
Members
Code states that: Every director
must have at least one share of the
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 share of the
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.
*In order to be eligible as director,
what is material is the legal title to
and
not
beneficial
title
or
ownership of the stocks appearing
on the books of the corporation.
*The directors/trustees must be
natural persons.
*They must also be of legal age.
*He
must
possess
other
qualifications as may be prescribed
in the by-laws of the corporation.
*Under
Sec.
27
of
the
Corporation Code: No person
convicted by final judgment of an
offense
punishable
by
imprisonment
for
a
period
exceeding 6 years, or a violation of
this Code committed within 5 years
prior to the date of his election or
appointment, shall qualify as a
director, trustee or officer of any
corporation.
Reason: The position is based on
trust and confidence.
*No citizenship requirement.
*The
By-Laws
may
provide
additional
qualifications/disqualifications.
Election of the Board Members
Code provides that: 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 a majority of the
outstanding capital stock, or if
there be no capital stock, a
majority of the members entitled to
13

Corporation Code
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
the
corporations 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 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 member

entitled to vote.
*It
is
the
stockholders
or
corporators who elect members of
the Board of Directors.
*The only procedure required by
the Code is through Election.
There can be no other modes.
*The election must be by ballot if
requested by any voting member
or stockholder.
*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.
*No delinquent stock shall be
voted.
*It is not required that the
candidate received the majority
vote, what the law provides is only
plurality of votes.
*Majority number is required only
for the existence of a quorum.
Not included in outstanding
capital
stocks:
1.
Unissued
stocks;
2. Non-voting stocks;
3. Treasury Shares.
Methods of Voting:
1. Straight Voting every
stockholder may vote such number
of shares for as many persons as
there are directors to be elected.
2. Cumulative Voting for One
Candidate 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.
*Example: X has 10 shares in his
name; there are 5 numbers of
directors to be elected. X has 50
votes (10x5) available to him. X
may opt to concentrate all his 50
votes to a particular candidate.
3.
Cumulative
Voting
by
Distribution 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
14

Corporation Code
among as many candidates as he

shall see fit.
*Example: X has 10 shares in his
name; there are 5 numbers of
directors to be elected. X has 50
votes available to him. X may opt
to distribute the votes to as many
candidates as there are provided
that the total number of votes does
not exceed 50.
Purpose of cumulative voting: To
protect the minority stockholders.
*The elected officer must act as a
body.
*In a stock corporation, cumulative
voting is a statutory right whereas
in
a
non-stock
corporation,
cumulative voting is applicable if it
is provided in the Article of
Incorporation.
Code provides that: Within 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 SEC, 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
SEC.
Term of Office
*The directors or trustees shall hold
office for one (1) year subject to
the hold over principle, i.e.,
they continue in office until their
successors
are
elected
and
qualified.
*The one year period does not
apply to directors initially elected
for purposes of incorporation.
Quorum
Requirement in Board
Meetings
Code states 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,
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.
Q: Is the director allowed to let a
proxy attend a board meeting in
behalf for himself?
A: NO. Proxy prohibition.
Reason: Because of their personal
qualifications.
*Quorum
requirement
should
always be computed based on the
number specified in the Articles of
Incorporation regardless of ensuing
vacancies.
*The basis is always the number
specified
in
the
Articles
of
Incorporation.
*The corporation can modify the
number by providing a different
provision
in
the
articles
of
incorporation, however, the law
provides that the modification must
be for a number greater than that
provided in the law. It cannot
provide for a number less than the
general requirement of the code.
*For voting purposes, majority of
the member present constituting a
quorum.
Except:
election
of
directors.
Removal of Board Members
Code states that: Any director or
trustee of a corporation may be
removed from office by a vote of
the
stockholders
holding
or
representing at least 2/3 of the
outstanding capital stock, or if the
corporation
be
a
non-stock
corporation, by a vote of at least
15

Corporation Code
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 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 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 Sec. 24
of this Code.
Requisites:
1. It must take place either at a
regular meeting or special meeting
of the stockholders or members
called for the purpose;
2. There must be previous notice to
the stockholders or member of the
intention to remove;
3. The removal must be by a vote

of the stockholders representing
2/3 outstanding capital stock or 2/3
of members;
4. The director may be removed
with or without cause unless he
was elected by the minority, in
which case, it is required that there
is cause for removal.
Reason: The functions of directors
are fiduciary in nature.
Requisites for the removal of
minority directors are:
1. Justifiable cause;
2. Satisfaction of the voting
requirements, i.e., 2/3 of OCS or
members.
*It is the secretary of the
corporation upon order of the
president or in case there is no
secretary, stockholder representing
stocks or member signing the
demand who may call a meeting
for the purpose of removal.
Vacancies in the Board
Code provides that: 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 or the
unexpired term of his predecessor
in
office.
A
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
16

Corporation Code
so stated in the notice of the

meeting.
General Rule: Power to elect
directors
is
vested
in
the
stockholders
Exception: 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.
Compensation of Board Members
Code provides that: In the
absence of any provision in the bylaws fixing their compensation, the
directors shall not receive any
compensation, as such directors,
except for reasonable per diems:
Provided, however, that any such
compensation other than per diems
may be granted to directors by the
vote
of
the
stockholders
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 10% of
the net income before income tax
of the corporation during the
preceding year.
General Rule: Directors are not
entitled to receive compensation
Exceptions:
1. When their compensation is
fixed in the by-laws;
2. If compensation is granted to
directors by the vote of the
stockholders representing at least
a majority of the outstanding
capital stock at a regular or special
stockholders meeting.
Limitation: In no case shall the
total
yearly
compensation
of
directors exceed 10% of the net
income before income tax of the
corporation during the preceding
year.
Reason:
In
order
to
avoid
temptation on the part of directors
to abuse powers by appropriating
compensation packages since they
are in control of corporate assets.
C. Corporate Officers
Concept of Corporate Officers
*Corporate powers reside on the
Board
of
Directors;
decision/policymaking resides on
them.
Implementation
of
rules/policy lies on the corporate
officers
Categories:
1.
Statutory
Corporate
Officers President (must be a
stockholder); Secretary (must be a
resident
and
citizen
of
the
Philippines); Treasurer (must be a
resident
and
citizen
of
the
Philippines).
2. As provided by the ByLaws must be clearly stated in
the By-Laws that such office is a
corporate office.
3. Those designated by the
Board of Directors provided the
Board
of
Directors
is
authorized to do so by the ByLaws.
Validity and Binding Effect of Acts
of Corporate Officers
General Rule: No one, even
corporate officers can bind the
corporation. It is only the Board of
Directors who has the authority to
bind the corporation.
Exceptions:
1. If the By-Laws provides that such
act is part of the function of such
office;
2. If authorized by the Board of
Directors
Doctrine of Apparent Authority
Doctrine
of
Apparent
Authority/Doctrine of Estoppel
If a corporation, knowingly permits
one of its officers, or any other
agent, to act within the scope of an
apparent authority, it holds him out
to the public as possessing the
power to do those acts; and thus,
17

Corporation Code
the corporation will, as against
anyone who has in good faith dealt
with it through such agent, be
stopped from denying the agents
authority.
Cases: Peoples Aircargo; InterAsia; Lapu-Lapu
*Requires good faith on the part of
third person.
D. Liability of Directors, Trustees and
Officers
Instances
when
Corporate
Officers/Directors
are
held
Solidarily Liable
Code provides that: Directors or
trustees who wilfully 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.
General
Rule:
Directors/Trustees/Officers are not
solidarily
liable
with
the
corporation.
Exceptions:
1. Wilfully and knowingly vote
for and assent to patently
unlawful
acts
of
the
corporation (Sec. 31).
Case: Carag v NLRC

2. Guilty of gross negligence or
bad faith in directing the
affairs of the corporation
(Sec. 31).
Case:
David
v
Construction Industry
3. Acquire any personal or
pecuniary interest in conflict
of their duty (Sec.31).
4. Consent to the issuance of
watered stocks or having
knowledge thereof, fails to
file objections with the
secretary (Sec. 65).
5. Agree or stipulate in a
contract to hold himself
personally liable with the
corporation.
6. By virtue of a specific
provision of law such as BP
22; Trust receipts Law; RA
7832
(Anti-Electricity
Pilferage
Act
of 1997);
Securities Regulation Code
*In Carag v NLRC, the Supreme
Court held that not any violative of
law, the Code means that violation
must have a corresponding penalty.
Patently unlawful act means that a law
declares an act unlawful and that such
law provides penalty for that unlawful
act.
Self-Dealing Directors/Officers
Code states that: 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 of 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; 3. That the
contract is fair and reasonable
under the circumstances; and 4.
18

Corporation Code
That in case of an officer, the
contract has been previously
authorized by the board of
directors. 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
2/3 of the outstanding capital stock
or of at least 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.
Example:
In XYZ Corporation, A is a director.
The corporation acts through the
Board of Directors. XYZ Corporation
and A entered into a lease
contract. A as the lessor and XYZ
Corporation as lessee. The contract
was approved by the Board of
Directors.
Q: What is the status of the
contract?
General Rule: The contract is
voidable.
Exception:
If
the
requisites
provided in Sec. 32 are present.
Exception to the Exception: If
requirement number 1 or 2 is
absent, in the case of a contract
with a director or trustee, such
contract may be considered valid
by the ratification of at least 2/3 of
the outstanding capital stock or 2/3
of the members.
Requisites:
1. 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. The vote of such director or
trustee was not necessary for the
approval of the contract;
3. The contract is fair and

reasonable
under
the
circumstances;
4. In case of an officer, the contract
has been previously authorized by
the board of directors.
Reason: As presence in the board
meeting might affect the status of
the contract.
Self-Dealing Directors/Officers
directors/officers
who
transact
business
with
their
own
corporation.
- This is not prohibited by law.
Interlocking Directors those
who have been elected as directors
in 2 or more different corporations.
- May be prohibited by the By-Laws
(Gokongwei case).
-Not prohibited by law however
there are consequences.
Contracts involving Inter-locking
Directors
Code provides that: 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 is substantial and his
interest in the other 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 20% of
the outstanding capital stock shall
be considered substantial for
purposes of interlocking directors.
Example:
A is a director of two corporation,
ABC
Corporation
and
XYZ
Corporation. XYZ Corporation and
ABC Corporation entered into a
lease
contract
where
ABC
19

Corporation Code
Corporation is the lessor and XYZ

Corporation is the lessee.
Q: Can this contract be invalidated
on the ground that there is an
interlocking director?
A: NO.
Q: What is the status of the
contract?
A:
General
Rule:
Contracts
between two or more corporations
having interlocking directors are
valid.
Exceptions:
1.
Contracts
are
void
if
contracts are fraudulent or if
contracts are unfair and
unreasonable.
2.
If the By-Laws prohibits
interlocking director.
Case: Gokongwei, Jr. v SEC
*The interest is nominal if his
interest is 20% or less of the
outstanding capital stock. The
interest is substantial if his interest
is more
than
20%
of
the
outstanding capital stock.
*If the interlocking director has a
substantial
interest
in
one
corporation and has a nominal
interest in the other corporation,
the director must comply with the
requisites provided in Sec. 32 on
self-dealing directors.
Reason: The case is analogous to
that of transactions involving selfdealing directors because such
director holds substantial interest
with the other company.
Doctrine of Corporate Opportunity
Code states that: 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
outstanding capital stock. This
provision
shall
be
applicable
notwithstanding the fact that the
director risked his own funds in the
venture.
General Rule: A director shall
refund to the corporation all the
profits he realizes on a business
opportunity
which:
1.
the
corporation is financially able to
undertake; 2. from its nature, is in
line with corporations business and
is of practical advantage to it; and
3. the corporation has an interest
or a reasonable expectancy.
Exception: His act has been
ratified
by
a
vote
of
the
stockholders
owning
or
outstanding capital stock.
*A business opportunity ceases to
be corporate opportunity and
transforms to personal opportunity
where the corporation refuses or is
definitely no longer able to avail
itself of the opportunity.
E. Executive Committee
states that: The by-laws of a
corporation may create an executive
committee composed of not less than
3 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 filing 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.
Keyword: BY-LAWS
*It must be stated in the By-Laws.
20

Corporation Code
*Board Resolution is not sufficient if
there is no provision in the By-Laws.
*The decision of the executive
committee is considered a Board
Resolution.
committee is not subject to appeal to
the board. However, if the resolution
of the Executive Committee is invalid
it may be ratified by the Board.
committee needs no confirmation from
the Board.
Case: Filipinas Port, Inc.
*The corporation may create other
committees.
Distinction: In executive committee,
there is a statutory restriction on
members whereas in other committee
there is no such restriction.
General
Rule:
The
executive
committee may act on 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.
Exceptions:
1. Approval of any action for which
shareholders approval is also
required;
2. The filing of vacancies in the board;
3. The amendment or repeal of bylaws or the adoption of new bylaws;
4. The amendment or repeal of any
resolution of the board which by its
express terms is not so amendable
or repealable;
5. A distribution of cash dividends to
the shareholders.
CORPORATE POWERS:
A. Doctrine of Limited Capacity; Concept
of Ultra Vires Act
states that: 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 powers so conferred.
Ultra Vires Acts an act committed

outside the object for which a
corporation is created as defined by
the law of its organization and
therefore beyond the power conferred
upon it by law.
Effects of Ultra Vires Acts:
1. Executed Contract courts will
not set aside or interfere with such
contracts.
2. Executory
Contract
no
enforcement even at the suit of
either party.
3. Partly executed and Partly
executory contract principle
against unjust enrichment shall
apply.
B. Classes of Corporate Powers
1. Express
2. Implied
3. Incidental
Express
those
expressly
authorized by the Corporation Code
and other laws, and its Articles of
Incorporation or Charter.
Implied those that can be
inferred from or necessary for the
exercise of the express powers.
Incidental those that are
incidental to the existence of the
corporation.
Doctrine of Necessary Implication
those which can be reasonably inferred from
the express powers given since they are
necessary for the corporation to perform a
particular act are deemed part of such
powers.
C. Statutory Powers of a Corporation and
the Limitations on their Exercise
states
that:
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
21

Corporation Code
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; 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 merger or
consolidation with other corporations
as provided in this Code; 9. To make
reasonable donations, including those
for the public welfare or for hospital,
charitable, cultural, 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 the articles of
incorporation.
Amendment
of
Articles
of
Incorporation
Code
states
that:
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

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 at least
2/3 of the members if it be a nonstock corporation.
*The following are excluded in
counting the outstanding capital
stock: 1. Treasury stock; 2.
Unissued shares.
*Aside from the votes of majority of
the board and assent of the 2/3 of
the OCS, the approval of the SEC is
necessary for the amendment of
the AOI.
*There is an implied approval of
the SEC, i.e., failure to act on the
application filed by the corporation
within 6 mos.
Q: How to get the approval of the
stockholders?
A: 1. Call for a meeting; 2. Obtain
the
written
assent
of
the
stockholders.
*In Tan v Sycip, the Supreme Court
held that in case of a non-stock
corporation,
membership
is
personal
and
non-transferrable
unless
the
by-laws
provides
otherwise. The deceased member
is not entitled to vote.
Four
changes
in
Articles
of
Incorporation that require the approval
of the stockholders.
1. Extension of corporate term;
2. Shortening of corporate term;
3. Increase or Decrease of Capital Stock;
4. Increase or Decrease of Bonded
indebtedness.
*Approval of Stockholders is necessary in
these changes because they are necessary
for the corporations existence.
Extension/Shortening of Corporate
Term
Code states that: A private
corporation may extend or shorten
its term as stated in the articles of
22

Corporation Code
incorporation when approved by a

majority vote of the board of
directors or trustees and ratified at
a meeting by the stockholders
outstanding capital stock or by at
least 2/3 of the members in case of
non-stock
corporation.
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.
Increase or Decrease of Capital
Stock/ Incurrence, Creation or
Increase of Bonded Indebtedness
Code states that: 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, 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
residence as shown on the books of

the corporation and deposited to
the addressee in the post office
with postage prepaid, or served
personally. xxx.
Q: When the corporation increases
its capital stock, is the 25%
requirement necessary? How can it
be computed?
A: YES. The SEC ruled that the
25% applies to the increase
amount.
*The corporation is required to
maintain a sinking fund.
Q:
What
does
bonded
indebtedness mean?
A:
Requires
longer
time
of
payment; special burden on the
corporation; involves the important
assets of the corporation.
Denial of Pre-emptive Right
Code states that: 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 preemptive 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 2/3
of the outstanding capital stock, in
exchange for property needed for
corporate purposes or in payment
of a previously contracted debt.
*Coming
from
the
increased
authorized capital stock.
* Similar to Right of First Refusal
*It is not a matter of right. It can be
denied by the corporation through
denial of such right in the articles
of incorporation.
Purposes:
1. In order that the stockholder
may be able to maintain their
relative proportional voting trend
23

Corporation Code
and control in the corporation; 2. To

avoid dilution of their proportionate
voting
and
control
in
the
corporation.
General Rule: Pre-emptive right is
available to stockholders.
Exception: if it is denied in the
Articles of Incorporation or through
amendment.
Exception to the Exception: Preemptive right shall not extend to:
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
the
stockholders representing 2/3 of
the outstanding capital stock, in
exchange for property needed for
corporate purposes; and
3. In payment of a previously
contracted debt.
*Pre-emptive right is satisfied as
long as the corporation gives the
stockholder the opportunity to buy
the shares.
*The offer must first be made to
the stockholders.
Sale or Disposition of Assets
Code states that: 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
outstanding capital stock, or in
case of non-stock corporation by

the vote of at least 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. xxx.
Q: What makes the disposition
peculiar?
A: The disposition is of all or
substantially
all
of
the
corporations
properties
and
assets.
Q: What kind of disposition
involve?
A: 1. Sell; 2. Lease; 3. Exchange; 4.
Mortgage; 5. Pledge.
Requirements:
1. Majority vote of the Board.
2. Vote
of
the
Stockholders
representing 2/3 of the OCS.
3. The sale does not bring about
the illegal combinations and
monopolies.
*No need for the approval of the
SEC.
Tests:
1. Quantitative
Test
no
statutory test; pertains to the
disposition of all assets
2. Qualitative Test there is a
statutory test; pertains to the
24

Corporation Code
disposition of substantially all of

its assets.
*The provision is so strict because
the law wants the corporation will
reach its expiration term.
Q: With the sale of all the assets of
the corporation, will the same
result to its dissolution?
A: NO. Possession or continued
possession of corporate properties
is not a condition for the existence
of a corporation. Corporation still
exists despite the disposition of all
its properties and assets.
Q: Will the buying corporation be
made answerable for the liabilities
of the selling corporation?
A: NO. The two corporations are
two separate personalities thus
they are separate and distinct from
each other hence the buying
corporation cannot be held liable to
the obligations of the selling
corporation.
General Rule: The sale of all or
substantially all of the assets of the
corporation does not make the
buyer
answerable
for
the
obligations of the seller.
Exceptions:
1. If the buyer expressly agrees to
assume the obligations of the
seller.
2. If sale amounts to merger or
consolidation.
3. If and when application of
piercing the veil of corporate
entity doctrine is warranted.
4. If the purchaser becomes a
continuation of the seller.
5. Sale was done in violation of the
Bulk Sales Law.
Case: PNB v Andrada
Acquisition of Corporate Shares
Code
states
that:
A
stock
corporation shall have the power to
purchase or acquire its own shares
for a legitimate corporate purpose
or purposes, 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.
Requisites:
1. Unrestricted Retained Earnings
2. The acquisition must be for
legitimate purpose
Q: What is an unrestricted retained
earnings?
A: Earnings not allocated for any
other purpose.
Q: What happens to reacquired
shares?
A: General Rule: They are
automatically deemed retired.
Exception: The AOI provides
otherwise.
Trust Fund Doctrine The capital stock,
property and other assets of the corporation
are regarded as equity in trust for the
payment of the corporate creditors. The
subscribed capital stock of the corporation is
a trust fund for the payment of debts of the
corporation which the creditors have the
right to look up to satisfy their credits.
Corporation may not dissipate this and the
creditors may sue stockholders directly for
the unpaid subscription.
Investment of Corporate Funds

Code states that: 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
25

Corporation Code

2/3 of the outstanding capital
stock, or by at least 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 investment by the
corporation
is
reasonably
necessary
to
accomplish
its
primary purpose as stated in the
articles
of
incorporation,
the
approval of the stockholders or
members shall not be necessary.
Requisites:
1. Majority vote of the Board
2. Vote
of
the
stockholders
representing 2/3 OCS.
Declaration of Dividends
Code states that: 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 2/3 of
the outstanding capital stock at a

regular or special meeting duly
called for the purpose. Stock
corporations are prohibited from
retaining surplus profits in excess
of 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 need for special reserve for
probable contingencies.
*This section is exclusive to stock
corporations.
Dividends represents part of the
earnings of the corporation which
the board has decided to distribute
among the stockholders.
*The fact that the corporation has
surplus earning does not mean that
it
is
mandated
to
declare
dividends; it is still upon the sound
discretion of the board of directors.
Reason: Trust Fund Doctrine
*There must be a unrestricted
retained earnings before dividends
may be declared.
*The board may opt to restrict its
earnings, as the earnings may be
allocated to legitimate business
purpose.
CASH
DIVIDENDS
does not require
stockholders
approval
The
stockholders
receive cash
Creditor-debtor
STOCK
DIVIDENDS
Requires
stockholders
approval
The stockholders
receive stocks
No creditor26

Corporation Code
relationship
debtor
relationship
Requisites for declaration of

cash/property dividends:
1. Board approval
2. Unrestricted Retained Earnings
Requisites for declaration of
stock dividends:
1. Unrestricted Retained Earnings;
2. Board approval;
3. Ratification by the stockholders.
Q: Why stockholders ratification is
necessary in the declaration of
stock dividends?
A: Because the earnings are
capitalized. It is considered to be a
corporate assets.
Q: May the board be compelled to
declare dividends?
A: General Rule: NO.
Exception: Stock corporations are
prohibited from retaining surplus
profits in excess of 100% of their
paid-in capital stock.
Exceptions to the Exception:
1. Corporate expansion
2. Pursuant to loan agreement
3. Special
circumstances/contingent
liabilities
Q: Are
the stock dividends
considered as watered stocks
because the stockholder concerned
does not pay anything therefor?
A: NO. The unrestricted retained
earnings are considered to be a
consideration
thus
dividends
received through stocks are not
watered stocks.
*The source of payment is the
unrestricted retained earnings.
Q: Are delinquent stockholders
entitled to receive dividends?
A: YES. But only in terms of cash
dividends.
Q: Who are entitled to receive
dividends?
A: Stockholders
*In Nielson case, the SC held that

dividends cannot be given to nonstockholders.
*If there is date of record
Dividends may be received by
those persons who are holders of
stocks as of date of record.
*If there is no date of record
dividends may be received by
those persons who are holders of
stocks as of the declaration.
Q: When the corporation declares
stock dividends, would it likewise
create
a
creditor-debtor
relationship
between
the
corporation and the stockholder?
A: NO. Stock dividends will not
bring about a creditor-debtor
relationship. When it comes to
shareholdings, the one holding the
shares are considered investors;
risk-takers.
Q: Will legal compensation possible
to occur?
A: NO. The parties are not
mutually creditor-debtor of each
other. The requisites under the Civil
Code on legal compensation are
not present.
Management Contract
Code states that: 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 a majority of the members in
the
case
of
a
non-stock
corporation, of both the managing
and the 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 1/3 of the total
outstanding capital stock entitled
27

Corporation Code
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 2/3 of
the total outstanding capital stock
entitled to vote, or by at least 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 5 years for any one term. 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.
Requisite:
General Rule: Majority vote of
the OCS
Exception: 2/3 of the OCS
*SECs approval is not necessary
*When the corporation enters into
a management contract, appraisal
right is NOT AVAILABLE to any
dissenting stockholder.
Reason: Sound business policy
dictates that it would be better for
the corporation, at the inception of
its operation, to be managed by a
company
who
has
been
experienced in a particular kind of
business
if
the
managed
corporation needs the technical
expertise,
skills,
experiences,
background of another entity.
CORPORATE BY-LAWS:
A. Concept, Use and Nature of By-Laws
By-Laws relatively permanent and
continuing rules of action adopted by
the
corporation
for
its
own
government and that of the individuals
composing it and those having the
direction, management and control of
its affairs, in whole or in part, in the
management and control of its affairs
and activities.
Nature: Regulates internal affairs of
the corporation.
B. By-Laws in relation to Articles of
Incorporation
Distinction between By-Laws and
Articles of Incorporation:
By-Laws is a condition subsequent.
Articles of Incorporation is a
condition precedent. Essential for
corporate existence.
ARTICLES OF
INCORPORATIO
N
External affairs
Affects the status
of existence of
the corporation
BY-LAWS
Internal Affairs
Does not affect
the status of the
existence but has
impact
on
the
existence; failure
to submit is a
ground
for
disenfranchisemen
t
Joint decision of General
Rule:
the board and joint decision
stockholders
Exception:
Delegates
the
power to amend
the By-Laws to the
Board
C. Adoption of By-Laws; Effect of NonFiling within the prescribed period
states that: Every corporation formed
under this Code must, within 1 month
after receipt of official notice of the
28

Corporation Code
issuance
of
its
certificate
of
incorporation by the SEC, 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
stock, or of at least a majority of the
members in 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
inspection of the stockholders or
members during office hours. A copy
thereof, duly certified to by a majority
of
the
directors
or
trustees
countersigned by the secretary of the
corporation, shall be filed with the SEC
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 ByLaws shall be approved and signed by
all the incorporators and submitted to
the SEC, together with the articles of
incorporation. In all cases, By-Laws
shall be effective only upon the
issuance by the SEC of a certification
that the By-Laws are not inconsistent
with this Code. The SEC shall not
accept for filing the By-Laws or any
amendment thereto of any bank,
banking institution, building and loan
association, trust company, insurance
companies, 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.
*Submission of By-Law is not a
requirement
for
acquisition
of
corporate existence, however, for the
corporation to be able to continue its
corporate existence, the corporation is

required to submit the corporate ByLaw.
*Non-submission of the By-Laws within
the prescribed period allowed by law is
a ground for the dissolution of the
corporation.
*In
Loyola
Grandvillas
Homeowners Association v CA, the
SC held that failure to adopt a set of
By-Laws within the prescribed period,
notwithstanding the word used in the
Code, the same would not result to
automatic
dissolution
of
the
corporation. The failure to file by-laws
would not, by itself, amount to
dissolution or extinguishment of the
corporate existence.
*Section 46 of the Corporation Code
must be read in conjunction with PD
902-A which outlines the procedure to
be
followed
before
the
franchise/license
of
a
private
corporation may be suspended or
revoked.
*Observance of Due Process is
necessary.
*In Sawadjaan v CA, the SC held that
meanwhile when the By-Laws is not
yet submitted, the corporation, at that
time, and the very least, may be
considered as a De Facto Corporation
and therefore, its right to exist as such
cannot be inquired into or cannot be
collaterally attacked in a private suit.
It is for the State to initiate a
proceeding questioning the existence,
on the ground of its non-submission of
By-Laws, within the prescribed period.
D. Contents of By-Laws; Requisites of a
Valid By-Law Provision
states that: 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
29

Corporation Code
conducting regular or special meetings
of the stockholders or members; 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
stock certificates; and 10. Such other
matters as may be necessary for the
proper or convenient transaction of its
corporate business and affairs.
Requisites:
1. It
must
be
consistent
with
Corporation Code, other pertinent
laws and regulations.
2. It must be consistent with the
3. It must be reasonable and not
arbitrary or oppressive.
4. It must not disturb vested rights,
impair contract or property rights
of stockholders or members or
create obligations unknown to law.
E. Amendment to By-Laws
provides that: 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 ByLaws or adopt new By-Laws. The
owners of 2/3 of the outstanding
capital stock or 2/3 of the members in
a non-stock 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 non-stock
corporations, shall so vote at a regular
or special meeting. Whenever any
amendment or new By-Laws are
adopted, such amendment or new ByLaws 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 SEC 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 SEC of a
certification that the same are not
inconsistent with this Code.
F. By-Laws in relation to Third Parties
*In China Banking Corporation v
CA, the SC held that in the absence of
evidence that China Bank is aware of
the provisions of the By-Laws, China
Bank is not bound to observe the
provisions of the By-Laws. Hence,
China Bank must be allowed to
register the shares in its name.
General Rule: Third parties are not
affected by the By-Laws.
Exception: If the third party has
actual knowledge of the provisions of
the By-Laws.
CORPORATE MEETINGS:
A. Kinds of Corporate Meetings
provides that: Meetings of directors,
trustees, stockholders, or members
may be regular or special.
Kinds:
a. Stockholders/Members:
1. Regular meeting
2. Special meeting
30

Corporation Code
b. Directors/Trustees:
1. Regular meeting
2. Special meeting
provides that: Regular meetings of
stockholders or members shall be held
annually on a date fixed in the bylaws, 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 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 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. Whenever, for any cause,
there is no person authorized to call a
meeting, the SEC, upon petition of a
stockholder or member on a showing
of good cause therefor, may issue an
order to the petitioning stockholder or
member directing him to call a
meeting of the corporation by giving
proper notice required by this Code or
by the by-laws. The petitioning
stockholder or member shall preside
thereat until at least a majority of the
stockholders or members present
have been chosen one of their number
as presiding officer.
*Regular
meeting
of
stockholders/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. Written notice of regular
meetings shall be sent 2 weeks prior
to the meeting unless a different
period is required by the by-laws.
**
Special
meeting
of
stockholders/members shall be held at
any time deemed necessary or as
provided in the by-laws. Written notice

shall be sent to all stockholders or
members at least one week or unless
otherwise provided in the by-laws.
provides that: 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 bylaws. 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 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.
*Regular
meetings
of
directors/trustees
shall
be
held
monthly unless the by-laws provide
otherwise.
*Special meetings of directors/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 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 1 day prior
to the scheduled meeting unless
otherwise provided by the by-laws.
B. Requirements of a Meeting
1. It must be held at the proper place.
2. It must be held at the stated date
and at the appointed time or at a
reasonable time thereafter.
3. It must be called by the proper
person.
31

Corporation Code
4. There must be a previous notice.
5. There must be a quorum.
provides
that:
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 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. 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.
*Applies to both stock and non-stock
corporations.
General Rule: The meeting must be
held in the city or municipality where
the principal office is located.
Exception:
Sec. 93 on non-stock
corporations, the By-Laws may provide
different venue for their meeting.
*A casual reading of section 51 would
say that a corporation cannot provide
any other place for the meeting of
stockholders. But in case of a nonstock corporation, Section 93 of the
Corporation provides that the by-laws
could provide any place for the
meeting of its members provided that
it is within the Philippines and proper
notice has been given.
Q: Is there a conflict between Section
51 and Section 93?
A: YES. There is conflict but this
conflict may be reconciled. As a rule,
the by-laws may provide a different
place of meeting provided that it is
within the Philippines and notice has
been given. As an exception, if the by-
laws is silent of the place of the

meeting, section 51 applies.
provides that: Unless otherwise
provided for in this Code or in the bylaws, 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.
General Rule: Majority of the OCS or
Majority of the members
Exception: Unless otherwise provided
by the Code or by the By-Laws.
*In Tan v Sycip, deceased member is
not entitled to vote
provides that: 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.
C. Right to Vote of Stockholders
Instances when voting right not
available
provides that: 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.
Instances when voting right is
not available:
1. Delinquent shares
2. Treasury shares
3. Fractional shares
4. Escrow shares
Rules on:
1. Delinquent Shares
Code
provides
that:
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
32

Corporation Code
and unless he pays the amount
due on his subscription with
accrued interest, and the costs
and expenses of advertisement,
if any.
*Delinquency
arises
upon
default
in
payment
of
subscription.
Q: Are they included for quorum
and voting purposes?
A: NO.
Q: Even if there are proxies?
A: YES.
Q: Shares not yet fully paid but
not yet delinquent, are they
entitled to vote?
A: YES.
*Delinquent stock is not entitled
to vote and his presence would
not be taken for purposes of
quorum.
*The only right remain is the
right
to
receive
dividends
subject to the provision of
Section 43.
2. Escrow Shares
*Escrow shares are not entitled
to vote before the fulfillment of
the condition imposed thereon.
3. Unpaid Shares
Code provides that: Holders of
subscribed shares not fully paid
which are not delinquent shall
have all the rights of a
stockholder.
General Rule: The holder of
unpaid shares can exercise the
right to vote.
Exception: If it is provided in
the subscription contract that
such right cannot be exercised
until the subscription is fully
paid.
4. Sequestered Shares
Q: What is the reason for
sequestration process?
A: For investigative purposes;
To avoid wastage dissipation of
assets.
Q: Is PCGG authorized to vote
for the sequestered shares?
A: General Rule: No. PCGG
cannot vote for the sequestered
shares
because
being
a
conservator/administrator,
it
should only perform acts of
administration and not acts of
ownership.
Exception: If there is a strong
evidence that indeed the shares
have been purchased through
public funds.
Requisites:
1. Strong evidence or prima
facie evidence that the
shares are ill-gotten.
2. There is an imminent danger
that the shares will be
dissipated.
Case: Transmiddle East v
CA
Q: During the pendency of
sequestration process, are the
sequestered shares included for
quorum purposes?
A: General Rule: YES.
Q: Who can vote them?
A: General Rule: Stockholder
of record.
*In
Republic
of
the
Philippines v COCOFED, the
SC held that there is a prima
facie evidence that the shares
are purchased with the use of
public funds.
5. Pledgor,
Mortgagor
or
Administrator of Shares
Code provides that: In case of
pledged or mortgaged shares in
stock corporations, the pledgor
or mortgagor shall have the
right to attend and vote at
meetings
of
stockholders,
unless
the
pledgee
or
mortgagee is expressly given by
the pledgor or mortgagor such
right in writing which is
recorded on the appropriate
corporate
books. Executors,
administrators, receivers, and
other legal representatives duly
appointed by the court may
attend and vote in behalf of the
stockholders
or
members
33

Corporation Code
without need of any written
proxy.
Q: Can the pledgee/mortgagee
exercise the right to vote?
A: General Rule:
No. The
right to vote remains to the
owner
thus,
it
is
the
pledgor/mortgagor
that
can
exercise it.
Exception: If there is an
agreement
that
the
pledgee/mortgagee
can
exercise the right to vote.
Case: Calapatia
*Administrator/executor/heirs
have the right to vote even
without prior proxy. But the SEC
requires them to submit letters
of appointment or documents
showing that he has been duly
instituted
as
executor/administrator of the
deceased.
6. Shares Jointly Owned
Code provides that: 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.
D. Concept of Proxy and Voting Trust
Agreement
Proxy is a written authorization given
by one person to another so that the
second person can act for the first.
*Proxy is a representative.
*Relationship: Principal-Agent.
*Proxy is authorized to vote and also
authorized to be present in a meeting.
Functions: For quorum purposes; for
voting purposes.
*In Board meeting, proxy is not

allowed (Sec. 25 of the Corporation
Code).
provides that: 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 5 years at any
one time.
Requisites:
1. Must be in writing
2. Filed
before
the
scheduled
meeting; under the SEC rule, 10
days before the scheduled meeting
*Proxy ensures presence of a quorum
and also approval of corporate acts.
General Rule: Proxy is revocable.
Exception: If proxy is coupled with
interest.
Ways to revoke proxy:
1. By execution of subsequent proxy.
2. If the stockholder concerned would
appear in the scheduled meeting.
Voting Trust Agreement is an
agreement whereby one or more
stockholders transfer their shares of
stocks to a trustee, who thereby
acquires for a period of time the
voting rights (and/or any other rights)
over such shares; and in return, trust
certificates
are
given
to
the
stockholders, which are transferable
like
stock
certificates,
subject
however, to the trust agreement.
PROXY
VOTING TRUST
AGREEMENT
The
stockholder The
stockholder
remains
the ceases to be a
stockholder
of stockholder
of
record
record
Revocable
Irrevocable
General Rule: 5
years
Exception:
If
34

Corporation Code
coupled
interest
with
*The transfer includes the transfer of

legal title.
provides
that:
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 5 years at any
time: Provided, That in the case of a
voting trust specifically required as a
condition in a loan agreement, said
voting trust may be for a period
exceeding
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 SEC;
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. Any other
stockholder may transfer his shares to
the same trustee or trustees upon the
terms and conditions stated in the
voting trust agreement, and thereupon
shall be bound by all the provisions of
said agreement. No voting trust
agreement shall be entered into for
the purpose of circumventing the law
against
monopolies
and
illegal
combinations in restraint of trade or
used for purposes of fraud. Unless
expressly renewed, all rights granted
in a voting trust agreement shall
automatically expire at the end of the
agreed period, and the voting trust
certificates as well as the certificates
of stock in the name of the trustee or
trustees shall thereby be deemed
cancelled and new certificates of stock
shall be reissued in the name of the
transferors. The voting trustee or
trustees may vote by proxy unless the
agreement provides otherwise.
Consequence:
The
stockholder
entering into a voting trust agreement
ceases to be a stockholder of record.
*In case of Lee v CA, the SC held that
the stockholder concerned loses his
legal title to the shares so that if the
stockholder is, at the same time, a
director
of
the
corporation,
automatically he is disqualified to
continue performing the duties of a
director because the law requires each
and every director to have legal, not
beneficial title to at least one share.
E. Derivative
Suit;
Concept
and
Requisites
Derivative Suit is a suit brought by
any stockholder, usually a minority
shareholder, to redress a wrong
committed against the corporation
whenever the responsible officers
refuse to take any action thereon or
are the very person to be sued.
*This prerogative is developed through
jurisprudence.
*This is expressly mandated by Sec.
31 of the Corporation Code.
35

Corporation Code
Q: Why derivative?
A: From the word derive. The one
bringing the suit derives the cause of
action from the corporation.
Q: Who brings the suit?
A: Any stockholder/member usually
minority stockholder.
Q: Whose cause of action?
A: It is the corporations cause of
action.
Q: Are we in violation of the Code?
A: No. Because the power to sue lies
on the board thus when the board
refuses to take action in order to
protect the corporation derivative suit
may be allowed.
Compelling Reason: Inaction of the
officers. Failure to discharge their
responsibilities. Requisites:
1. The stockholder bringing the suit
must be one of record as of the
time the cause of action accrues as
well as of the time the action is
brought unless the cause of action
is a continuing offer.
*The stockholder must implead the
real party in interest, i.e. the
corporation.
*In Chua v CA, the SC held that
the corporation must be impleaded
since it is the real party in interest.
2. The action must be named under
the corporations name
3. General Rule: The stockholder
bringing the suit must have
exhausted
intra-corporate
remedies within the corporation.
Exception: If the very person to
be sued is the responsible officers
themselves.
**This is a condition precedent.
4. The suit is not intended to harass
the defendant, not a nuisance or
harassment suit.
5. Appraisal right must not be an
available remedy.
Individual suit is a suit filed by the
stockholder because his personal right
has been violated. The cause of action
is personal to the stockholder. The
party injured is the stockholder
himself.
Representative suit is a suit filed by

a group of stockholders that suffered
common injury.
SUBSCRIPTION CONTRACT:
A. Ways to become a Stockholder of a
Corporation
1. Subscription contract with the
corporation.
2. Purchase or acquisition of shares
from existing stockholders.
3. Purchase of treasury shares from
the corporation.
*All of them involve shareholdings.
*Subscription is unique because it
involves unissued shares.
B. Concept of Subscription Contract
Subscription Contract is, under
Sec. 60 of the Corporation Code,
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.
*This is strictly regulated by the
Corporation Code.
C. Kinds of Subscription
1. Pre-incorporation subscription
one
entered
into
before
incorporation.
Code provides that: A subscription
for shares of stock of a corporation
still to be formed shall be
irrevocable for a period of at least 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
36

Corporation Code
the articles of incorporation to the
SEC.
*Contracts
between
the
subscribers.
2 Fold Characteristics:
a. It is a contract between
subscribers.
b. May be regarded as continuing
offer on the part of the
subscriber concerned which the
corporation may accept upon
acquisition
of
juridical
personality.
Reason: The corporation is not
yet in existence.
2. Post incorporation subscription
one entered into after the
incorporation for the acquisition of
unissued stock.
*Contracts between the subscribers
and the corporation.
*Creates
a
creditor-debtor
relationship.
D. Consideration for the Issuance of
Shares
provides that: 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 of
the
corporation;
5.
Amounts
transferred from unrestricted retained
earnings to stated capital; and 6.
Outstanding shares exchanged for
stocks in the event of reclassification
of
conversion.
Where
the
consideration is other than actual
cash, or consists of intangible property
such as patents of copyrights, the
valuation thereof shall initially be
determined by the incorporators or the

board of directors, subject to the
approval by the SEC. Shares of stock
shall not be issued in exchange for
promissory notes or future service.
The same considerations provided for
in this section, insofar as they may be
applicable, may be used for the
issuance of bonds by the corporation.
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
representing at least a majority of the
outstanding capital stock at a meeting
duly called for the purpose.
Valid
considerations
for
the
subscription agreements:
1. Cash
2. Property
3. Labor or services actually rendered
to the corporation
4. Prior corporate obligations
5. Amounts
transferred
from
unrestricted retained earnings to
stated capital
6. Outstanding shares in exchange for
stocks
in
the
event
of
reclassification or conversion.
E. Payment of Subscription
Q When payment of the subscription
is made?
A:
Look
into
the
subscription
agreement. If subscription agreement
is silent as to when the amount of
subscription to be paid, the board of
directors may call on all the unpaid
subscribers to pay the remaining
balance of their subscription.
Remedies to enforce payment of
subscription
1. By Extra-judicial sale at public
auction.
2. By judicial action.
3. Collection from cash dividends
and
withholding
of
stock
dividends.
When shares are considered

delinquent
37

Corporation Code
Code provides that: Subject to the
provisions of the contract of
subscription, the board of 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 thereof, in either case
with accrued interest, 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 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.
*If there was no date as to
payment of subscription stated in
the subscription agreement, the
board may call on all the unpaid
subscribers to pay the remaining
balance of their subscription.
Failure to pay within 30 days from
the said date, all stocks covered by
said subscription shall thereupon
become delinquent and shall be
subject to sale unless the board of
directors orders otherwise.
F. Certificate of Stock
Certificate of Stock is a written
evidence of the shares of stock but it
is not the share itself.
*Does not represent credit.
Q: How important is a stock

certificate?
A: It is an evidence of ownership of
stocks.
Q: Who issue stock certificate?
A: Stock certificates must be signed
by the president or vice-president,
countersigned by the secretary or
assistant secretary.
Q: When certificate of stock may be
issued?
A: Sec. 64 of the Corporation Code
states that: 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 is
due, has been paid.
Doctrine
of
Indivisibility
of
Subscription Contract
Doctrine of Indivisibility of
Subscription Contract: Failure to
pay any of the installments due
would necessarily affect all the
other installments because the
subscription is to be treated as
one, whole, entire, indivisible
contract. Upon default of payment
on any of the installment results to
entire
subscription
due
and
demandable.
*The Certificate of Stock cannot be
divided into portions.
*No certificate of stock shall be
issued until the full payment of the
subscription.
*The corporation has an automatic
lien over the shares.
Q: What will happen to the
payment already made by the
subscriber?
A: The payment partially made
shall be applied proportionately to
all the shares covered by the
subscription.
Example:
P10 per share; payment made is
P6000 covering 1000 shares. The
P6000 shall be allocated equally to
all shares. P6 per share has been
paid. P4 per share is the liability.
Certificate
of
Stock,
quasinegotiable
38

Corporation Code
Q: can the stock certificate be
treated as negotiable instrument
under NIL?
A:
No. The requisites are not
complied
with.
There
is
no
engagement to pay in sum certain
in money.
*Negotiable instrument represents
credit. Creditor-debtor relationship
arises.
Q: Are certificates of stock
negotiable?
A: They are negotiable in certain
extent. That is why they are quasinegotiable.
*The title over the share can be
assigned,
transferred
by
indorsement and delivery.
*Due course
holding is not
applicable.
G. Transfer of Shares
If represented by a certificate, the
following
must
be
strictly
complied with:
1. Delivery of the certificate;
2. Indorsement by the owner or his
agent;
3. To be valid to third parties, the
transfer must be recorded in the books
of the corporation.
*If not represented by the certificate,
the shares may be transferred by
means of a deed of assignment and
such is duly recorded in the books of
the corporation.
*To make the transfer binding to the
corporation and third person, the
transfer must be recorded in the stock
and transfer book of the corporation.
Q: Who is the owner of the share?
A: The stockholder of record.
H. Lost and Destroyed Certificate of Stock
provides
that:
The
following
procedure shall be followed for the
issuance
by a corporation of new
certificates of stock in lieu of those
which have been lost, stolen or
destroyed: 1. The registered owner of
a certificate 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
was
lost,
stolen
or
destroyed, the number of shares
represented by such certificate, the
serial number of the certificate 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 3 consecutive weeks
at the expense of the registered owner
of the certificate of stock which has
been lost, stolen or destroyed. The
notice shall state the name of said
corporation,
the
name
of
the
registered owner and the serial
number of said certificate, and the
number of shares represented by such
certificate,
and
that
after
the
expiration of 1 year from the date of
the last publication, if no contest has
been presented to said corporation
regarding said certificate of stock, the
right to make such contest shall be
barred and said corporation shall
cancel in its books the certificate of
stock which has been lost, stolen or
destroyed and issue in lieu thereof
new certificate of stock, unless the
registered owner files a bond or other
security in lieu thereof as may be
required, effective for a period of 1
year, for such amount 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 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 of
stock which has been lost, stolen or
39

Corporation Code
destroyed, the issuance of the new
certificate of stock in lieu thereof shall
be suspended until the final decision
by the court regarding the ownership
of said certificate of stock which has
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 of stock in lieu of those lost,
stolen or destroyed pursuant to the
procedure above-described.
CORPORATE BOOKS AND RECORDS:
A. Books required to be kept by a
Corporation
provides that: Every corporation shall
keep and carefully preserve at its
principal office a record of all business
transactions and minutes of all
meetings of stockholders or members,
or of the board of directors or trustees,
in 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 meetings shall be
open to inspection by any director,
trustee, stockholder or member of the
corporation at reasonable hours on
business days and he may demand,
writing, for a copy of excerpts from

said records or minutes, at his
expense. Any officer or agent of the
corporation who shall refuse to allow
any director, 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 made pursuant
to a resolution or order of the board of
directors or trustees, the liability under
this section for such action shall be
imposed upon the directors or trustees
who voted for such refusal: and
Provided, further, That it shall be a
defense to any action under this
section that the person demanding to
examine and copy excerpts from the
corporations 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 by
any director or stockholder of the
corporation at reasonable hours on
40

Corporation Code
business days. No stock transfer agent
or one engaged principally in the
business of registering transfers of
stocks in behalf of a stock corporation
shall be allowed to operate in the
Philippines unless he secures a license
from the SEC and pays a fee as may
be fixed by the Commission, which
shall be renewable annually: Provided,
That a stock corporation is not
precluded from performing or making
transfer of its own stocks, in which
case all the rules and regulations
imposed on stock transfer agents,
except the payment of a license fee
herein provided, shall be applicable.
*Keeping of books and records are
mandatory.
Books required to be kept:
1. Book of minutes reflects the
decisions and actions of the Board
of Directors/Stockholders.
2. Record of all business transactions
3. Stock
and
Transfer
Book/Membership Book
4. Books of Proceedings
B. Right to Inspect Corporate Books
Basis and Extent of the Right of
Inspection
Q: Is the keeping of these books
mandatory?
A: YES. Section 144 of the
Corporation Code provides penalty
for any violation of the provision of
the Code.
Rationale: Right of inspection
would be futile. Right of inspection
would not be exercised.
Limitations on
the
Right of
Inspection
1. The books and records shall be
open
to
inspection
at
reasonable hours on business
days.
2. The books and records shall not
be
improperly
used
any
information secured through
any prior examination of the
books or records.
3. The stockholders demand must
be in good faith or for a
legitimate purpose.
*Inspection can be done personally

or through agent.
Remedies to Enforce Right of
Inspection
*In case of refusal to exercise the
right of inspection, the stockholder
concerned may file an action for
mandamus before the RTC.
*Can also claim damages.
MERGER AND CONSOLIDATION:

A. Concept of Merger and Consolidation
Merger is one where a corporation
absorbs the other and remains in
existence while the others are
dissolved.
*There is a continuous flow of juridical
personality.
Examples:
A+B=B
A+B+C=C
A+B+C=A
A+B+C=B
Consolidation is one where a new
corporation
is
created,
and
consolidating
corporations
are
extinguished.
Examples:
A+B=C
A+B+C=D
A + B + C = ABC
A + B + C = XYZ
B. Requisites of and Procedure for Merger
and Consolidation
1. Approval by majority vote of the
Board
of
Directors
of
each
corporation.
2. Approval of the stockholders of
each corporation representing 2/3
of the outstanding capital stock.
3. Approval of SEC
Cases: Associated Bank v CA;
Polyan v CA
Procedure:
1. The Board of each corporation shall
draw
up
a
plan
of
merger/consolidation.
2. The plan of merger or consolidation
shall be approved by majority vote
of each board of the concerned
corporations at separate meetings.
3. The plan of merger/consolidation
shall be approved by the majority
41

Corporation Code
vote of the 2/3 of the shareholders
of the outstanding capital stock or
members in case of a non-stock
corporation.
4. Articles of Merger/Consolidation
shall be executed by each of the
constituent corporators, signed by
the President or Vice-President and
certified by the secretary or
assistant secretary.
5. Four copies of the Articles of
Merger or Consolidation together
with favorable recommendation of
a pertinent government agency in
certain cases shall be submitted to
the SEC for approval.
6. The SEC shall issue a certificate or
merger if it is satisfied that the
merger or consolidation of the
corporations concerned is not
inconsistent with the provisions of
this Code and existing laws.
C. Effects of Merger or Consolidation
1. All property, real or personal, and
all receivables due to, and all other
interest
of
each
constituent
corporation, shall be deemed
transferred to and vested in such
surviving
or
consolidated
corporation without further act or
deed.
2. The surviving or consolidated
corporation shall be responsible for
all the liabilities and obligations of
each
of
the
constituent
corporations.
3. Any claim, action or proceeding
pending by or against any of the
constituent corporations may be
prosecuted by or against the
surviving
or
consolidated
corporations.
4. The rights of the creditors or lien
upon the property of any of each
constituent corporation shall not be
impaired by such merger or
consolidation.
5. Dissolution of other corporation
leaving
the
surviving
or
consolidated corporation exists.
Remedy
of
the
dissenting
stockholder:
The
dissenting
stockholder may exercise his appraisal
right.
RIGHT OF APPRAISAL:
A. Concept of Appraisal Right
Appraisal Right is the right to
withdraw from the corporation and
demand payment of the fair value of
his shares after dissenting from
certain
corporate
acts
involving
fundamental changes in corporate
structure.
*Demanding for the reasonable return
of investment.
*Stockholders cannot exercise this
right at his pleasure.
Requisites:
1. The Stockholder has dissented
2. Corporate change must have been
approved by the SEC.
*Any changes that affect the
stockholders right.
*Any changes that concern the
corporations existence.
*Corporate changes that appraisal
right can be availed of.
3. There must have an unrestricted
retained earnings,
*It is not a matter of right.
Reason: If it is a matter of right it
shall lead to the diminution or
depletion of corporate assets which is
violative of the Trust Fund Doctrine.
B. Instances of Appraisal Right
provides that: 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
42

Corporation Code
substantially all of the corporate
property and assets as provided in the
Code; and 3. In case of merger or
consolidation.
C. Requirements for a Valid Exercise of
Appraisal Right
provides that: 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 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
affected, the corporation shall pay to
such stockholder, upon surrender of
the certificate or certificates 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
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 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 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.
Requisites:
1. Any of the instances set forth by
law must be present.
2. Dissenting stockholder must have
voted against the proposed action.
*Abstaining stockholder cannot
claim or exercise his appraisal
right.
3. Demand for payment must be
made within 30 days from the date
vote is taken thereon. Failure to
make demand shall be deemed a
waiver.
4. Price must be based on fair value
as of day prior to date on which
vote was taken
5. Submission
by
withdrawing
stockholder of his shares to the
corporation for notation of being a
dissenting stockholder within 10
days from written demand.
6. Payment must be made only when
the corporation has unrestricted
retained earnings in its books.
7. Stockholder must transfer his
shares to the corporation upon
payment by the corporation.
D. Effects of Exercising Appraisal Right
provides that: From the time of
demand for payment of the fair value
of a stockholders 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.
Effects:
1. All rights accruing to such shares
shall be suspended from the time
of demand for payment of the fair
43

Corporation Code
value of the shares until either the
abandonment of the corporate
action.
2. The dissenting stockholder 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.
*Sec. 86. The dissenting stock can be
sold during the pendency of its
payment.
Remedy in case appraisal right
cannot be exercised: Dispose the
shareholdings.
NON-STOCK CORPORATIONS:
A. Definition and Purposes of a Non-Stock
Corporation
states that: For the purposes of this
Code, a non-stock 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 nonstock corporations, except as may be
covered by specific provisions of this
Title.
*Sec. 87 should be read in harmony
with Sec. 94.
*A Non-stock corporation is not
precluded from engaging in profitbusiness related.
provides that: Non-stock corporations
may be formed or organized for
charitable,
religious,
educational,
professional,
cultural,
fraternal,
literary, scientific, social, civic service,
or similar purposes, like trade,
industry,
agricultural
and
like
chambers, or any combination thereof,
subject to the special provisions of this
Title governing particular classes of
non-stock corporations.
*The purpose of a non-stock
corporation is related to public
welfare.
B. Distinguished from Stock Corporation
Non- stock
Corporation
Public welfare
Board of Trustees
Generally,
the
term of office of
trustees is 3 years
By-laws
can
provide
for
a
different venue as
long as it is within
the Philippines
Member may be
deprived of their
right to designate
proxies
by
provisions in the
articles
of
incorporation
or
by-laws
Reason:
To
promote
camaraderie,
togetherness,
unity
and
familiarity.
Generally,
members
could
directly
elect
officers.
Except
unless
AOI
provides
otherwise.
C. Membership
Corporation
in
Stock
Corporation
For profit
Board of directors
1 year subject to
hold-over
principle
City
or
municipality
where
the
principal office is
located
Proxy is allowed
Election is vested
upon Board of
Directors
Non-Stock

provides that: The right of the
membership of any class or classes to
vote may be limited, broadened or
denied to the extent specified in the
articles of incorporation or the bylaws. Unless so limited, broadened or
denied, each member, regardless of
44

Corporation Code
class, shall be entitled to one vote.
Unless otherwise provided in the
articles of incorporation of the by-laws,
a member may vote by proxy in
Code. 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 SEC.
General Rule: Sec. 58
Exception: Sec. 89. This provision
allows denial of proxy.
Reason: To promote camaraderie,
togetherness, unity and familiarity.
*A member is entitled to 1 vote.
However, such right may be limited,
broadened or denied in the Articles of
Incorporation or By-Laws. Thus, the
By-laws of a non-stock corporation
may provide for the desired voting
rights of members including the
number of votes.
provides that: Membership in a nonstock corporation and all rights arising
therefrom are personal and nontransferable, unless the articles of
incorporation or the by-laws otherwise
provide.
General Rule: Membership is nontransferable.
Exception:
If
the
Articles
of
Incorporation or the By-laws provide
otherwise.
provides that: 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 bylaws.
Rules on Place of Meeting:
General Rule: Sec. 51
Exception: Sec. 93
D. Rule on Distribution of Assets

provides that: In case 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, 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 according to a
plan of distribution adopted pursuant
to 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 bylaws, 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 adopted pursuant to
this Chapter.
Order of distribution:
1. All its creditors shall be paid;
45

Corporation Code
2. Assets held subject to return on
dissolution, shall be delivered back
to their givers;
3. Assets held for charitable, religious
purposes, etc., without a condition
for their return on dissolution, shall
be conveyed to one or more
organizations engaged in similar
activities as dissolved corporation;
and
4. All other assets shall be distributed
to members, as provided for in the
Articles or By-Laws.
provides that: 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 a 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 2/3 of the
members having voting rights present
or represented by proxy at such
meeting.
Q: Would it be possible for a non-stock
corporation to be converted into a
stock corporation by mere amendment
of the Articles of Incorporation?
A: NO. Because it would violate
Section 87 of the Corporation Code
which prohibits distribution of income
as dividends to members.
Reason: Fraudulent to donors
Q: Can a stock corporation be
converted to a non-stock corporation
by mere amendment of the Articles of
Incorporation?
A: YES.
Requirements:
1. Approval of 2/3 of the members
2. Approval of the SEC
Q: What was relinquished?
A: Proprietary rights.
*Appraisal right is available.
CLOSE CORPORATIONS:
A. Concept; Distinguished from Open
Corporations
states that: A corporation, within the
meaning of this Code, is one whose
articles of incorporation provide that:
(1) All the corporations 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 20; (2) all 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 not be
deemed a close corporation when at
least 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
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.
*Whether open or close corporation
depends on its charter.
Case: San Juan Structural
The following must be stated in
the Articles of Incorporation:
46

Corporation Code
1. Membership is limited to 20
2. Transfer or disposition of shares is
subject to specified restrictions
3. Prohibition against offering to the
public of the shares or listing in the
stock exchange.
General Rule: Any corporation may
be incorporated as close corporation.
Exceptions:
1. Mining or oil companies
2. Stock exchanges
3. Banks
4. Insurance companies
5. Public utilities
6. Educational institutions
7. Corporations declared to be vested
with public interest
Distinctions
Corporations:
from
Open
Corporation
Its
articles
of
incorporation
need only contain
the
general
matters
enumerated
in
Section 14 of the
Corporation Code
Close
Corporation
Its articles must
contain
the
special
matters
prescribed
by
Section 97 aside
from the general
matters in Section
14. Failure to do
so precludes a de
jure
close
corporation status
2/3 of its voting
stock or voting
rights must not be
owned
or
controlled
by
another
corporation which
is not a close
corporation
Its articles may
classify
its
directors
Business of the
corporation may
be managed by
the stockholders if
the articles so
provide, but they
are
liable
as
directors
Its articles may
provide that any
or
all
of
the
corporate officers
Its status as an
ordinary
stock
corporation is not
affected by the
ownership of its
voting stock or
voting rights
Its articles cannot
classify
its
directors
Business of the
corporation
is
managed by the
board of directors
The
corporate
officers
and
employees
are
elected
by
a
Open
majority vote of
all the members
of the board of
directors
The pre-emptive
right is subject to
the
exceptions
found in Section
39
of
the
Corporation Code
The
appraisal
right
may
be
exercised by a
stockholder only
in
the
cases
provided
in
Sections 81 and
42
of
the
Corporation Code
Except as regards
redeemable
shares,
the
purchase by the
corporation of its
own stock must
always be made
from
the
unrestricted
retained earnings
Arbitration
of
intracorporate
deadlock by the
SEC is not a
remedy in case
the directors or
stockholders are
so
divided
respecting
the
management
of
the corporation.
or employees may
be
elected
or
appointed by the
stockholders
The pre-emptive
right is subject to
no
exceptions
unless denied in
the articles
The
appraisal
right
may
be
exercised
and
compelled against
the corporation by
a stockholder for
any reason
In case of an
arbitration of an
intracorporate
deadlock by the
SEC,
the
corporation may
be
ordered
to
purchase its own
shares from the
stockholders
regardless of the
availability
of
unrestricted
retained earnings
Arbitration
of
intracorporate
deadlock by the
SEC
is
an
available remedy
in
case
the
directors
or
stockholders are
so
divided
respecting
the
management
of
the corporation.
*In San Juan Structural Steel

Fabricators v CA, the SC held that
the circumstance that around 99.86%
of the total share holding of petitioner
belongs to respondent would not
justify classification of the corporation
as close.
B. Permissive Provisions in the Articles of
Incorporation
47

Corporation Code
provides that: 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 whom
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 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 the purpose of applying
the provisions of this Code; and 3. The
stockholders of 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.
C. Restrictions on Transfer of Shares
provides that: 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.
Option Restriction this restriction
provides that no disposition of shares
will be made unless the shares are
offered first to the corporation or the
stockholders.
*Pre-emptive right is exercisable or
available.
*This restriction is valid and allowed.
Reason: it is the one contemplated by
law.
*Restriction derogates private rights.
Consent Restriction this restriction
provides that no disposition of shares
will be made without the consent of
directors.
*This restriction is not valid.
Reason: It is more onerous and
burdensome.
CORPORATE DISSOLUTION/LIQUIDATION:
A. Methods
of
Voluntary
Corporate
Dissolution and the Requirements
therefor
Dissolution
refers
to
the
extinguishment
of
franchise
or
termination of corporate existence.
Modes of Dissolution:
1. Voluntary dissolution
2. Involuntary dissolution
Methods of Voluntary Dissolution:
1. Voluntary dissolution where no
creditors are affected
2. Voluntary
dissolution
where
3. Shortening of the corporate term
by amending the articles of
incorporation
*Dissolution takes effect upon the
coming of the shortened term.
4. Expiration of corporate term
Voluntary dissolution where no

Code provides that: If dissolution
48

Corporation Code
of a corporation does not prejudice
the rights of any creditor having a
claim against it, the 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
2/3 of the outstanding capital stock
or of at least 2/3 of the members of
a meeting to be held upon call of
the directors or trustees after
publication of the notice of time,
place and object of the meeting for
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, after sending such
notice to each stockholder or
member either by registered mail
or by personal delivery at least 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
SEC shall thereupon issue the
certificate of dissolution.
Requisites:
1. A meeting must be held on the
call of the directors or trustees;
2. Notice of the meeting should be
given to the stockholders by
personal delivery or registered
mail at least 30 days prior to
the meeting;
3. The notice of meeting should
also
be
published
for
3
consecutive
weeks
in
a
newspaper published in the
place;
4. The resolution to dissolve must
be approved by the majority of
the
directors/trustees
and
approved by the stockholders
outstanding capital stock or 2/3

of members;
5. A copy of the resolution shall be
certified by the majority of the
directors
or
trustees
and
countersigned by the secretary;
6. The signed and countersigned
copy will be filed with the SEC
and the latter will issue the
certificate of dissolution
Voluntary
dissolution
where
Code provides that: Where the
dissolution of a corporation may
prejudice the rights of any creditor,
the petition for dissolution 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
two-thirds (2/3) of the outstanding
capital stock or by at least twothirds (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 shall,
by an order reciting the purpose of
the petition, 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) consecutive 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)
49

Corporation Code
public places in such municipality
or city. Upon five (5) day's 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 the 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.
Requisites:
1. Approval of the stockholders
outstanding capital stock or 2/3
of members in a meeting called
for that purpose;
2. Filing of a Petition with the SEC
signed by majority of directors
or trustees or other officers
having the management of its
affairs verified by President or
Secretary or Director. Claims
and demands must be stated in
the petition;
3. If petition is sufficient in form
and substance, the SEC shall
issue an Order fixing a hearing
date for objections;
4. A copy of the Order shall be
published at least once a week
for 3 consecutive weeks in a
newspaper
of
general
circulation or if there is no
newspaper in the municipality
or city of the principal office,
posting for 3 consecutive weeks
in 3 public places is sufficient;
5. Objections must be filed no less
than 30 days nor more than 60
days after the entry of the
order;
6. After the expiration of the time
to file objections, a hearing shall
be conducted upon prior 5 day
notice to hear the objections;
7. Judgment shall be rendered
dissolving the corporation and
directing the disposition of
assets; the judgment may
include
appointment
of
a
receiver.
Shortening of term of existence

Code provides that: 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
of 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.
B. Concept of Involuntary Dissolution and

the Grounds therefor
provides that: A corporation may be
dissolved by the Securities and
Exchange Commission upon filing of a
verified complaint and after proper
notice and hearing on the grounds
provided by existing laws, rules and
regulations.
*This must be done with substantive
and procedural due process.
Grounds:
1. Failure to submit by-laws within the
prescribed period
2. Fraud in the procurement of
Certificate of Registration
3. Misrepresentation
as
to
the
activities that the corporation will
undertake
4. Treasurers affidavit is false
5. Continued inoperation for 5 years
6. Failure to commence business
transactions within 2 years from
issuance
of
certificate
of
registration
7. To some cases, performance of
ultra vires act since it is a violation
to the franchise but depending on
the seriousness or gravity of the
offense
50

Corporation Code
8. Issuance of watered stocks
9. De facto status
10.Failure to keep corporate books and
records depending on the gravity
or seriousness of the offense
11.Violation of its charter
C. Corporate Liquidation
Liquidation is a process by which all
the assets of the corporation are
converted into liquid assets in order to
facilitate the payment of obligations to
creditors, and the remaining balance if
any is to be distributed to the
stockholders.
*Liquidation
takes
place
after
dissolution.
provides that: Every corporation
whose charter expires by its own
limitation or is annulled by forfeiture
or otherwise, or whose corporate
existence for other purposes is
terminated in any other manner, shall
nevertheless be continued as a body
corporate for three (3) years after the
time when it would have been so
dissolved,
for
the
purpose
of
prosecuting and defending suits by or
against it and enabling it to settle and
close its affairs, to dispose of and
convey its property and to distribute
its assets, but not for the purpose of
continuing the business for which it
was established. At any time during
said three (3) years, the corporation is
authorized and empowered to convey
all of its property to trustees for the
benefit of stockholders, members,
creditors, and other persons in
interest. From and after any such
conveyance by the corporation of its
property in trust for the benefit of its
stockholders, members, creditors and
others in interest, all interest which
the corporation had in the property
terminates, the legal interest vests in
the trustees, and the beneficial
interest in the stockholders, members,
creditors or other persons in interest.
Upon the winding up of the corporate
affairs, any asset distributable to any
creditor or stockholder or member

who is unknown or cannot be found
shall be escheated to the city or
municipality where such assets are
located. Except by decrease of capital
stock and as otherwise allowed by this
Code, no corporation shall distribute
any of its assets or property except
upon lawful dissolution and after
payment of all its debts and
liabilities.
D. Methods of Liquidation or Winding Up
1. By Board of Directors
2. Through a trustee to whom the
properties are conveyed
3. By management committee or
rehabilitation receiver
Q: Can the 3 year period be extended?
A: NO.
Reason: Beyond the 3 year period,
there is no corporate existence for all
purposes subject to doctrine of
relation.
Remedy: Before the expiration of the
3
year
period,
appoint
a
trustee/receiver.
Q: During the 3 year period, does the
corporation enjoy corporate existence?
A: YES. But for limited purpose only,
i.e., for liquidation purposes only.
(Limited existence)
Q: May such corporation sue during
the 3 year period?
A: YES. But only when the subject
matter is related to liquidation and
winding up of its remaining affairs.
*In case trustee/receiver is appointed,
he is not bound by the 3 year period.
*In Gelano v CA, the SC held that the
lawyer of the corporation can be
considered as trustee. The term
trustee must be considered in its
generic sense. Anyone who has been
designated by the corporation to act
on its behalf could be considered as
trustee for purposes of pursuing a
claim for and on behalf of the
corporation. A lawyer falls within the
ambit of the word trustee.
51

Corporation Code
*Appointment of trustee can be
inferred from the conduct of the
corporation. This is by Implication.
*If the corporation is the creditor
appoint a trustee. If the corporation is
the debtor appoint a receiver.
Q: What if the corporate properties
have already been distributed among
the
shareholders
without
trustee/receiver?
A: Remedy: Run after the erring
directors and officers.
E. Concept of Rehabilitation; Effects of
Appointment
of
Management
Committee or Receiver
Rehabilitation connotes a reopening
or reorganization. Contemplates a
continuance of corporate existence in
an effort to restore the corporation to
its former successful operation.
*This is a remedy expressly allowed
under Section 6 of PD 902-A.
Purpose: To make the corporation
financially viable again.
Substantive Grounds:
1. When there is imminent danger of
dissipation or wastage of corporate
assets
2. Serious paralyzation of business
which would work to the prejudice
of the stockholders and creditors of
the corporation
*Mere misconduct of an officer is not a
ground for corporate rehabilitation.
*A
corporation
cannot
ask
for
corporate rehabilitation and at the
same time dissolution.
*With the passage of RA8799, the
remedy could now be instituted with
the proper RTC.
Effect: Stay Order - stops or
suspends the enforcement of all
claims for money or otherwise
whether enforcement is by court or
not, until rehabilitation proceedings
are terminated.
Cases: PAL v Garcia; Sobrejuanite;
Lingkod
Manggagawa
ng
Rubberworld
v
Rubberworld
Philippines; RCBC v IAC
*In PAL v Garcia, the SC held that

stay order suspends all enforcement in
all stages of the proceedings.
*In
Lingkod
Manggagawa
sa
Rubberworld
v
Rubberworld
Philippines, the SC held that labor
claims are likewise affected by the
Stop order.
*In RCBC v IAC, the SC held that
whether creditors are secured or not,
stay order will still affect them. The
preference still remains it is just the
enforcement that is suspended.
FOREIGN CORPORATIONS:
A. Concept of Foreign Corporation
Foreign Corporation is a corporation
any law other than those of the
Philippines, and whose laws allow
business in its own country or state.
provides that: For the purposes of this
Code, a foreign corporation is one
any laws other than those of the
Philippines and whose laws allow
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.
Reciprocity Clause provides that the
foreign laws allow Filipino citizens and
corporations to do business in its own
country or state.
B. Tests to Determine Nationality of a
Corporation
1. Incorporation Test when the
corporation
is
incorporated,
organized under the law of other
country.
2. Control Test for purposes of
investment; the citizenship of a
particular corporation is to be
52

Corporation Code
determined by the citizenship of
the controlling stockholders.
C. Concept of Doing Business and the
License Requirement therefor
Substance Test provides that: a
foreign corporation is doing business
in the country if it is continuing the
body or substance of the enterprise of
business for which it was organized.
Continuity Test provides that: doing
business implies a continuity of
commercial
dealings
and
arrangements, and contemplates to
some extent the performance of acts
or works or the exercise of some
functions normally incident to and in
progressive
prosecution
of,
the
purpose and object of its organization.
*Foreign Corporation is required to
obtain license from the SEC to enable
them to do business in the Philippines.
*The foreign corporation must appoint
a resident agent so that court may
acquire jurisdiction over the foreign
corporation
*License is essential if there is an
intention
to
maintain
main
or
substance of the business in the
Philippines or to continue the same.
*Lack of license does not affect the
validity of the transaction.
*License is for regulatory purposes.
*License requirement does not prevent
performance of acts that are isolated
from the main business of the
corporation and there is no intent to
continue the same in the Philippines.
*If the foreign corporation is not
licensed to do business in the
Philippines, General Rule: they have
no access in Philippine Courts
Exceptions:
1. Isolated transactions
2. Infringement of trademark
*International offense can be sued
anywhere.
Cases: Expert Travel Tours v CA;
Home
Insurance
v
Eastern
Shipping Lines
*In Expert Travel Tours v CA, the SC
held that resident agent is not with
authority to execute a certification of
Forum shopping following Sec. 23 of

the Corporation Code.
*In Home Insurance v Eastern
Shipping Lines, the SC held that if at
the time the suit was brought, the
suing foreign entity already have
license to do business in the
Philippines, the suit will be allowed
although at the time the transaction
was made it does not have the
requisite of a license to do so, the
remedial defect is cured.
Cases: Japan Airlines v CA
*In Japan Airlines v CA, the SC held
that the selling of tickets though there
is no aircraft landing in the Philippines
constitute doing business in the
Philippines.
*In Ericks v CA, the SC held that
license is necessary in order the
foreign corporation may sue. In this
case, the court considered the
continuity test, they found out that the
foreign corporation has the intent to
continue business in the Philippines.
*Credit is obtained to maintain longer
transactions.
D. Effects of Being Issued a License
1. They are placed under the
jurisdiction of the Philippine courts
2. They are placed under the same
footing as domestic corporations
3. The public is protected in dealing
with foreign corporations.
E. Revocation and Withdrawal of License
Grounds for Revocation:
1. Failure to file its annual report or
pay any fees as required by the
Corporation Code
2. Failure to appoint and maintain a
resident agent in the Philippines as
required by the Corporation Code
3. Failure, after change of its resident
agent or his address, to submit to
the SEC a statement of such
change
as
required
by
the
Corporation Code
4. Failure to submit to the SEC an
authenticated
copy
of
any
amendment to its articles of
incorporation or by-laws or of any
53

Corporation Code
5.
6.
7.
8.
9.
articles of merger or consolidation

within the time prescribed by the
Corporation Code
A
misrepresentation
of
any
material matter in any application,
report affidavit or other document
submitted by such corporation
pursuant to the provisions of the
Corporation Code
Failure to pay any and all taxes,
imposts, assessments or penalties,
if any, lawfully due to the Philippine
Government or any of its agencies
or political subdivision
Transacting
business
in
the
Philippines outside of the purpose
or purposes for which such
corporation is authorized under its
license
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
Any other ground as would render
it unfit to transact business in the
Philippines.
54

Corporation Code

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Commercial Law Review

A. Statutory definition of a Corporation

created by operation of law, having

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stockholders, directors and

7. Corporations are incapable

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corporation is an alter ego, business

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Creature of enumerated powers,

C. Classification of Private Corporations:

Q: Is it correct to say that a Non-stock

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There is an irregularity or defect

Can be compared to a voidable

*Lim is stopped because he

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registered or protected by law. x x

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corporation affairs and not to

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Directors and trustees

agreements whether fully paid or

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3. Redeemable shares may be

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for the limited period not to

C. Grounds for rejection of the Articles of

4. The percentage of ownership of the

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*The period must be counted from the

A. Levels of Corporate Control

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questions of policy or management

shall stand in his name on the

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stock, a majority of the member

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among as many candidates as he

articles of incorporation or the bylaws provide for a greater majority,

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3. The removal must be by a vote

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so stated in the notice of the

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Case: Carag v NLRC

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3. The contract is fair and

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Corporation is the lessor and XYZ

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Ultra Vires Acts an act committed

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stockholders representing at least

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incorporation when approved by a

residence as shown on the books of

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and control in the corporation; 2. To

case of non-stock corporation by

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disposition of substantially all of

unrestricted retained earnings in its