Corporation Code

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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
LesL of economlc vlablllLy."
*Congress has limited powers in the formation, creation and regulation of a private
corporation.
Purposes:
a. Uniformity
b. 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:
a. Interest in the common good
b. 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 ATTRIBUTES OF A CORPORATION:
A. Statutory definition of a Corporation
Section 2 of the Corporation Code: A corporaLlon ls an arLlflclal belng creaLed by
operation of law, having the right of succession and the powers, attributes and
properties expressly auLhorlzed by law or lncldenL Lo lLs exlsLence."
B. Attributes of a Corporation
1. 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:
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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: Magsaysay-Labrador 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
stockholders, directors and officers.
Case: Francisco v CA
3. The rights belonging to the corporation cannot be invoked by the stockholders,
directors and officers and vice versa.
4. 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 self-incrimination is applicable only to natural persons.
General Rule: Constitutional guarantees are applicable to corporations.
Exceptions:
a. Right against self-incrimination
b. Freedom to travel
Case: Bataan Shipyard v PCGG
5. 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.
6. Generally, the corporation is considered a national of the country where it was
incorporated (Place of incorporation test)
* Exceptions:
a. In times of war, the nationality of a corporation is determined by the
nationality of the controlling stockholders;
b. 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.
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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 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:
a. Stockholder;
b. Group of stockholders;
c. 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
conLravenLlon of plalnLlffs legal rlghLs,
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;
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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.

2. Creature of Law
Article kII ect|on 16 of the 1987 Const|tut|on: "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
Lhe LesL of economlc vlablllLy."
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.

3. 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
Reason: To make the corporation more stable

4. 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
corporaLlons capaclLy ls llmlLed Lo such express, lmplled and lncldenLal 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:
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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 formed, organized or existing under any laws
other than those of the Philippines and whose laws allow Filipino citizens and
corporations to do business in its own country or state. (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.
- 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;
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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:
1. 1he lssuance of a cerLlflcaLe of lncorporaLlon slgnals Lhe blrLh of Lhe corporaLlons
juridical personality;
2. It is an essential requirement for the existence of a corporation, even a de facto one.
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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. 1reasurers AffldavlL.

1. 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 whlch provldes LhaL: 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. ln order Lo prevenL confuslon 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 reglsLered or proLecLed by law. x x x"
Case: Ang Mga Kaanib Ni Jesus Cristo
* 1he phrase Ang Mga kaanlb" are words merely descrlpLlve of membershlp whlle
Lhe phrase a 8ansang lllplnas" are merely descrlpLlve of Lhe 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
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* 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.

2. Purpose Clause
* 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.

3. 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.

4. 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: 1o compel Lhe sLockholders Lo meeL Lhe corporaLlons Lerm.
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.
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* The delay in submitting the application for extension is justifiable.
Keywords:
a. Excusable delay;
b. Beyond the control of the corporation (insuperable intervening causes)

5. Incorporators
* Once an incorporator always an incorporator. (Fait accompli an accomplished
fact which cannot be altered)
* They are the signatories to the Articles of Incorporation.
* 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.

6. 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 non-stock corporation.
* They exercise the powers of the corporation.
Qualifications:
a. Every director must own at least one (1) share of the capital stock;
b. 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.

7. Capitalization
Section 14(8) sLaLes LhaL: lf lL be a sLock corporaLlon, Lhe amounL of lLs auLhorlzed
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
wlLhouL par value, such facL musL be sLaLed."
* 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.
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* 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.

8. Shares of stock
Q: Why shares of stock?
A: Because there is a share on the capitalization.
Economic Value:
a. expectancy on the share in the profits
b. expectancy on the share of assets in case of dissolution/liquidation.
Political Value:
a. vote
b. control in the management of the corporation.
Doctrine of Equality of Shares LxcepL as oLherwlse provlded ln Lhe arLlcles of
incorporation and stated in the certificate of stock, each share shall be equal in all
respecLs Lo every oLher 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 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:
a. No par value shares cannot have an issued price of less than P5.00;
b. The entire consideration for its issuance constitutes capital so that no part
of it should be distributed as dividends;
c. They cannot be used as preferred stocks;
d. They cannot be issued by banks, trust companies, insurance companies,
public utilities and building and loan association (Reason: imbued with
public interest);
e. The articles of incorporation must state the fact that it issued no par value
shares as well as the number of said shares;
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f. Once issued, they are deemed fully paid and non-assessable.
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:
a. Amendment of the articles of incorporation;
b. Adoption and amendment of by-laws;
c. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property;
d. Incurring, creating or increasing bonded indebtedness;
e. Increase or decrease of capital stock;
f. Merger or consolidation of the corporation with another corporation or
other corporations;
g. Investment of corporate funds in another corporation or business in
accordance with the Corporation Code;
h. 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:
a. Delinquent in paying the subscription;
b. lf Lhere was a founders share where lL was glven Lhe rlghL Lo voLe
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 Shares- shares which enjoy preference as to dividends or assets upon
dissolution as stated in the Articles of Incorporation.
Reason: To attract investors.
* Preference does not give them a lien upon the property nor make them
creditors of the corporation.
* Characterized as redeemable shares.
Kinds:
a. 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;
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b. 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;
c. Participating preferred shares the holders thereof are still given the right
to participate with the common stockholders in dividends beyond their
stated preference;
d. Non-participating preferred shares where there is no such participation;
e. 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;
f. 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:
a. Redeemable shares may be issued only when expressly provided for in the
Articles of Incorporation;
b. The terms and conditions affecting said shares must be stated both in the
certificate of stock representing such share;
c. Redeemable shares may be deprived of voting rights in the Articles of
Incorporation, unless otherwise provided in the Corporation Code;
d. The corporation is required to maintain a sinking fund to answer for
redemption price if the corporation is required to redeem;
e. The redeemable shares are deemed retired upon redemption unless
otherwise provided in the Articles of Incorporation;
f. 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. Iounders hares classified as such in the articles of incorporation may be
given certain rights and privileges not enjoyed by the owners of other stocks,
provided that where the exclusive right to vote and be voted for in the election
of directors is granted, it must be for 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.

9. 1reasurers aff|dav|t
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* 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.
* lf Lhe 1reasurers affldavlL ls false such acL ls LanLamounL Lo fraud. (u 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.
* lf Lheres no 1reasurers AffldavlL, Lhe flrsL ground shall apply, l. e., noncompllance
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. 1he 1reasurers AffldavlL concernlng Lhe amounL of caplLal sLock subscrlbed 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 sLaLes LhaL A prlvaLe corporaLlon 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 corporaLlon ls sooner dlssolved ln accordance wlLh 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
Sec. 16 of the Corporation Code sLaLes LhaL: unless oLherwlse prescrlbed by Lhls 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
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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
Sec. 22 of the Corporation Code states that:
lf a corporaLlon does noL 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 determlned by Lhe LC."
* 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 MANAGEMENT OF A CORPORATION:
A. Levels of Corporate Control
1. By Stockholders/Shareholders;
2. By Corporate Officers;
3. By Directors/Trustees

B. Board of Directors/Trustees
1. General Powers of the Board
Sec. 23 of the Corporation Code sLaLes LhaL: unless oLherwlse provlded ln Lhls
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 offlce for one year unLll Lhelr successors are elecLed and quallfled."
Powers of the Board of Directors:
1. Corporate Powers;
2. Manage the Corporation; and
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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.
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.

2. 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.

3. Qualifications of the Board Members
Sec. 23 of the Corporation Code states that:
Lvery dlrecLor musL have aL leasL one share of Lhe caplLal sLock of Lhe corporaLlon
of which he is a director, which share shall stand in his name on the books of the
corporation.
Any director who ceases to be the owner of at least one share of the capital stock of
the corporation of which he is a director shall thereby cease to be a director.
Trustees of non-stock corporations must be members thereof.
A majority of the directors or trustees of all corporations organized under this Code
musL be resldenLs of Lhe hlllpplnes."
* 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 convlcLed 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 corporaLlon."
Reason: The position is based on trust and confidence.
* No citizenship requirement.
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* The By-Laws may provide additional qualifications/disqualifications.

4. Election of the Board Members
Sec. 24 of the Corporation Code provides that:
AL all elecLlons of dlrecLors or LrusLees, Lhere musL be presenL, elLher ln 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 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
caplLal sLock, a ma[orlLy of Lhe member enLlLled Lo voLe."
* 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:
a. Unissued stocks;
b. Non-voting stocks;
c. Treasury Shares.
Methods of Voting:
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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 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.
Sec. 26 of the Corporation 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 facL Lo Lhe LC."

5. Term of Office
* 1he dlrecLors or LrusLees shall hold offlce for one (1) year sub[ecL Lo Lhe hold
over" pr|nc|p|e, 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.

6. Quorum Requirement in Board Meetings
Sec. 25 of the Corporation Code sLaLes LhaL: unless Lhe arLlcles of lncorporaLlon or
the by-laws provide for a greater majority, a majority of the number of directors or
trustees as fixed in the articles of incorporation shall constitute a quorum for the
transaction of corporate business, and every decision of at least a majority of the
directors or trustees present at a meeting at which there is a quorum shall be valid
as a corporate act, except for the election of officers which shall require the vote of
a ma[orlLy of all Lhe members of Lhe 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.
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* 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.

7. Removal of Board Members
Sec. 28 of the Corporation Code states that:
Any dlrecLor or LrusLee of a corporaLlon may be removed from offlce by a voLe 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 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
enLlLled under ec. 24 of Lhls 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.
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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 majority of the outstanding capital stocks or
member signing the demand who may call a meeting for the purpose of removal.

8. Vacancies in the Board
Sec. 29 of the Corporation Code provides that:
Any vacancy occurrlng ln Lhe board of dlrecLors or LrusLees oLher Lhan 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 so stated in the notice of
Lhe meeLlng."
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.

9. Compensation of Board Members
Sec. 30 of the Corporation Code provides that:
ln the absence of any provision in the by-laws fixing their compensation, the
directors shall not receive any compensation, as such directors, except for
reasonable per diems:
Provided, however, that any such compensation other than per diems may be
granted to directors by the vote of the stockholders representing at least a
ma[orlLy of Lhe ouLsLandlng caplLal sLock aL a regular or speclal sLockholders
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
speclal sLockholders meeLlng.
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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
1. 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:
a. 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).
b. As provided by the By-Laws must be clearly stated in the By-Laws that such
office is a corporate office.
c. Those designated by the Board of Directors provided the Board of Directors is
authorized to do so by the By-Laws.
2. 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:
a. If the By-Laws provides that such act is part of the function of such office;
b. If authorized by the Board of Directors
3. 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, the corporation will, as against anyone who has in good faith
dealL wlLh lL Lhrough such agenL, be sLopped from denylng Lhe agenLs auLhorlLy.
Cases: eop|es A|rcargo, Inter-Asia; Lapu-Lapu
*Requires good faith on the part of third person.

D. Liability of Directors, Trustees and Officers
1. Instances when Corporate Officers/Directors are held Solidarily Liable
Sec. 31 of the Corporation Code provides that:
ulrecLors or LrusLees who wllfully and knowlngly voLe for or assenL Lo paLenLly
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
accounL for Lhe proflLs whlch oLherwlse would have accrued Lo Lhe corporaLlon."
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General Rule: Directors/Trustees/Officers are not solidarily liable with the
corporation.
Exceptions:
a. Wilfully and knowingly vote for and assent to patently unlawful acts of the
corporation (Sec. 31).
Case: Carag v NLRC
b. Guilty of gross negligence or bad faith in directing the affairs of the
corporation (Sec. 31).
Case: David v Construction Industry
c. Acquire any personal or pecuniary interest in conflict of their duty (Sec.31).
d. Consent to the issuance of watered stocks or having knowledge thereof, fails
to file objections with the secretary (Sec. 65).
e. Agree or stipulate in a contract to hold himself personally liable with the
corporation.
f. 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.

2. Self-Dealing Directors/Officers
Sec. 32 of the Corporation Code staLes LhaL: A conLracL of Lhe corporaLlon wlLh 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. 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 stockholders representing at least 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
clrcumsLances."
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.
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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 ln Lhe board meeLlng mlghL affecL Lhe sLaLus of Lhe conLracL.

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.

3. Contracts involving Inter-locking Directors
Sec. 33 of the Corporation Code provides that:
LxcepL ln cases of fraud, and provlded Lhe conLracL ls falr and reasonable under Lhe
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
subsLanLlal for purposes of lnLerlocklng dlrecLors."
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
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:
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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 self-dealing directors
because such director holds substantial interest with the other company.

4. Doctrine of Corporate Opportunity
Sec. 34 of the Corporation Code sLaLes LhaL: Where a dlrecLor, by vlrLue of hls
office, acquires for himself a business opportunity which should belong to the
corporation, thereby obtaining profits to the prejudice of such corporation, he must
account to the latter for all such profits by refunding the same, unless his act has
been ratified by a vote of the stockholders owning or representing at least 2/3 of
the outstanding capital stock. This provision shall be applicable notwithstanding the
fact that the director risked his own funds ln Lhe venLure."
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
representing at least 2/3 of the 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
Sec. 35 of the Corporation Code sLaLes LhaL: 1he 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 acLlon for whlch shareholders approval ls also requlred,
(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
(3) a dlsLrlbuLlon of cash dlvldends Lo Lhe shareholders."
Keyword: BY-LAWS
* It must be stated in the By-Laws.
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* 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.
* The decision of the executive 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.
* The decision of the executive 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 acLlon for whlch shareholders approval ls also requlred,
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;
5. A distribution of cash dividends to the shareholders.


CORPORATE POWERS:
A. Doctrine of Limited Capacity; Concept of Ultra Vires Act
Sec. 45 of the Corporation Code sLaLes LhaL: no corporaLlon under Lhls 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
1. Express those expressly authorized by the Corporation Code and other laws, and
its Articles of Incorporation or Charter.
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2. Implied those that can be inferred from or necessary for the exercise of the
express powers.
3. 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
Sec. 36 of the Corporation Code sLaLes LhaL: Lvery corporation incorporated under this
Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or
repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury
stocks in accordance with the provisions of this Code; and to admit members to the
corporation if it be a non-stock corporation;
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 incorporatlon."

1. Amendment of Articles of Incorporation
Sec. 16 of the Corporation Code sLaLes LhaL: unless oLherwlse prescrlbed by Lhls
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
corporaLlon."
* The following are excluded in counting the outstanding capital stock:
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a. Treasury stock;
b. 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 Lhe corporaLlons exlsLence.

2. Extension/Shortening of Corporate Term
Sec. 37 of the Corporation Code sLaLes LhaL: A prlvaLe corporaLlon may exLend or
shorten its term as stated in the articles of incorporation when approved by a
majority vote of the board of directors or trustees and ratified at a meeting by the
stockholders representing at least 2/3 of the 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
provlded ln Lhls code."

3. Increase or Decrease of Capital Stock/ Incurrence, Creation or Increase of Bonded
Indebtedness
Sec. 38 of the Corporation Code states that:
no corporaLlon shall lncrease or decrease lLs caplLal sLock or lncur, creaLe or
increase any bonded indebtedness unless approved by a majority vote of the board
of dlrecLors and, aL a sLockholders meeLlng duly called for Lhe purpose, 2/3 of Lhe
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 Lhe sLockholders meeLlng aL whlch Lhe proposed lncrease or dlmlnuLlon 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
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shown on the books of the corporation and deposited to the addressee in the post
offlce wlLh posLage prepald, 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.

4. Denial of Pre-emptive Right
Sec. 39 of the Corporation Code sLaLes LhaL: All sLockholders of a sLock corporaLlon
shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any
class, in proportion to their respective shareholdings, unless such right is denied by
the articles of incorporation or an amendment thereto:
Provided, That such pre-emptive right shall not extend to shares to be issued in
compliance with laws requiring stock offerings or minimum stock ownership by the
public; or to shares to be issued in good faith with the approval of the stockholders
representing 2/3 of the outstanding capital stock, in exchange for property needed
for corporate purposes or ln paymenL of a prevlously conLracLed debL."
* 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:
a. In order that the stockholder may be able to maintain their relative proportional
voting trend and control in the corporation;
b. 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: Pre-emptive 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.

5. Sale or Disposition of Assets
Sec. 40 of the Corporation Code states that:
ub[ecL Lo Lhe provlslons of exlsLlng laws on lllegal comblnaLlons and monopolles,
a corporation may, by a majority vote of its board of directors or trustees, sell,
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1

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
representing at least 2/3 of the outstanding capital stock, or in case of non-stock
corporation by Lhe voLe of aL leasL 2/3 of Lhe members, ln a sLockholders or
members meeLlng duly called for Lhe 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: 1he dlsposlLlon ls of all or subsLanLlally all of Lhe corporaLlons properLles and
assets.
Q: What kind of disposition involve?
A: 1. Sell;
2. Lease;
3. Exchange;
4. Mortgage;
5. Pledge.
Requirements:
a. Majority vote of the Board.
b. Vote of the Stockholders representing 2/3 of the OCS.
c. The sale does not bring about the illegal combinations and monopolies.
* No need for the approval of the SEC.
Tests:
a. Quantitative Test no statutory test; pertains to the disposition of all assets
b. Qualitative Test there is a statutory test; pertains to the 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?
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1

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:
a. If the buyer expressly agrees to assume the obligations of the seller.
b. If sale amounts to merger or consolidation.
c. If and when application of piercing the veil of corporate entity doctrine is
warranted.
d. If the purchaser becomes a continuation of the seller.
e. Sale was done in violation of the Bulk Sales Law.
Case: PNB v Andrada

6. Acquisition of Corporate Shares
Sec. 41 of the Corporation Code sLaLes LhaL: A sLock corporaLlon shall have Lhe
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 Lhe provlslons of Lhls Code."
Requisites:
a. Unrestricted Retained Earnings
b. 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.

7. Investment of Corporate Funds
Sec. 42 of the Corporation Code states that:
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1

ub[ecL Lo Lhe provlslons of Lhls Code, a prlvaLe corporaLlon may lnvesL lLs funds ln
any other corporation or business or for any purpose other than the primary
purpose for which it was organized when approved by a majority of the board of
directors or trustees and ratified by the stockholders representing at least 2/3 of the
outstanding capital stock, or by at least 2/3 of the members in the case of non-stock
corporaLlons, aL a sLockholders or members meeLlng duly called for Lhe 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:
a. Majority vote of the Board
b. Vote of the stockholders representing 2/3 OCS.

8. Declaration of Dividends
Sec. 43 of the Corporation Code states that:
1he board of dlrecLors of a sLock corporaLlon may declare dlvldends ouL of Lhe
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
speclal reserve for probable conLlngencles."
* 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
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1

* 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 STOCK DIVIDENDS
does noL requlre sLockholders approval 8equlres sLockholders approval
The stockholders receive cash The stockholders receive stocks
Creditor-debtor relationship No creditor-debtor relationship

Requisites for declaration of cash/property dividends:
a. Board approval
b. Unrestricted Retained Earnings
Requisites for declaration of stock dividends:
a. Unrestricted Retained Earnings;
b. Board approval;
c. Ratification by the stockholders.

Q: Why sLockholders raLlflcaLlon ls necessary ln Lhe declaraLlon of sLock dlvldends?
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:
a. Corporate expansion
b. Pursuant to loan agreement
c. 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 non-stockholders.
* If there is date of record Dividends may be received by those persons who are
holders of stocks as of date of record.
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1

* 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.

9. Management Contract
Sec. 44 of the Corporation Code sLaLes LhaL: no corporaLlon 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 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
pertinenL laws or regulaLlons."
Requisite:
General Rule: Majority vote of the OCS
Exception: 2/3 of the OCS
* LCs approval ls noL 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.


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1

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 INCORPORATION BY-LAWS
External affairs Internal Affairs
Affects the status of existence of the
corporation
Does not affect the status of the existence but
has impact on the existence; failure to submit
is a ground for disenfranchisement
Joint decision of the board and
stockholders
General Rule: joint decision
Exception: Delegates the power to amend the
By-Laws to the Board

C. Adoption of By-Laws; Effect of Non-Filing within the prescribed period
Sec. 46 of the Corporation Code sLaLes LhaL: Lvery corporaLlon formed under Lhls Code
must, within 1 month after receipt of official notice of the 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 majority of the outstanding capital 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 By-Laws 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,
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1

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 amendmenLs are ln accordance wlLh 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 By-Law.
* 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
Sec. 47 of the Corporation Code sLaLes LhaL: ub[ecL Lo Lhe provlslons of Lhe
Constitution, this Code, other special laws, and the articles of incorporation, a private
corporation may provide in its By-Laws for:
1. The time, place and manner of calling and conducting regular or special
meetings of the directors or trustees;
2. The time and manner of calling and conducting regular or special meetings of
the stockholders or members;
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
LransacLlon of lLs corporaLe buslness and affalrs."
Requisites:
1. It must be consistent with Corporation Code, other pertinent laws and regulations.
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1

2. It must be consistent with the Articles of Incorporation.
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
Sec. 48 of the Corporation Code provldes LhaL: 1he board of dlrecLors or LrusLees, by a
majority vote thereof, and the owners of at least a majority of the outstanding capital
stock, or at least a majority of the members of a non-stock corporation, at a regular or
special meeting duly called for the purpose, may amend or repeal any By-Laws or adopt
new By-Laws.
The owners of 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 By-
Laws shall be attached to the original By-Laws in the office of the corporation, and a
copy thereof, duly certified under oath by the corporate secretary and a majority of the
directors or trustees, shall be filed with the 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
cerLlflcaLlon LhaL Lhe same are noL lnconslsLenL wlLh Lhls 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
Sec. 49 of the Corporation Code provldes LhaL: MeeLlngs of dlrecLors, LrusLees,
sLockholders, or members may be regular or speclal."
Kinds:
1. Stockholders/Members:
a. Regular meeting
b. Special meeting
2. Directors/Trustees:
a. Regular meeting
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1

b. Special meeting

Sec. 50 of the Corporation Code provides that:
8egular meeLlngs of sLockholders or members shall be held annually on a daLe flxed ln
the by-laws, or if not so fixed, on any date in April of every year as determined by the
board of directors or trustees:
Provided, That written notice of regular meetings shall be sent to all stockholders or
members of record at least 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
presldlng offlcer."
* 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.

Sec. 53 of the Corporation Code provides that:
8egular meeLlngs of Lhe board of dlrecLors or LrusLees of every corporaLlon shall be
held monthly, unless the by-laws provide otherwise.
Special meetings of the board of directors or trustees may be held at any time upon the
call of the president or as provided in the by-laws.
Meetings of directors or trustees of corporations may be held anywhere in or outside of
the Philippines, unless the by-laws provide otherwise.
Notice of regular or special meetings stating the date, time and place of the meeting
must be sent to every director or trustee at least 1 day prior to the scheduled meeting,
unless otherwise provided by the by-laws.
A dlrecLor or LrusLee may walve Lhls requlremenL, elLher expressly or lmplledly."
* 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.
Corporation Code
1

* 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.
4. There must be a previous notice.
5. There must be a quorum.

Sec. 51 of the Corporation Code provides that:
Lockholders or members meeLlngs, wheLher regular or speclal, shall be held ln Lhe
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 presenL or duly represenLed aL Lhe meeLlng."
*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 non-stock 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.

Sec. 52 of the Corporation Code provldes LhaL: unless oLherwlse provlded for ln Lhls
Code or in the by-laws, a quorum shall consist of the stockholders representing a
majority of the outstanding capital stock or a majority of the members in the case of
non-sLock corporaLlons."
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

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Sec. 54 of the Corporation Code provldes LhaL: 1he presldenL shall preslde aL all
meetings of the directors or trustees as well as of the stockholders or members, unless
the by-laws provlde oLherwlse."

D. Right to Vote of Stockholders
1. Instances when voting right not available
Sec. 6 of the Corporation Code provldes LhaL: LxcepL as provlded ln Lhe
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:
a. Delinquent shares
b. Treasury shares
c. Fractional shares
d. Escrow shares

2. Rules on:
a. Delinquent Shares
Sec. 71 of the Corporation Code provldes LhaL: no dellnquenL sLock shall be
voLed for or be enLlLled Lo voLe or Lo represenLaLlon aL any sLockholders
meeting, nor shall the holder thereof be entitled to any of the rights of a
stockholder except the right to dividends in accordance with the provisions of
this Code, until and unless he pays the amount due on his subscription with
accrued lnLeresL, and Lhe cosLs and expenses of adverLlsemenL, lf 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.
b. Escrow Shares
* Escrow shares are not entitled to vote before the fulfillment of the condition
imposed thereon.
c. Unpaid Shares
Sec. 72 of the Corporation Code provldes LhaL: Polders of subscrlbed shares
not fully paid which are not delinquent shall have all the rights of a
sLockholder."
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.
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d. 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.
e. Pledgor, Mortgagor or Administrator of Shares
Sec. 55 of the Corporation Code provides that:
ln case of pledged or morLgaged shares ln sLock corporaLlons, Lhe 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 wlLhouL need of any wrlLLen 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.
f. Shares Jointly Owned
Sec. 56 of the Corporation Code provldes LhaL: ln case of shares of sLock
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:
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Provided, 1haL when Lhe shares are owned ln an and/or" capaclLy by Lhe
holders thereof, any one of the joint owners can vote said shares or appoint
a proxy Lherefor."

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).

Sec. 58 of the Corporation Code provides that:
Lockholders 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 valld and effecLlve for a perlod longer Lhan 3 years aL any one Llme."
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 remains the stockholder
of record
The stockholder ceases to be a
stockholder of record
Revocable Irrevocable
General Rule: 5 years
Exception: If coupled with interest
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* The transfer includes the transfer of legal title.

Sec. 59 of the Corporation Code provides that:
Cne or more sLockholders of a sLock corporaLlon may creaLe a voLlng LrusL for Lhe
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.

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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.
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: lL ls Lhe corporaLlons cause of acLlon.
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. 1he acLlon musL be named under Lhe corporaLlons 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.
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* Subscription is unique because it involves unissued shares.

B. Concept of Subscription Contract
Subscription Contract is, under Sec. 60 of the Corporation Code, any conLracL for Lhe
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
Lhe facL LhaL Lhe parLles refer Lo lL as a purchase or some oLher conLracL."
* This is strictly regulated by the Corporation Code.

C. Kinds of Subscription
1. Pre-incorporation subscription one entered into before incorporation.
Sec. 61 of the Corporation Code provldes LhaL: A subscrlpLlon for shares of sLock 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 the articles of incorporaLlon Lo Lhe LC."
*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
Sec. 62 of the Corporation Code provides that:
Locks shall noL be lssued for a conslderaLlon less Lhan Lhe par or lssued prlce Lhereof.
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.
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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 Lhe 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
QWhen 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.
1. Remedies to enforce payment of subscription
a. By Extra-judicial sale at public auction.
b. By judicial action.
c. Collection from cash dividends and withholding of stock dividends.
2. When shares are considered delinquent
Sec. 67 of the Corporation Code provides that:
ub[ecL Lo Lhe provlslons of Lhe conLracL of subscrlpLlon, Lhe board of dlrecLors 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 Lhe board of dlrecLors orders oLherwlse."
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* 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 sLaLes LhaL: no cerLlflcaLe of sLock shall be lssued Lo
a subscriber until the full amount of his subscription together with interest and expenses
(ln case of dellnquenL shares), lf any ls due, has been pald."

1. 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.
2. Certificate of Stock, quasi-negotiable
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 quasi-negotiable.
* The title over the share can be assigned, transferred by indorsement and delivery.
* Due course holding is not applicable.
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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
Sec. 73 of the Corporation Code provides that:
1he followlng 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 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
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certificate of stock in lieu of those lost, stolen or destroyed pursuant to the
procedure above-descrlbed."


CORPORATE BOOKS AND RECORDS:
A. Books required to be kept by a Corporation
Sec. 74 of the Corporation Code provides that:
Lvery corporaLlon shall keep and carefully preserve aL lLs prlnclpal offlce 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 corporaLlons 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.
Lock corporaLlons musL also keep a book Lo be known as Lhe sLock and Lransfer 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 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:
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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
appllcable."
* 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
1. 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.
2. 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. 1he sLockholders demand musL be ln good falLh or for a leglLlmaLe purpose.
* Inspection can be done personally or through agent.
3. 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.
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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 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.

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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 LhaL affecL Lhe sLockholders rlghL.
*Any changes LhaL concern Lhe corporaLlons 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
Sec. 81 of the Corporation Code provldes LhaL: Any sLockholder of a corporaLlon shall
have the right to dissent and demand payment of the fair value of his shares in the
following instances:
1. In case any amendment to the articles of incorporation has the effect of changing or
restricting the rights of any stockholder or class of shares, or of authorizing
preferences in any respect superior to those of outstanding shares of any class, or of
extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all
or substantially all of the corporate property and assets as provided in the Code; and
3. ln case of merger or consolldaLlon."

C. Requirements for a Valid Exercise of Appraisal Right
Sec. 82 of the Corporation Code provides that:
1he appralsal rlghL may be exerclsed by any sLockholder who shall have voLed agalnsL
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
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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
prlce, Lhe sLockholder shall forLhwlLh Lransfer hls shares Lo Lhe corporaLlon."

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
Sec. 83 of the Corporation Code provides that:
lrom Lhe Llme of demand for paymenL of Lhe falr value of a sLockholders shares unLll
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
resLored."
Effects:
1. All rights accruing to such shares shall be suspended from the time of demand for
payment of the fair 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:
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1

A. Definition and Purposes of a Non-Stock Corporation
Sec. 87 of the Corporation Code states that:
lor Lhe purposes of Lhls 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 non-
sLock corporaLlons, excepL as may be covered by speclflc provlslons of Lhls 1lLle."
* Sec. 87 should be read in harmony with Sec. 94.
* A Non-stock corporation is not precluded from engaging in profit-business related.
Sec. 88 of the Corporation Code provldes LhaL: 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-sLock corporaLlons."
* The purpose of a non-stock corporation is related to public welfare.

B. Distinguished from Stock Corporation
Non- stock Corporation Stock Corporation
Public welfare For profit
Board of Trustees Board of directors
Generally, the term of office of trustees is
3 years
1 year subject to hold-over principle
By-laws can provide for a different venue
as long as it is within the Philippines
City or municipality where the principal
office is located
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.
Proxy is allowed
Generally, members could directly elect
officers. Except unless AOI provides
otherwise.
Election is vested upon Board of Directors

C. Membership in a Non-Stock Corporation
Sec. 89 of the Corporation Code provides that:
1he rlghL of Lhe membershlp of any class or classes Lo voLe may be llmlLed, broadened
or denied to the extent specified in the articles of incorporation or the by-laws.
Unless so limited, broadened or denied, each member, regardless of class, shall be
entitled to one vote.
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Unless otherwise provided in the articles of incorporation of the by-laws, a member may
vote by proxy in accordance with the provisions of this 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 condlLlons whlch may be prescrlbed by, Lhe LC."
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.
Sec. 90 of the Corporation Code provldes LhaL: Membershlp ln a non-stock corporation
and all rights arising therefrom are personal and non-transferable, unless the articles of
incorporation or the by-laws oLherwlse provlde."
General Rule: Membership is non-transferable.
Exception: If the Articles of Incorporation or the By-laws provide otherwise.
Sec. 91 of the Corporation Code provides LhaL: Membershlp shall be LermlnaLed ln Lhe
manner and for the causes provided in the articles of incorporation or the by-laws.
Termination of membership shall have the effect of extinguishing all rights of a member
in the corporation or in its property, unless otherwise provided in the articles of
incorporation or the by-laws."
Rules on Place of Meeting:
General Rule: Sec. 51
Exception: Sec. 93

D. Rule on Distribution of Assets
Sec. 94 of the Corporation Code provldes LhaL: ln case dlssoluLlon 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
by-laws, to the extent that the articles of incorporation or the by-laws, determine the
distributive rights of members, or any class or classes of members, or provide for
distribution; and
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1

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
dlsLrlbuLlon adopLed pursuanL Lo Lhls ChapLer."
Order of distribution:
1. All its creditors shall be paid;
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.

Sec. 95 of the Corporation Code provides that:
A plan provldlng for Lhe dlsLrlbuLlon of asseLs, noL lnconslsLenL wlLh Lhe provlslons 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
havlng voLlng rlghLs presenL or represenLed by proxy aL such meeLlng."
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
Sec. 96 of the Corporation Code states that:
A corporaLlon, wlLhln Lhe meanlng of Lhls Code, ls one whose arLlcles of lncorporaLlon
provide that:
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(1) All Lhe corporaLlons lssued sLock 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 accordance
with the provisions of this Code.
The provisions of this Title shall primarily govern close corporations:
Provided, That the provisions of other Titles of this Code shall apply suppletorily
excepL lnsofar as Lhls 1lLle oLherwlse provldes."
*Whether open or close corporation depends on its charter.
Case: San Juan Structural
The following must be stated in the Articles of Incorporation:
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 from Open Corporations:
Open Corporation Close Corporation
Its articles of incorporation need only
contain the general matters enumerated in
Section 14 of the Corporation Code
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
Its status as an ordinary stock corporation
is not affected by the ownership of its
voting stock or voting rights
2/3 of its voting stock or voting rights must
not be owned or controlled by another
corporation which is not a close
corporation
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1

Its articles cannot classify its directors Its articles may classify its directors
Business of the corporation is managed by
the board of directors
Business of the corporation may be
managed by the stockholders if the articles
so provide, but they are liable as directors
The corporate officers and employees are
elected by a majority vote of all the
members of the board of directors
Its articles may provide that any or all of
the corporate officers or employees may
be elected or appointed by the
stockholders
The pre-emptive right is subject to the
exceptions found in Section 39 of the
Corporation Code
The pre-emptive right is subject to no
exceptions unless denied in the articles
The appraisal right may be exercised by a
stockholder only in the cases provided in
Sections 81 and 42 of the Corporation
Code
The appraisal right may be exercised and
compelled against the corporation by a
stockholder for any reason
Except as regards redeemable shares, the
purchase by the corporation of its own
stock must always be made from the
unrestricted retained earnings
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 not a remedy in case the
directors or stockholders are so divided
respecting the management of the
corporation.
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
Sec. 97 of the Corporation Code provides that:
1he arLlcles of lncorporaLlon of a close corporaLlon may provlde:
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;
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1

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,
lnsLead of by Lhe board of dlrecLors."

C. Restrictions on Transfer of Shares
Sec. 98 of the Corporation Code provides that:
8esLrlcLlons on Lhe rlghL Lo Lransfer shares musL appear ln Lhe arLlcles of lncorporaLlon
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
Lhlrd 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 creditors are affected
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
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1


1. Voluntary dissolution where no creditors are affected
Sec. 118 of the Corporation Code provides that:
lf dlssoluLlon of a corporaLlon does noL pre[udlce Lhe rlghLs of any credlLor havlng 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.
1he LC shall Lhereupon lssue Lhe cerLlflcaLe of dlssoluLlon."
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 representing at least 2/3 of
the 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

2. Voluntary dissolution where creditors are affected
Sec. 119 of the Corporation Code provides that:
Where Lhe dlssoluLlon of a corporaLlon 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 stockholders representing at least two-thirds (2/3) of the outstanding
capital stock or by at least two-thirds (2/3) of the members at a meeting of its
stockholders or members called for that purpose.
If the petition is sufficient in form and substance, the Commission 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.
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1

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) 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
corporaLlon."
Requisites:
1. Approval of the stockholders representing at least 2/3 of the 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.

3. Shortening of term of existence
Sec. 120 of the Corporation Code provldes LhaL: A volunLary dlssoluLlon 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
Lhls Code on llquldaLlon."

B. Concept of Involuntary Dissolution and the Grounds therefor
Sec. 121 of the Corporation Code provldes LhaL: A corporaLlon may be dlssolved by Lhe
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 regulaLlons."
*This must be done with substantive and procedural due process.
Grounds:
1. Failure to submit by-laws within the prescribed period
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2. Fraud in the procurement of Certificate of Registration
3. Misrepresentation as to the activities that the corporation will undertake
4. 1reasurers affldavlL ls 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
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.
Sec. 122 of the Corporation Code provides that:
Lvery corporaLlon whose charLer explres by lLs own llmlLaLlon or ls 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 afLer paymenL of all lLs debLs and llablllLles."

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
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1

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
Lhe amblL of Lhe word LrusLee."
*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.
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1

*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 formed, organized or existing under any law 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 of the Corporation Code provides that:
lor Lhe purposes of Lhls Code, a forelgn corporaLlon ls one formed, organlzed or
existing under any laws other than those of the Philippines and whose laws allow Filipino
citizens and corporations to do business in its own country or state.
It shall have the right to transact business in the Philippines after it shall have obtained a
license to transact business in this country in accordance with this Code and a certificate
of auLhorlLy from Lhe approprlaLe governmenL 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 determined by the citizenship of the controlling stockholders.

C. Concept of "Do|ng 8us|ness" and the L|cense kequ|rement 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,
Corporation Code
1

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 articles of merger or consolidation within the
time prescribed by the Corporation Code
5. 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
6. 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
7. Transacting business in the Philippines outside of the purpose or purposes for which
such corporation is authorized under its license
8. Transacting business in the Philippines as agent of or acting for and in behalf of any
foreign corporation or entity not duly licensed to do business in the Philippines
9. Any other ground as would render it unfit to transact business in the Philippines.