Commercial Law Review
Corporation Code
CORPORATION CODE (BP BLG 68)
*Corporation Code is the general law on Private
Corporation regarding to its creation, formation and
powers.
INTRODUCTION:
A. Historical Background
Effectivity: May 1, 1980
Article XII Section 16 of the 1987
Constitution: “The Congress shall not,
except by general law, provide for the
formation, organization, or regulation of
private corporations. Government-owned or
controlled corporations may be created or
established by special charters in the interest
of the common good and subject to the test
of economic viability.”
*Congress has limited powers in the
formation, creation and regulation of a
private corporation.
Purposes:
1. Uniformity
2. To avoid corruption
General Rule: Congress is prohibited to
enact a law directly forming a private
corporation.
Exception: GOCC may be created by
special charter.
*GOCC is a private corporation with regard
to function and in the meantime a public
corporation with regard to ownership.
Twin Conditions must be present in
forming a GOCC:
1. Interest in the common good
2. Subject to the test of economic viability
- Means can survive alone in the
market; can generate income which
they can use for their operating
expenses
CONCEPT AND ATTRIBUTES OF
CORPORATION:
A. Statutory definition of a Corporation
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Section 2 of the Corporation Code: “A
corporation is an artificial being created by
operation of law, having the right of
succession and the powers, attributes and
properties expressly authorized by law or
incident to its existence.”
B. Attributes of a Corporation
• Artificial Being
- It exist by fiction of law only, hence it
is subject to limitations that are
inherent because of its nature
- A corporation is a juridical person
which exists by process of legal
fiction
Doctrine of Corporate
Entity/Doctrine of Separate
Personality - A corporation is a legal
or juridical person with a personality
separate and apart from its individual
stockholders or members and from
any other legal entities to which it
may be connected
Consequences/Implications of
Separate Personality:
1. It is entitled to own properties in
its own name and its properties
are not the properties of its
stockholders, directors and
officers.
Cases: 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
A and declaration by the Board of
Directors.
2. It can incur obligations and its
obligations are not the obligations
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of its stockholders, directors and Under the Foreign Investment Act

officers. of 1991

Case: Francisco v CA 7. Corporations are incapable of

intent, hence, they cannot commit
3. The rights belonging to the felonies that are punishable
corporation cannot be invoked by under the RPC. They cannot
the stockholders, directors and commit crimes that are
officers and vice versa. punishable under special laws
because crimes are personal in
4. Corporations are entitled to
nature requiring personal
certain constitutional rights, i.e.,
performance of overt acts. In
right against unreasonable
addition, the penalty of
searches and seizure, due
imprisonment cannot be imposed.
process clause.
*Criminal liability falls upon to
*It is not entitled to certain
responsible officers.
constitutional right, i.e., right
against self-incrimination *Responsible officers cannot
particularly production of invoke the doctrine of separate
corporate documents. personality.
*Right against self-incrimination is *Corporations cannot be
applicable only to natural incarcerated.
persons.
8. Moral damages cannot be
General Rule: Constitutional awarded in favor of corporations
guarantees are applicable to because they do not have
corporations. feelings and mental state.
Exceptions: *Corporations can claim damages
such as actual, compensatory,
1. Right against self-
exemplary, loss of earning
incrimination
capacity.
2. Freedom to travel
General Rule: Corporation
Case: Bataan Shipyard v PCGG cannot claim moral damages.

5. It is liable for tort. It is liable when Exception: If the corporation has

the act was committed by the a good reputation and such
officer or agent under express reputation was destroyed.
direction or authority from the
Case: Coastal Pacific Trading v
stockholders or members acting
Southern Rolling Mills, Co.
as a body or generally from the
directors as the governing body. *In Filipinas Broadcasting
Network Inc. v. Ago Medical and
6. Generally, the corporation is
Educational Center, the SC ruled
considered a national of the
that a corporation can recover
country where it was incorporated
moral damages under Article
(Place of incorporation test)
2219(7) if it was the victim of
*Exceptions: 1. In times of war, defamation.
the nationality of a corporation is
Doctrine of Piercing the Veil of Corporate Entity
determined by the nationality of
– The doctrine that a corporation is a legal entity
the controlling stockholders; 2.
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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: 1. Stockholder; 2.
Group of stockholders; 3. Another corporation.
Effects: 1. Stockholders, officers and corporation
are in effect jointly liable; 2. In case of two
corporations, they will be treated as one wherein
they will be both solidarily liable. (Instrumentality
rule)
*There is no effect on the existence of each
corporation as long as their separate entity is used
for legitimate purposes.
Instrumentality Rule – When one corporation is so
organized and controlled and its affairs are
conducted so that it is in fact a mere instrumentality
or adjunct of the other, the fiction of the corporate
entity to the instrumentality may be disregarded.
*The user is another corporation.
Keyword: CONTROL
Requisites: 1. Control, not mere majority or
complete stock control, but complete dominion,
not only of finances but of policy and business in
respect to the transaction attacked so that the
corporate entity as to this transaction had at the
time no separate mind, will or existence of its
own; 2. Such control must have been used by
the defendant to commit fraud or wrong in
contravention of plaintiff’s legal rights; 3. The
aforesaid control and breach of duty must
proximately cause the injury or unjust loss
complained of.
Three cases of piercing the veil:
1. Fraud Cases – when a corporation is used as
a cloak to cover fraud, or to do wrong;
2. Alter Ego Cases – when the corporate entity
is merely a farce since the corporation is an alter
ego, business conduit or instrumentality of a
person or another corporation;
3. Equity cases – when piercing the corporate
fiction is necessary to achieve justice or equity.
Probative Factors of Identity:
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1. Identical shareholders;
2. Same set of officers, directors, or trustees;
3. Use of same premises, properties, tools and
equipments;
4. Engage practically in the same business; 5.
The same manner of keeping books and
records.
*The probative factors of identity are not
conclusive but may be considered as strong
evidence.
• Creature of Law
Article XII Section 16 of the 1987
Constitution: “The Congress shall not,
except by general law, provide for the
formation, organization, or regulation of
private corporations. Government-owned
or controlled corporations may be
created or established by special
charters in the interest of the common
good and subject to the test of economic
viability.”
Concession Theory – It is a principle in
the creation of corporations, under which
a corporation is an artificial creature
without any existence until it has
received the imprimatur of the State
acting according to law, through the
SEC. The life of the corporation is a
concession made by the State.
• Right of Succession
- Capacity to have continuity of
existence despite the changes on the
persons who compose it. Thus, the
personality continues despite the
change of stockholders, members,
board members or officers; death or
disability.
- Also known as Principle of Perpetual
Succession
Reason: To make the corporation more
stable
• Creature of enumerated powers,
attributes and properties
Doctrine of Limited Capacity – No
corporation under the Corporation Code,
shall possess or exercise any corporate
powers, except those conferred by law,
its Articles of Incorporation, those implied
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from express powers and those as are
necessary or incidental to the exercise of
the powers so conferred. The
corporation’s capacity is limited to such
express, implied and incidental powers.
*Corporation may be restrained from
engaging a particular transaction
because it is beyond their powers.
*General Capacity – a corporation can
perform any act for as long as it is lawful,
moral and not contrary to public policy or
order.
Ultra Vires Doctrine – Even if the act is
lawful, moral and not contrary to public
order or policy but such act is not within
the express, implied and incidental
powers of the corporation such act shall
be void for being ultra vires.
*These doctrines are based on Section 2
and Section 45 of the Corporation Code.
C. Classification of Private Corporations:
1. As to existence of Stocks:
Stock Corporation – Corporations which
have capital stock divided into shares and
are authorized to distribute to the holders of
such shares dividends or allotments of the
surplus profits on the basis of the shares
held. (Sec. 3)
Non-stock Corporation – A corporation
where no part of its income is distributable as
dividends to its members, trustees, or
officers, subject to the provisions of this
Code on dissolution. (Sec. 87)
Q: Is it correct to say that a Non-stock
corporation cannot generate income on their
own?
A: NO
2. As to function/organizers:
Public Corporation – for public purpose and
organized by the State.
Private Corporation – for profit making
functions and organized by private persons
alone or with the State
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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
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for the existence of a de facto
corporation.
Requisites:
1. The existence of a valid law under
which it may be incorporated;
2. An attempt in good faith to incorporate;
3. Use of corporate powers;
4. Filing of the Articles of Incorporation;
5. Subsequent compliance with the
requirement of law.
*In both corporations, there must be a
certificate of registration issued.
Doctrine of Corporation by Estoppel – All
persons who assume to act as a corporation
knowing it to be without authority to do so shall
be liable as general partners for all debts,
liabilities and damages incurred or arising as an
result thereof: Provided, however, that when any
such ostensible corporation is sued on any
transaction entered into by it as a corporation or
on any tort committed by it as such, it shall not
be allowed to use as a defense its lack or
corporate personality. (Sec. 21)
- Group of persons which holds itself
out as a corporation and enters into a
contract with a third person on the
strength of such appearance cannot
be permitted to deny its existence in
an action under said contract.
Case: Lim Tong Lim v CA
*Lim is stopped because he benefited
from the transaction.
Remedy: To ran after those persons
responsible for the representations
Essence: They are precluded from
denying their existence by their previous
act or conduct
Holding Corporation – it is one which controls
another as a subsidiary by the power to elect
management. It is one that holds stocks in other
companies for purposes of control rather than for
mere investment.
Affiliate – one related to another by owning or being
owned by common management or by a long-term
lease of its properties or other control device. It may
be the controlled or controlling corporation, or under
common control.
Subsidiary Corporation – one which is so related
to another corporation that the majority of its
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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. The issuance of a certificate of
incorporation signals the birth of the
corporation’s juridical personality;
2. It is an essential requirement for the
existence of a corporation, even a de facto
one.
B. Contents and Form of the Articles of
Incorporation (Secs. 14 and 15)
Contents of Articles of Incorporation:
1. Corporate Name;
2. Purpose Clause;
3. Principal office;
4. Term of existence;
5. Incorporators;
6. Directors or trustees;
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7. Capitalization;
8. Shares of stock;
9. Treasurer’s Affidavit.
• Corporate Name
Purpose: Identification
*Corporation can not adopt any name or
group of words at its pleasure because of
statutory limitation, viz., Sec. 18 of the
Corporation Code which provides that:
“No corporate name may be allowed by
the SEC if the proposed name is
identical or deceptively or confusingly
similar to that of any existing
corporation or to any other name
already protected by law or is patently
deceptive, confusing or contrary to
existing laws. When a change in the
corporate name is approved, the
Commission shall issue an amended
certificate of incorporation under the
amended name.
SEC Guideline ”x x x b. In order to
prevent confusion and difficulties of
administration, supervision and control, if
the proposed name contains a word
already use as a part of the firm name or
style of a registered entity, the proposed
name must contain two other words
different and distinct from the name of
the company already registered or
protected by law. x x x”
Case: Ang Mga Kaanib Ni Jesus
Cristo
*The phrase “Ang Mga Kaanib” are
words merely descriptive of membership
while the phrase “Sa Bansang Pilipinas”
are merely descriptive of the place.
*Both parties are religious institutions
*Both use the acronym H.S.K.
As a rule, generic name or descriptive
word may be used as a corporate name.
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Reason: public domain; can be used by
anyone; public use.
Exception: Doctrine of Secondary
Meaning – a word or phrase originally
incapable of exclusive appropriation with
reference to an article on the market,
because geographically or otherwise
descriptive, might nevertheless have
been used so long and so exclusively by
one producer with reference to his article
that in that trade and to that branch of the
purchasing public, the word or phrase
has come to mean that the article was
his product.
Requisites:
1. Period of use;
2. The use must be exclusive.
Case: Lyceum of the Philippines
*The exclusivity requirement was not
satisfied by Lyceum of the Philippines.
*In case of change of name, the
corporation is not dissolve nor create a
new corporation; it also does not
extinguish the corporate liability.
*Change of name can be done by
amending the Articles of Incorporation.
Procedure:
1. Obtain approval of majority of the
Board and 2/3 stockholders;
2. Submission to the SEC for approval.
• Purpose Clause
*Only one primary purpose. Primary
purpose defines the business activities of
the corporation. It is the ordinary course
of business of the corporation.
*Secondary Purpose is for future
expansion. There is no limit on the
secondary purpose.
*In case the primary purpose is not viable
then secondary purpose may be used.
• Principal Office
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*The principal place of business may
determine the venue of court cases
involving corporations. It may also
determine if service of summons and
notices was properly made. It is also
important for tax purposes (local
taxation).
*The SEC requires the exact address to
be indicated in the Articles of
Incorporation.
*It is the residence of the corporation. It
is where the corporation maintains its
books and records and where normally
the bulk of its business is being
conducted or undertaken.
*For personal action, venue is the
residence.
• Term of Existence
*A corporation has a maximum term of
50 years. It may be extended for a period
not exceeding 50 years in any single
instance.
As a rule, no extension can be made
earlier than 5 years prior to the expiration
of the term.
*No limitations regarding number of
extension can apply.
Reason: To compel the stockholders to
meet the corporation’s term.
Exception: If for compelling reasons,
earlier extension will be allowed.
*During the three year winding up period,
the corporation still has personality but
activities are limited to the liquidation of
the corporation affairs and not to transact
further business.
As a rule, after the term has expired, no
more extensions be allowed or
entertained by the SEC.
Reason: No more period to extend.
Exception: Doctrine of Relation – The
filing and recording of a certificate of
extension after the term cannot relate
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back to the date of the passage of the
resolution of the stockholders to extend
the life of the corporation. However, the
doctrine of relations applies if the failure
to file the application for existence within
the term of the corporation is due to
neglect of the officer with whom the
certificate is required to be filed or to
wrongful refusal on is part to receive it.
*The delay in submitting the application
for extension is justifiable.
Keywords:
1. Excusable delay;
2. Beyond the control of the corporation
(insuperable intervening causes)
• Incorporators
*Once an incorporator always an
incorporator. (Fait accompli – an
accomplished fact which cannot be
altered)
*They are the signatories to the 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.
• Directors and trustees
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*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:
1. Every director must own at least one
(1) share of the capital stock;
2. Majority of the directors or trustees
must be residents of the Philippines.
*Any director who ceases to be the
owner of at least one share of the capital
stock of the corporation of which he is a
director shall thereby cease to be a
director.
*Trustees of non-stock corporations must
be members thereof.
*Initial directors/trustees shall hold office
for one year until their successors are
elected and qualified.
• Capitalization
Section 14(8) states that: “If it be a stock
corporation, the amount of its authorized
capital stock in lawful money of the
Philippines, the number of shares into
which it is divided, and in case the share
are par value shares, the par value of
each, the names, nationalities and
residences of the original subscribers,
and the amount subscribed and paid by
each on his subscription, and if some or
all of the shares are without par value,
such fact must be stated.”
*It is required that at least 25% of the
subscribed capital must be paid and in
no case may be paid-up capital be less
than P5,000.
Authorized Capital Stock – the amount
fixed in the articles of incorporation to be
subscribed and paid by the stockholders
of the corporation.
*Shows the total number of shares
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Subscribed Capital – that portion of the
authorized capital stock that is covered
by subscription agreements whether fully
paid or not.
Paid-Up Capital – the portion of the
authorized capital stock which has been
subscribed and actually paid.
Outstanding Capital Stock – the total
shares of stock issued to subscribers or
stockholders, whether or not fully or
partially paid except treasury shares so
long as there is a binding subscription
agreement.
• Shares of stock
Q: Why shares of stock?
A: Because there is a share on the
capitalization.
Economic Value:
1. expectancy on the share in the profits
2. expectancy on the share of assets in
case of dissolution/liquidation.
Political Value:
1. vote
2. control in the management of the
corporation.
Doctrine of Equality of Shares –
“Except as otherwise provided in the
articles of incorporation and stated in the
certificate of stock, each share shall be
equal in all respects to every other
share.”
- Provides that where the Article of
Incorporation do not provide for any
distinction of the shares of stock, all
shares issued by the corporation are
presumed to be equal and enjoy the
same rights and privileges and are also
subject to the same liabilities.
Classes of Shares:
1. Par Value Share – shares that have
a nominal value in the certificate of
stock.
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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:
1. No par value shares cannot have
an issued price of less than P5.00;
2. The entire consideration for its
issuance constitutes capital so that
no part of it should be distributed as
dividends;
3. They cannot be used as preferred
stocks;
4. They cannot be issued by banks,
trust companies, insurance
companies, public utilities and
building and loan association
(Reason: imbued with public
interest);
5. The articles of incorporation must
state the fact that it issued no par
value shares as well as the number
of said shares;
6. Once issued, they are deemed
fully paid and 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.
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General Rule: Shareholder owning
non-voting shares has no right to
vote.
Exceptions:
1. Amendment of the articles of
incorporation;
2. Adoption and amendment of by-
laws;
3. Sale, lease, exchange, mortgage,
pledge or other disposition of all or
substantially all of the corporate
property;
4. Incurring, creating or increasing
bonded indebtedness;
5. Increase or decrease of capital
stock; 6. Merger or consolidation of
the corporation with another
corporation or other corporations;
7. Investment of corporate funds in
another corporation or business in
accordance with the Corporation
Code; 8. Dissolution of the
corporation.
*The exceptions are exclusive; the
list is a closed list
Statutory Constraint: Sec. 6 of the
Corporation Code
*The corporation cannot provide for
shares with no voting right
General Rule: Only redeemable and
preferred shares are deprived of
voting right.
Exception: Common shares may be
denied of its voting right in the
following instances: 1. Delinquent in
paying the subscription; 2. If there
was a founder’s share where it was
given the right to vote exclusively for
5 years (Sec. 7).
5. Common Shares – the most
common type of shares which enjoy
no preference.
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*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:
1. Preferred shares as to assets –
share which gives the holder thereof
preference in the distribution of the
assets of the corporation in case of
liquidation;
2. Preferred shares as to dividends
– share which gives the holder
thereof preference in the distribution
of the dividends to the extent agreed
upon before any dividends at all are
paid to the holders of common
shares;
3. Participating preferred shares –
the holders thereof are still given the
right to participate with the common
stockholders in dividends beyond
their stated preference;
4. Non-participating preferred
shares – where there is no such
participation;
5. Cumulative preferred shares –
the shareholder is entitled to recover
dividends in arrears. While dividend
declaration may not be compelled,
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once it is declared, the shareholder is
entitled to the said arrears;
6. Non-cumulative preferred
shares – not entitled to arrears only
to present dividends.
7. Redeemable Shares – are those
which permit the issuing corporation
to redeem or purchase its own
shares.
Limitations:
1. Redeemable shares may be
issued only when expressly provided
for in the Articles of Incorporation;
2. The terms and conditions affecting
said shares must be stated both in
the certificate of stock representing
such share;
3. Redeemable shares may be
deprived of voting rights in the
Articles of Incorporation, unless
otherwise provided in the Corporation
Code;
4. The corporation is required to
maintain a sinking fund to answer for
redemption price if the corporation is
required to redeem;
5. The redeemable shares are
deemed retired upon redemption
unless otherwise provided in the
Articles of Incorporation;
6. Unrestricted retained earnings is
not necessary before shares can be
redeemed but there must be
sufficient assets to pay the creditors
and to answer for operations.
8. Treasury Shares – shares which
have been earlier issued as fully paid
and have thereafter been acquired by
the corporation by purchase,
donation, redemption or through
some lawful means.
- Shares which are previously issued
by the corporation but subsequently
reacquired by the corporation.
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*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.
C. Grounds for rejection of the Articles of
*These shares may again be
disposed of for a reasonable price
fixed by the Board of Directors.
9. Founders’ Shares – classified as
such in the articles of incorporation
may be given certain rights and
privileges not enjoyed by the owners
of other stocks, provided that where
the exclusive right to vote and be
voted for in the election of directors is
granted, it must be 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.
• Treasurer’s affidavit
*The SEC shall not accept the Articles of
Incorporation of any stock corporation
unless accompanied by a sworn
statement of the Treasurer elected by the
subscribers showing that at least 25% of
the authorized capital stock of the
corporation has been subscribed, and at
least 25% of the total subscription has
been fully paid to him in actual cash
and/or in property the fair valuation of
which is equal to at least 25% of the said
subscription, such paid up capital being
not less than P5,000.
*If the Treasurer’s affidavit is false such
act is tantamount to fraud. (PD 902-A)
*Fraud on the part of the corporation is a
ground for revocation or suspension of
D. Commencement of Corporate Existence
license depending upon the extent of the
violation committed.
*If there’s no Treasurer’s Affidavit, the
first ground shall apply, i. e.,
noncompliance with the minimum
requirement.
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General Rule: 25% must be subscribed
and 25% must be paid.
Exception: If the law provides otherwise,
i.e., special laws.
Incorporation
1. The articles of incorporation or any
amendment thereto is not substantially in
accordance with the form prescribed
herein;
2. The purpose or purposes of the
corporation are patently unconstitutional,
illegal, immoral, or contrary to
government rules and regulations;
3. The Treasurer’s Affidavit concerning the
amount of capital stock subscribed
and/or paid is false;
4. The percentage of ownership of the
capital stock to be owned by citizens of
the Philippines has not been complied
with as required by existing laws or the
Constitution.
Dual Franchise Requirement: No articles of
incorporation or amendment to articles of
incorporation of banks, banking and quasi-
banking institutions, building and loan
associations, trust companies and other
financial intermediaries, insurance
companies, public utilities, educational
institutions, and other corporations governed
by special laws shall be accepted or
approved by the Commission unless
accompanied by a favourable
recommendation of the appropriate
government agency to the effect that such
articles or amendment is in accordance with
law.
Sec. 19 of the Corporation Code states
that “ A private corporation formed or
organized under this Code commences to
have corporate existence and juridical
personality and is deemed incorporated from
the date the SEC issues a certificate of
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incorporation under its official seal; and
thereupon the incorporators,
stockholders/members and their successors
shall constitute a body politic and corporate
under the name stated in the articles of
incorporation for the period of time
mentioned therein, unless said period is
extended or the corporation is sooner
dissolved in accordance with law.”
*For purposes of determining whether a
corporation enjoys the status of a de facto
corporation, it must have been at least
issued a certificate of registration.
E. Amendment of the Articles of Incorporation
Sec. 16 of the Corporation Code states
that: “Unless otherwise prescribed by this
Code or by special law, and for legitimate
purposes, any provision or matter stated in
the articles of incorporation may be amended
by a majority vote of the board of directors or
trustees and the vote or written assent of the
stockholders representing at least 2/3 of the
outstanding capital stock, without prejudice
to the appraisal right of dissenting
stockholders in accordance with the
provisions of this Code, or the vote or written
assent of at least 2/3 of the members if it be
a non-stock corporation.”
*It is effective upon the approval of the SEC.
*There may be an amendment by inaction.
Amendment by Inaction – Upon filing with
the SEC of the amendment and the
Commission failed to act on it within 6
months from the date of filing for a cause not
attributable to the corporation.
F. Effects of Non-Use of Corporate Charter
Sec. 22 of the Corporation Code states
that: “If a corporation does not formally
organize and commence the transaction of
its business or the construction of its work
within 2 years from the date of its
incorporation, its corporate powers cease
and the corporation shall be deemed
dissolved. However, if the corporation has
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commenced the transaction of its business
but subsequently becomes continuously
inoperative for a period of at least 5 years,
the same shall be a ground for the
suspension or revocation of its corporate
franchise or certificate of incorporation. This
provision shall not apply if the failure to
organize, commence the transaction of its
businesses or the construction of its works,
or to continuously operate is due to causes
beyond the control of the corporation as may
be determined by the SEC.”
*The period must be counted from the
issuance of the Certificate of Incorporation.
*Automatic dissolution is not contemplated
under Section 22. (SEC Opinion).
*Section 22 must be read in conjunction with
Sec 6(1) of PD 902-A which requires that the
corporation must be given the opportunity to
be heard in compliance with the requirement
of due process before the revocation of its
license.
CONTROL AND 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
• General Powers of the Board
Sec. 23 of the Corporation Code states
that: “Unless otherwise provided in this
Code, the corporate powers of all
corporations formed under this Code
shall be exercised, all business
conducted and all property of such
corporations controlled and held by the
board of directors or trustees to be
elected from among the holders of
stocks, or where there is no stock, from
among the members of the corporation,
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who shall hold office for one year until
their successors are elected and
qualified.”
Powers of the Board of Directors:
1. Corporate Powers;
2. Manage the Corporation; and
3. Control over and hold the properties of
the Corporation.
*Board of Directors/Trustees is the
statutory representative of the
corporation.
General Rule: All corporate powers
emanate from the Board of
Directors/Trustees.
Exception: Unless otherwise provided in
this Code. (Limiting Clause)
The limiting clause means that there
are certain corporate matters that cannot
be done by the Board by reason that
such matters fall upon the shareholders;
or corporate matters that cannot be
resolved by the Board alone, i.e., it must
be done with the approval of the
shareholders.
• Business Judgment Rule
Business Judgment Rule – questions
of policy or management are left solely to
the honest decision of officers and
directors of a corporation and the courts
are without authority to substitute their
judgment for the judgment of the board of
directors; the board is the business
manager of the corporation and so long
as it acts in good faith its orders are not
reviewable by the courts or the SEC.
- A resolution or transaction pursued
within the corporate powers and
business operations of the corporation,
and passed in good faith by the board of
directors/trustee, is valid and binding,
and generally the courts have no
authority to review the same and
substitute their own judgment, even
when the exercise of such power may
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cause losses to the corporation or
decrease the profits of a department.
*Great respect is accorded to the
decisions of the Board of
Directors/Trustees.
*The directors are not liable to the
stockholders in performing such acts.
• Qualifications of the Board Members
Sec. 23 of the Corporation Code states
that: “Every director must have at least
one share of the capital stock of the
corporation of which he is a director,
which share shall stand in his name on
the books of the corporation. Any director
who ceases to be the owner of at least
one share of the capital stock of the
corporation of which he is a director shall
thereby cease to be a director. Trustees
of non-stock corporations must be
members thereof. A majority of the
directors or trustees of all corporations
organized under this Code must be
residents of the Philippines.”
*In order to be eligible as director, what is
material is the legal title to and not
beneficial title or ownership of the stocks
appearing on the books of the
corporation.
*The directors/trustees must be natural
persons.
*They must also be of legal age.
*He must possess other qualifications as
may be prescribed in the by-laws of the
corporation.
*Under Sec. 27 of the Corporation
Code: “No person convicted by final
judgment of an offense punishable by
imprisonment for a period exceeding 6
years, or a violation of this Code
committed within 5 years prior to the date
of his election or appointment, shall
qualify as a director, trustee or officer of
any corporation.”
Reason: The position is based on trust
and confidence.
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*No citizenship requirement.
*The By-Laws may provide additional
qualifications/disqualifications.
• Election of the Board Members
Sec. 24 of the Corporation Code
provides that: “At all elections of directors
or trustees, there must be present, either
in person or by representative authorized
to act by written proxy, the owners of a
majority of the outstanding capital stock,
or if there be no capital stock, a majority
of the members entitled to 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,
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no election is held, or if there not present
or represented by proxy, at the meeting,
the owners of a majority of the
outstanding capital stock, or if there be
no capital stock, a majority of the
member entitled to vote.”
*It is the stockholders or corporators who
elect members of the Board of Directors.
*The only procedure required by the
Code is through Election. There can be
no other modes.
*The election must be by ballot if
requested by any voting member or
stockholder.
*A stockholder cannot be deprived in the
articles of incorporation or in the by-laws
of his statutory right to use any of the
methods of voting in the election of
directors.
*No delinquent stock shall be voted.
*It is not required that the candidate
received the majority vote, what the law
provides is only plurality of votes.
*Majority number is required only for the
existence of a quorum.
Not included in outstanding capital
stocks: 1. Unissued stocks;
2. Non-voting stocks;
3. Treasury Shares.
Methods of Voting:
1. Straight Voting – every stockholder
may vote such number of shares for as
many persons as there are directors to
be elected.
2. Cumulative Voting for One
Candidate – a stockholder is allowed to
concentrate his votes and give one
candidate as many votes as the number
of directors to be elected multiplied by
the number of his shares shall equal.
*Example: X has 10 shares in his name;
there are 5 numbers of directors to be
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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 fact to the SEC.”
• Term of Office
*The directors or trustees shall hold
office for one (1) year subject to the
“hold over” principle, i.e., they continue
in office until their successors are elected
and qualified.
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*The one year period does not apply to
directors initially elected for purposes of
incorporation.
• Quorum Requirement in Board Meetings
Sec. 25 of the Corporation Code states
that: “Unless the articles of incorporation
or the by-laws provide for a greater
majority, a majority of the number of
directors or trustees as fixed in the
articles of incorporation shall constitute a
quorum for the transaction of corporate
business, and every decision of at least a
majority of the directors or trustees
present at a meeting at which there is a
quorum shall be valid as a corporate act,
except for the election of officers which
shall require the vote of a majority of all
the members of the board.”
Q: Is the director allowed to let a proxy
attend a board meeting in behalf for
himself?
A: NO. Proxy prohibition.
Reason: Because of their personal
qualifications.
*Quorum requirement should always be
computed based on the number specified
in the Articles of Incorporation regardless
of ensuing vacancies.
*The basis is always the number
specified in the Articles of Incorporation.
*The corporation can modify the number
by providing a different provision in the
articles of incorporation, however, the
law provides that the modification must
be for a number greater than that
provided in the law. It cannot provide for
a number less than the general
requirement of the code.
*For voting purposes, majority of the
member present constituting a quorum.
Except: election of directors.
• Removal of Board Members
Sec. 28 of the Corporation Code states
that: “Any director or trustee of a
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corporation may be removed from office
by a vote of the stockholders holding or
representing at least 2/3 of the
outstanding capital stock, or if the
corporation be a non-stock corporation,
by a vote of at least 2/3 of the members
entitled to vote: Provided, that such
removal shall take place either at a
regular meeting of the corporation or at a
special meeting called for the purpose,
and in either case, after previous notice
to stockholders or members of the
corporation of the intention to propose
such removal at the meeting. A special
meeting of the stockholders or members
of a corporation for the purpose of
removal of directors or trustees, or any of
them, must be called by the secretary on
order of the president or on the written
demand of the stockholders representing
or holding at least a majority of the
outstanding capital stock, or, if it be a
non-stock corporation, on the written
demand of a majority of the members
entitled to vote. Should the secretary fail
or refuse to call the special meeting upon
such demand or fail or refuse to give the
notice, or if there is no secretary, the call
for the meeting may be addressed
directly to the stockholders or members
by any stockholder or member of the
corporation signing the demand. Notice
of the time and place of such meeting, as
well as of the intention to propose such
removal, must be given by publication or
by written notice prescribed in this Code.
Removal may be with or without cause:
Provided, that removal without cause
may not be used to deprive minority
stockholders or members of the right of
representation to which they may be
entitled under Sec. 24 of this Code.”
Requisites:
1. It must take place either at a regular
meeting or special meeting of the
stockholders or members called for the
purpose;
2. There must be previous notice to the
stockholders or member of the intention
to remove;
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3. The removal must be by a vote of the
stockholders representing 2/3
outstanding capital stock or 2/3 of
members;
4. The director may be removed with or
without cause unless he was elected by
the minority, in which case, it is required
that there is cause for removal.
Reason: The functions of directors are
fiduciary in nature.
Requisites for the removal of minority
directors are:
1. Justifiable cause;
2. Satisfaction of the voting
requirements, i.e., 2/3 of OCS or
members.
*It is the secretary of the corporation
upon order of the president or in case
there is no secretary, stockholder
representing majority of the outstanding
capital stocks or member signing the
demand who may call a meeting for the
purpose of removal.
• Vacancies in the Board
Sec. 29 of the Corporation Code
provides that: “Any vacancy occurring in
the board of directors or trustees other
than by removal by the stockholders or
members or by expiration of term, may
be filled by the vote of at least a majority
of the remaining directors or trustees, if
still constituting a quorum; otherwise,
said vacancies must be filled by the
stockholders in a regular or special
meeting called for that purpose. A
director or trustee so elected to fill a
vacancy shall be elected only or the
unexpired term of his predecessor in
office. A directorship or trusteeship to be
filled by reason of an increase in the
number of directors or trustees shall be
filled only by an election at a regular or at
a special meeting of stockholders or
members duly called for the purpose, or
in the same meeting authorizing the
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increase of directors or trustees if so
stated in the notice of the meeting.”
General Rule: Power to elect directors is
vested in the stockholders
Exception: Vacancy occurring in the
board of directors or trustees other than
by removal by the stockholders or
members or by expiration of term may be
filled by the vote of at least a majority of
the remaining directors or trustees if still
constituting a quorum.
• Compensation of Board Members
Sec. 30 of the Corporation Code
provides that: “In the absence of any
provision in the by-laws fixing their
compensation, the directors shall not
receive any compensation, as such
directors, except for reasonable per
diems: Provided, however, that any such
compensation other than per diems may
be granted to directors by the vote of the
stockholders representing at least a
majority of the outstanding capital stock
at a regular or special stockholders’
meeting. In no case shall the total yearly
compensation of directors, as such
directors, exceed 10% of the net income
before income tax of the corporation
during the preceding year.”
General Rule: Directors are not entitled
to receive compensation
Exceptions:
1. When their compensation is fixed in
the by-laws;
2. If compensation is granted to directors
by the vote of the stockholders
representing at least a majority of the
outstanding capital stock at a regular or
special stockholders’ meeting.
Limitation: In no case shall the total
yearly compensation of directors exceed
10% of the net income before income tax
of the corporation during the preceding
year.
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Reason: In order to avoid temptation on
the part of directors to abuse powers by
appropriating compensation packages
since they are in control of corporate
assets.
C. Corporate Officers
• Concept of Corporate Officers
*Corporate powers reside on the Board
of Directors; decision/policymaking
resides on them. Implementation of
rules/policy lies on the corporate officers
Categories:
1. Statutory Corporate Officers –
President (must be a stockholder);
Secretary (must be a resident and citizen
of the Philippines); Treasurer (must be a
resident and citizen of the Philippines).
2. As provided by the By-Laws –
must be clearly stated in the By-Laws
that such office is a corporate office.
3. Those designated by the Board
of Directors provided the Board of
Directors is authorized to do so by the
By-Laws.
• Validity and Binding Effect of Acts of
Corporate Officers
General Rule: No one, even corporate
officers can bind the corporation. It is
only the Board of Directors who has the
authority to bind the corporation.
Exceptions:
1. If the By-Laws provides that such act
is part of the function of such office;
2. If authorized by the Board of Directors
• Doctrine of Apparent Authority
Doctrine of Apparent
Authority/Doctrine of Estoppel –If a
corporation, knowingly permits one of its
officers, or any other agent, to act within
the scope of an apparent authority, it
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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 dealt with it through
such agent, be stopped from denying the
agent’s authority.
Cases: People’s Aircargo; Inter-Asia;
Lapu-Lapu
*Requires good faith on the part of third
person.
D. Liability of Directors, Trustees and Officers
• Instances when Corporate
Officers/Directors are held Solidarily
Liable
Sec. 31 of the Corporation Code
provides that: “Directors or trustees who
wilfully and knowingly vote for or assent
to patently unlawful acts of the
corporation or who are guilty of gross
negligence or bad faith in directing the
affairs of the corporation or acquire any
personal or pecuniary interest in conflict
with their duty as such directors or
trustees shall be liable jointly and
severally for all damages resulting
therefrom suffered by the corporation, its
stockholders or members and other
persons. When a director, trustee or
officer attempts to acquire or acquires, in
violation of his duty, any interest adverse
to the corporation in respect of any
matter which has been reposed in him in
confidence, as to which equity imposes a
disability upon him to deal in his own
behalf, he shall be liable as a trustee for
the corporation and must account for the
profits which otherwise would have
accrued to the corporation.”
General Rule:
Directors/Trustees/Officers are not
solidarily liable with the corporation.
Exceptions:
1. Wilfully and knowingly vote for
and assent to patently unlawful
acts of the corporation (Sec. 31).
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Case: Carag v NLRC
2. Guilty of gross negligence or bad
faith in directing the affairs of the
corporation (Sec. 31).
Case: David v Construction
Industry
3. Acquire any personal or
pecuniary interest in conflict of
their duty (Sec.31).
4. Consent to the issuance of
watered stocks or having
knowledge thereof, fails to file
objections with the secretary
(Sec. 65).
5. Agree or stipulate in a contract to
hold himself personally liable with
the corporation.
6. By virtue of a specific provision of
law such as BP 22; Trust receipts
Law; RA 7832 (Anti-Electricity
Pilferage Act of 1997); Securities
Regulation Code
*In Carag v NLRC, the Supreme Court
held that not any violative of law, the Code
means that violation must have a
corresponding penalty. Patently unlawful act
means that a law declares an act unlawful
and that such law provides penalty for that
unlawful act.
• Self-Dealing Directors/Officers
Sec. 32 of the Corporation Code states
that: “A contract of the corporation with
one or more of its directors or trustees or
officers is voidable, at the option of such
corporation, unless all of the following
conditions are present: 1. That the
presence of such director or trustee in
the board meeting in which the contract
was approved was not necessary to
constitute a quorum for such meeting; 2.
That the vote of such director or trustee
was not necessary for the approval of the
contract; 3. That the contract is fair and
reasonable under the circumstances; and
4. That in case of an officer, the contract
has been previously authorized by the
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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 circumstances.”
Example:
In XYZ Corporation, A is a director. The
corporation acts through the Board of
Directors. XYZ Corporation and A
entered into a lease contract. A as the
lessor and XYZ Corporation as lessee.
The contract was approved by the Board
of Directors.
• Contracts
Q: What is the status of the contract?
General Rule: The contract is voidable.
Exception: If the requisites provided in
Sec. 32 are present.
Exception to the Exception: If
requirement number 1 or 2 is absent, in
the case of a contract with a director or
trustee, such contract may be considered
valid by the ratification of at least 2/3 of
the outstanding capital stock or 2/3 of the
members.
Requisites:
1. The presence of such director or
trustee in the board meeting in which the
contract was approved was not
necessary to constitute a quorum for
such meeting;
2. The vote of such director or trustee
was not necessary for the approval of the
contract;
3. The contract is fair and reasonable
under the circumstances;
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4. In case of an officer, the contract has
been previously authorized by the board
of directors.
Reason: A’s presence in the board
meeting might affect the status of the
contract.
Self-Dealing Directors/Officers –
directors/officers who transact business
with their own corporation.
- This is not prohibited by law.
Interlocking Directors – those who
have been elected as directors in 2 or
more different corporations.
- May be prohibited by the By-Laws
(Gokongwei case).
-Not prohibited by law however there are
consequences.
involving Inter-locking
Directors
Sec. 33 of the Corporation Code
provides that: “Except in cases of fraud,
and provided the contract is fair and
reasonable under the circumstances, a
contract between two or more
corporations having interlocking directors
shall not be invalidated on that ground
alone: Provided, That if the interest of the
interlocking director in one corporation is
substantial and his interest in the other
corporation or corporations is merely
nominal, he shall be subject to the
provisions of the preceding section
insofar as the latter corporation or
corporations are concerned.
Stockholdings exceeding 20% of the
outstanding capital stock shall be
considered substantial for purposes of
interlocking directors.”
Example:
A is a director of two corporation, ABC
Corporation and XYZ Corporation. XYZ
Corporation and ABC Corporation
entered into a lease contract where ABC
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Corporation is the lessor and XYZ
Corporation is the lessee.
Q: Can this contract be invalidated on
the ground that there is an interlocking
director?
A: NO.
Q: What is the status of the contract?
A: General Rule: Contracts between two
or more corporations having interlocking
directors are valid.
Exceptions:
1. Contracts are void if contracts are
fraudulent or if contracts are unfair
and unreasonable.
2. If the By-Laws prohibits
interlocking director.
Case: Gokongwei, Jr. v SEC
*The interest is nominal if his interest is
20% or less of the outstanding capital
stock. The interest is substantial if his
interest is more than 20% of the
outstanding capital stock.
E. Executive Committee
*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.
• Doctrine of Corporate Opportunity
Sec. 34 of the Corporation Code states
that: “Where a director, by virtue of his
office, acquires for himself a business
opportunity which should belong to the
corporation, thereby obtaining profits to
the prejudice of such corporation, he
must account to the latter for all such
profits by refunding the same, unless his
act has been ratified by a vote of the
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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 in the venture.”
General Rule: A director shall refund to
the corporation all the profits he realizes
on a business opportunity which: 1. the
corporation is financially able to
undertake; 2. from its nature, is in line
with corporations business and is of
practical advantage to it; and 3. the
corporation has an interest or a
reasonable expectancy.
Exception: His act has been ratified by a
vote of the stockholders owning or
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.
Sec. 35 of the Corporation Code states
that: “The by-laws of a corporation may
create an executive committee composed of
not less than 3 members of the board to be
appointed by the board. Said committee may
act, by majority vote of all its members, on
such specific matters within the competence
of the board, as may be delegated to it in the
by-laws or on a majority vote of the board,
except with respect to: (1) approval of any
action for which shareholders’ approval is
also required; (2) the filing of vacancies in
the board; (3) the amendment or repeal of
by-laws or the adoption of new by-laws; (4)
the amendment or repeal of any resolution of
the board which by its express terms is not
so amendable or repealable; and (5) a
distribution of cash dividends to the
shareholders.”
Keyword: BY-LAWS
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*It must be stated in the By-Laws.
*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 action for which
shareholders’ approval is also required;
2. The filing of vacancies in the board;
3. The amendment or repeal of by-laws or
the adoption of new by-laws;
4. The amendment or repeal of any
resolution of the board which by its
express terms is not so amendable or
repealable;
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 states
that: “No corporation under this Code shall
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Maria Zarah Villanueva - Castro
possess or exercise any corporate powers
except those conferred by this Code or by its
articles of incorporation and except such as
are necessary or incidental to the exercise of
powers so conferred.”
Ultra Vires Acts – an act committed outside
the object for which a corporation is created
as defined by the law of its organization and
therefore beyond the power conferred upon it
by law.
Effects of Ultra Vires Acts:
1. Executed Contract – courts will not set
aside or interfere with such contracts.
2. Executory Contract – no enforcement
even at the suit of either party.
3. Partly executed and Partly executory
contract – principle against unjust
enrichment shall apply.
B. Classes of Corporate Powers
1. Express
2. Implied
3. Incidental
• Express – those expressly authorized by
the Corporation Code and other laws,
and its Articles of Incorporation or
Charter.
• Implied – those that can be inferred from
or necessary for the exercise of the
express powers.
• Incidental – those that are incidental to
the existence of the corporation.
Doctrine of Necessary Implication – those which
can be reasonably inferred from the express powers
given since they are necessary for the corporation to
perform a particular act are deemed part of such
powers.
C. Statutory Powers of a Corporation and the
Limitations on their Exercise
Sec. 36 of the Corporation Code states
that: “Every corporation incorporated under
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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 incorporation.”
• Amendment of Articles of Incorporation
Sec. 16 of the Corporation Code states
that: “Unless otherwise prescribed by this
Code or by special law, and for legitimate
purposes, any provision or matter stated
in the articles of incorporation may be
amended by a majority vote of the board
of directors or trustees and the vote or
written assent of the stockholders
representing at least 2/3 of the
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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.”
*The following are excluded in counting
the outstanding capital stock: 1. Treasury
stock; 2. Unissued shares.
*Aside from the votes of majority of the
board and assent of the 2/3 of the OCS,
the approval of the SEC is necessary for
the amendment of the AOI.
*There is an implied approval of the SEC,
i.e., failure to act on the application filed
by the corporation within 6 mos.
Q: How to get the approval of the
stockholders?
A: 1. Call for a meeting; 2. Obtain the
written assent of the stockholders.
*In Tan v Sycip, the Supreme Court held
that in case of a non-stock corporation,
membership is personal and non-
transferrable unless the by-laws provides
otherwise. The deceased member is not
entitled to vote.
Four changes in Articles of Incorporation that
require the approval of the stockholders.
1. Extension of corporate term;
2. Shortening of corporate term;
3. Increase or Decrease of Capital Stock;
4. Increase or Decrease of Bonded indebtedness.
*Approval of Stockholders is necessary in these
changes because they are necessary for the
corporation’s existence.
• Extension/Shortening of Corporate Term
Sec. 37 of the Corporation Code states
that: “A private corporation may extend
or shorten its term as stated in the
articles of incorporation when approved
by a majority vote of the board of
directors or trustees and ratified at a
meeting by the stockholders representing
at least 2/3 of the outstanding capital
stock or by at least 2/3 of the members in
22

case of non-stock corporation. Written
notice of the proposed action and of the
time and place of the meeting shall be
addressed to each stockholder or
member at his place of residence as
shown on the books of the corporation
and deposited to the addressee in the
post office with postage prepaid, or
served personally: Provided, That in case
of extension of corporate term, any
dissenting stockholder may exercise his
appraisal right under the conditions
provided in this code.”
• Increase or Decrease of Capital Stock/
Incurrence, Creation or Increase of
Bonded Indebtedness
Sec. 38 of the Corporation Code states
that: “No corporation shall increase or
decrease its capital stock or incur, create
or increase any bonded indebtedness
unless approved by a majority vote of the
board of directors and, at a stockholders’
meeting duly called for the purpose, 2/3
of the outstanding capital stock shall
favor the increase or diminution of the
capital stock, or the incurring, creating or
increasing of any bonded indebtedness.
Written notice of the proposed increase
or diminution of the capital stock or of the
incurring, creating, or increasing of any
bonded indebtedness and of the time
and place of the stockholders’ meeting at
which the proposed increase or
diminution of the capital stock or the
incurring or increasing of any bonded
indebtedness is to be considered , must
be addressed to each stockholder at his
place of residence as shown on the
books of the corporation and deposited
to the addressee in the post office with
postage prepaid, or served personally.
xxx.”
Q: When the corporation increases its
capital stock, is the 25% requirement
necessary? How can it be computed?
A: YES. The SEC ruled that the 25%
applies to the increase amount.
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Maria Zarah Villanueva - Castro
*The corporation is required to maintain a
sinking fund.
Q: What does bonded indebtedness
mean?
A: Requires longer time of payment;
special burden on the corporation;
involves the important assets of the
corporation.
• Denial of Pre-emptive Right
Sec. 39 of the Corporation Code states
that: “All stockholders of a stock
corporation shall enjoy pre-emptive right
to subscribe to all issues or disposition of
shares of any class, in proportion to their
respective shareholdings, unless such
right is denied by the articles of
incorporation or an amendment thereto:
Provided, That such 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 in payment of a previously contracted
debt.”
*Coming from the increased authorized
capital stock.
* Similar to Right of First Refusal
*It is not a matter of right. It can be
denied by the corporation through denial
of such right in the articles of
incorporation.
Purposes:
1. In order that the stockholder may be
able to maintain their relative proportional
voting trend and control in the
corporation; 2. To avoid dilution of their
proportionate voting and control in the
corporation.
General Rule: Pre-emptive right is
available to stockholders.
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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.
• Sale or Disposition of Assets
Sec. 40 of the Corporation Code states
that: “ Subject to the provisions of
existing laws on illegal combinations and
monopolies, a corporation may, by a
majority vote of its board of directors or
trustees, sell, lease, exchange,
mortgage, pledge or otherwise dispose of
all or substantially all of its property and
assets, including its goodwill, upon such
terms and conditions and for such
consideration, which may be money,
stocks, bonds or other instruments for
the payment of money or other property
or consideration, as its board of directors
or trustees may deem expedient, when
authorized by the vote of the
stockholders representing at least 2/3 of
the outstanding capital stock, or in case
of non-stock corporation by the vote of at
least 2/3 of the members, in a
stockholders’ or members’ meeting duly
called for the purpose. Written notice of
the proposed action and of the time and
place of the meeting shall be addressed
to each stockholder or member at his
place of residence as shown on the
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books of the corporation and deposited
to the addressee in the post office with
postage prepaid, or served personally:
Provided, That any dissenting
stockholder may exercise his appraisal
right under the conditions provided in this
Code. A sale or other disposition shall be
deemed to cover substantially all the
corporate property and assets if thereby
the corporation would be rendered
incapable of continuing the business or
accomplishing the purpose for which it
was incorporated. xxx.”
Q: What makes the disposition peculiar?
A: The disposition is of all or
substantially all of the corporation’s
properties and assets.
Q: What kind of disposition involve?
A: 1. Sell; 2. Lease; 3. Exchange; 4.
Mortgage; 5. Pledge.
Requirements:
1. Majority vote of the Board.
2. Vote of the Stockholders
representing 2/3 of the OCS.
3. The sale does not bring about the
illegal combinations and monopolies.
*No need for the approval of the SEC.
Tests:
1. Quantitative Test – no statutory test;
pertains to the disposition of all
assets
2. Qualitative Test – there is a
statutory test; pertains to the
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
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despite the disposition of all its properties
and assets.
Q: Will the buying corporation be made
answerable for the liabilities of the selling
corporation?
A: NO. The two corporations are two
separate personalities thus they are
separate and distinct from each other
hence the buying corporation cannot be
held liable to the obligations of the selling
corporation.
General Rule: The sale of all or
substantially all of the assets of the
corporation does not make the buyer
answerable for the obligations of the
seller.
Exceptions:
1. If the buyer expressly agrees to
assume the obligations of the seller.
2. If sale amounts to merger or
consolidation.
3. If and when application of piercing
the veil of corporate entity doctrine is
warranted.
4. If the purchaser becomes a
continuation of the seller.
5. Sale was done in violation of the Bulk
Sales Law.
Case: PNB v Andrada
• Acquisition of Corporate Shares
Sec. 41 of the Corporation Code states
that: “A stock corporation shall have the
power to purchase or acquire its own
shares for a legitimate corporate purpose
or purposes, including but not limited to
the following cases: Provided, That the
corporation has unrestricted retained
earnings in its books to cover the shares
to be purchased or acquired: 1. To
eliminate fractional shares arising out of
stock dividends; 2. To collect or
compromise an indebtedness to the
corporation, arising out of unpaid
subscription, in a delinquency sale, and
to purchase delinquent shares sold
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during said sale; and 3. To pay
dissenting or withdrawing stockholders
entitled to payment for their shares under
the provisions of this Code.”
Requisites:
1. Unrestricted Retained Earnings
2. The acquisition must be for legitimate
purpose
Q: What is an unrestricted retained
earnings?
A: Earnings not allocated for any other
purpose.
Q: What happens to reacquired shares?
A: General Rule: They are automatically
deemed retired.
Exception: The AOI provides otherwise.
Trust Fund Doctrine – The capital stock, property
and other assets of the corporation are regarded as
equity in trust for the payment of the corporate
creditors. The subscribed capital stock of the
corporation is a trust fund for the payment of debts
of the corporation which the creditors have the right
to look up to satisfy their credits. Corporation may
not dissipate this and the creditors may sue
stockholders directly for the unpaid subscription.
• Investment of Corporate Funds
Sec. 42 of the Corporation Code states
that: “Subject to the provisions of this
Code, a private corporation may invest
its funds in any other corporation or
business or for any purpose other than
the primary purpose for which it was
organized when approved by a majority
of the board of directors or trustees and
ratified by the 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 corporations, at
a stockholders’ or members’ meeting
duly called for the purpose. Written
notice of the proposed investment and
the time and place of the meeting shall
be addressed to each stockholder or
member at his place of residence as
shown on the books of the corporation
and deposited to the addressee in the
post office with postage prepaid, or
served personally: Provided, That any
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dissenting stockholder shall have corporation, such as when there is need

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:
for special reserve for probable
contingencies.”
*This section is exclusive to stock
corporations.
Dividends – represents part of the
earnings of the corporation which the
board has decided to distribute among
the stockholders.

1. Majority vote of the Board *The fact that the corporation has surplus
earning does not mean that it is
2. Vote of the stockholders representing mandated to declare dividends; it is still
2/3 OCS. upon the sound discretion of the board of
directors.
• Declaration of Dividends
Reason: Trust Fund Doctrine
Sec. 43 of the Corporation Code states
that: “The board of directors of a stock *There must be a unrestricted retained
corporation may declare dividends out of earnings before dividends may be
the unrestricted retained earnings which declared.
shall be payable in cash, in property, or
*The board may opt to restrict its
in stock to all stockholders on the basis
earnings, as the earnings may be
of outstanding stock held by them:
allocated to legitimate business purpose.
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 CASH DIVIDENDS STOCK
dividends shall be withheld from the DIVIDENDS
delinquent stockholder until his unpaid does not require Requires
subscription is fully paid: Provided, stockholders’ stockholders’
approval approval
further, That no stock dividend shall be
The stockholders The stockholders
issued without the approval of receive cash receive stocks
stockholders representing not less than Creditor-debtor No creditor-debtor
2/3 of the outstanding capital stock at a relationship relationship
regular or special meeting duly called for
the purpose. Stock corporations are
prohibited from retaining surplus profits in Requisites for declaration of
excess of 100% of their paid-in capital cash/property dividends:
stock, except: 1. When justified by
1. Board approval
definite corporate expansion projects or
programs approved by the board of 2. Unrestricted Retained Earnings
directors; or 2. When the corporation is
prohibited under any loan agreement Requisites for declaration of stock
with any financial institution or creditor, dividends:
whether local or foreign, from declaring 1. Unrestricted Retained Earnings;
dividends without its/his consent, and 2. Board approval;
such consent has not yet been secured; 3. Ratification by the stockholders.
or 3. When it can be clearly shown that Q: Why stockholders’ ratification is
such retention is necessary under necessary in the declaration of stock
special circumstances obtaining in the dividends?

26

A: Because the earnings are capitalized.
It is considered to be a corporate assets.
Q: May the board be compelled to
declare dividends?
A: General Rule: NO.
Exception: Stock corporations are
prohibited from retaining surplus profits in
excess of 100% of their paid-in capital
stock.
Exceptions to the Exception:
1. Corporate expansion
2. Pursuant to loan agreement
3. Special circumstances/contingent
liabilities
Q: Are the stock dividends considered as
watered stocks because the stockholder
concerned does not pay anything
therefor?
A: NO. The unrestricted retained
earnings are considered to be a
consideration thus dividends received
through stocks are not watered stocks.
*The source of payment is the
unrestricted retained earnings.
Q: Are delinquent stockholders entitled to
receive dividends?
A: YES. But only in terms of cash
dividends.
Q: Who are entitled to receive dividends?
A: Stockholders
*In Nielson case, the SC held that
dividends cannot be given to 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.
*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?
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A: NO. The parties are not mutually
creditor-debtor of each other. The
requisites under the Civil Code on legal
compensation are not present.
• Management Contract
Sec. 44 of the Corporation Code states
that: “No corporation shall conclude a
management contract with another
corporation unless such contract shall
have been approved by the board of
directors and by stockholders owning at
least the majority of the outstanding
capital stock, or by at least a majority of
the members in the case of a non-stock
corporation, of both the managing and
the managed corporation, at a meeting
duly called for the purpose: Provided,
That 1. Where a stockholder or
stockholders representing the same
interest of both the managing and the
managed corporations own or control
more than 1/3 of the total outstanding
capital stock entitled to vote of the
managing corporation; or 2. Where a
majority of the members of the board of
directors of the managing corporation
also constitute a majority of the members
of the board of directors of the managed
corporation, then the management
contract must be approved by the
stockholders of the managed corporation
owning at least 2/3 of the total
outstanding capital stock entitled to vote,
or by at least 2/3 of the members in the
case of a non-stock corporation. No
management contract shall be entered
into for a period longer than 5 years for
any one term. The provisions of the next
preceding paragraph shall apply to any
contract whereby a corporation
undertakes to manage or operate all or
substantially all of the business of
another corporation, whether such
contracts are called service contracts,
operating agreements or otherwise:
Provided, however, That such service
contracts or operating agreements which
relate to the exploration, development,
exploitation or utilization of natural
resources may be entered into for such
periods as may be provided by the
pertinent laws or regulations.”
27

Requisite:
General Rule: Majority vote of the OCS
Exception: 2/3 of the OCS
*SEC’s approval is not necessary
*When the corporation enters into a
management contract, appraisal right is
NOT AVAILABLE to any dissenting
stockholder.
Reason: Sound business policy dictates
that it would be better for the corporation,
at the inception of its operation, to be
managed by a company who has been
experienced in a particular kind of
business if the managed corporation
needs the technical expertise, skills,
experiences, background of another
entity.
CORPORATE BY-LAWS:
A. Concept, Use and Nature of By-Laws
By-Laws – relatively permanent and
continuing rules of action adopted by the
corporation for its own government and that
of the individuals composing it and those
having the direction, management and
control of its affairs, in whole or in part, in the
management and control of its affairs and
activities.
Nature: Regulates internal affairs of the
corporation.
B. By-Laws in relation to Articles of
Incorporation
Distinction between By-Laws and Articles
of Incorporation:
By-Laws –is a condition subsequent.
Articles of Incorporation – is a condition
precedent. Essential for corporate existence.
ARTICLES OF BY-LAWS
INCORPORATION
External affairs Internal Affairs
Affects the status of Does not affect the
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Maria Zarah Villanueva - Castro
existence of the status of the
corporation existence but has
impact on the
existence; failure to
submit is a ground for
disenfranchisement
Joint decision of the General Rule: joint
board and decision
stockholders 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 states
that: “Every corporation formed under this
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, public utility, educational
28

institution or other special corporations
governed by special laws, unless
accompanied by a certificate of the
appropriate government agency to the effect
that such By-Laws or amendments are in
accordance with law.”
*Submission of By-Law is not a requirement
for acquisition of corporate existence,
however, for the corporation to be able to
continue its corporate existence, the
corporation is required to submit the
corporate 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 states
that: “Subject to the provisions of the
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Maria Zarah Villanueva - Castro
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 transaction of its
corporate business and affairs.”
Requisites:
1. It must be consistent with Corporation
Code, other pertinent laws and
regulations.
2. It must be consistent with the 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 provides
that: “The board of directors or trustees, by a
majority vote thereof, and the owners of at
least a majority of the outstanding capital
stock, or at least a majority of the members
of a non-stock corporation, at a regular or
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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
certification that the same are not
inconsistent with this Code.”
F. By-Laws in relation to Third Parties
*In China Banking Corporation v CA, the
SC held that in the absence of evidence that
China Bank is aware of the provisions of the
By-Laws, China Bank is not bound to
observe the provisions of the By-Laws.
Hence, China Bank must be allowed to
register the shares in its name.
General Rule: Third parties are not affected
by the By-Laws.
Exception: If the third party has actual
knowledge of the provisions of the By-Laws.
CORPORATE MEETINGS:
A. Kinds of Corporate Meetings
Sec. 49 of the Corporation Code provides
that: “Meetings of directors, trustees,
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stockholders, or members may be regular or
special.”
Kinds:
a. Stockholders/Members:
1. Regular meeting
2. Special meeting
b. Directors/Trustees:
1. Regular meeting
2. Special meeting
Sec. 50 of the Corporation Code provides
that: “Regular meetings of stockholders or
members shall be held annually on a date
fixed in the by-laws, or if not so fixed, on any
date in April of every year as determined by
the board of directors or trustees: Provided,
That written notice of regular meetings shall
be sent to all stockholders or members of
record at least 2 weeks prior to the meeting,
unless a different period is required by the
by-laws. Special meetings of stockholders or
members shall be held at any time deemed
necessary or as provided in the by-laws:
Provided, however, That at least 1 week
written notice shall be sent to all
stockholders or members, unless otherwise
provided in the by-laws. Notice of any
meeting may be waived, expressly or
impliedly, by any stockholder or member.
Whenever, for any cause, there is no person
authorized to call a meeting, the SEC, upon
petition of a stockholder or member on a
showing of good cause therefor, may issue
an order to the petitioning stockholder or
member directing him to call a meeting of the
corporation by giving proper notice required
by this Code or by the by-laws. The
petitioning stockholder or member shall
preside thereat until at least a majority of the
stockholders or members present have been
chosen one of their number as presiding
officer.”
*Regular meeting of stockholders/members
shall be held annually on a date fixed in the
by-laws or if not so fixed, on any date in April
of every year. Written notice of regular
meetings shall be sent 2 weeks prior to the
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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: “Regular meetings of the board of
directors or trustees of every corporation
shall be held monthly, unless the by-laws
provide otherwise. Special meetings of the
board of directors or trustees may be held at
any time upon the call of the president or as
provided in the by-laws. Meetings of
directors or trustees of corporations may be
held anywhere in or outside of the
Philippines, unless the by-laws provide
otherwise. Notice of regular or special
meetings stating the date, time and place of
the meeting must be sent to every director or
trustee at least 1 day prior to the scheduled
meeting, unless otherwise provided by the
by-laws. A director or trustee may waive this
requirement, either expressly or impliedly.”
*Regular meetings of directors/trustees shall
be held monthly unless the by-laws provide
otherwise.
*Special meetings of directors/trustees may
be held at any time upon the call of the
president or as provided in the by-laws.
*Meetings of directors or trustees may be
held anywhere in or outside of the
Philippines unless the by-laws provide
otherwise.
*Notice of regular or special meetings stating
the date, time and place of the meeting must
be sent to every director or trustee at least 1
day prior to the scheduled meeting unless
otherwise provided by the by-laws.
B. Requirements of a Meeting
1. It must be held at the proper place.
2. It must be held at the stated date and at
the appointed time or at a reasonable
time thereafter.
3. It must be called by the proper person.
4. There must be a previous notice.
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5. There must be a quorum.
Sec. 51 of the Corporation Code provides
that: “Stockholders’ or members’ meetings,
whether regular or special, shall be held in
the city or municipality where the principal
office of the corporation is located, and if
practicable in the principal office of the
corporation: Provided, That Metro Manila
shall, for purposes of this section, be
considered a city or municipality. Notice of
meetings shall be in writing, and the time and
place thereof stated therein. All proceedings
had and any business transacted at any
meeting of the stockholders or members, if
within the powers or authority of the
corporation, shall be valid even if the
meeting be improperly held or called,
provided all the stockholders or members of
the corporation are present or duly
represented at the meeting.”
*Applies to both stock and non-stock
corporations.
General Rule: The meeting must be held in
the city or municipality where the principal
office is located.
Exception: Sec. 93 on non-stock
corporations, the By-Laws may provide
different venue for their meeting.
*A casual reading of section 51 would say
that a corporation cannot provide any other
place for the meeting of stockholders. But in
case of a 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 provides
that: “Unless otherwise provided for in this
Code or in the by-laws, a quorum shall
consist of the stockholders representing a
majority of the outstanding capital stock or a
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majority of the members in the case of non-
stock corporations.”
General Rule: Majority of the OCS or
Majority of the members
Exception: Unless otherwise provided by
the Code or by the By-Laws.
*In Tan v Sycip, deceased member is not
entitled to vote
Sec. 54 of the Corporation Code provides
that: “The president shall preside at all
meetings of the directors or trustees as well
as of the stockholders or members, unless
the by-laws provide otherwise.”
C. Right to Vote of Stockholders
• Instances when voting right not available
Sec. 6 of the Corporation Code
provides that: “Except as provided in the
immediately preceding paragraph, the
vote necessary to approve a particular
corporate act as provided in this Code
shall be deemed to refer only to stocks
with voting rights.”
Instances when voting right is not
available:
1. Delinquent shares
2. Treasury shares
3. Fractional shares
4. Escrow shares
• Rules on:
1. Delinquent Shares
Sec. 71 of the Corporation Code
provides that: “No delinquent stock
shall be voted for or be entitled to
vote or to representation at any
stockholders’ meeting, nor shall the
holder thereof be entitled to any of
the rights of a stockholder except the
right to dividends in accordance with
the provisions of this Code, until and
unless he pays the amount due on
his subscription with accrued interest,
and the costs and expenses of
advertisement, if any.”
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*Delinquency arises upon default in
payment of subscription.
Q: Are they included for quorum and
voting purposes?
A: NO.
Q: Even if there are proxies?
A: YES.
Q: Shares not yet fully paid but not
yet delinquent, are they entitled to
vote?
A: YES.
*Delinquent stock is not entitled to
vote and his presence would not be
taken for purposes of quorum.
*The only right remain is the right to
receive dividends subject to the
provision of Section 43.
2. Escrow Shares
*Escrow shares are not entitled to
vote before the fulfillment of the
condition imposed thereon.
3. Unpaid Shares
Sec. 72 of the Corporation Code
provides that: “Holders of subscribed
shares not fully paid which are not
delinquent shall have all the rights of
a stockholder.”
General Rule: The holder of unpaid
shares can exercise the right to vote.
Exception: If it is provided in the
subscription contract that such right
cannot be exercised until the
subscription is fully paid.
4. Sequestered Shares
Q: What is the reason for
sequestration process?
A: For investigative purposes; To
avoid wastage dissipation of assets.
Q: Is PCGG authorized to vote for
the sequestered shares?
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A: General Rule: No. PCGG cannot
vote for the sequestered shares
because being a and vote in behalf of the stockholders
conservator/administrator, it should
only perform acts of administration
and not acts of ownership.
Exception: If there is a strong
evidence that indeed the shares have
been purchased through public
funds.
Requisites:
1. Strong evidence or prima facie
evidence that the shares are ill-
gotten.
2. There is an imminent danger that
the shares will be dissipated.
Case: Transmiddle East v CA
Q: During the pendency of
sequestration process, are the
sequestered shares included for
quorum purposes?
A: General Rule: YES.
Q: Who can vote them?
A: General Rule: Stockholder of
record.
*In Republic of the Philippines v
COCOFED, the SC held that there is
a prima facie evidence that the
shares are purchased with the use of
public funds.
5. Pledgor, Mortgagor or Administrator
of Shares
Sec. 55 of the Corporation Code
provides that: “In case of pledged or
mortgaged shares in stock
corporations, the pledgor or
mortgagor shall have the right to
attend and vote at meetings of
stockholders, unless the pledgee or
mortgagee is expressly given by the
pledgor or mortgagor such right in
writing which is recorded on the
appropriate corporate books.
Executors, administrators, receivers,
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and other legal representatives duly
appointed by the court may attend
or members without need of any
written proxy.”
Q: Can the pledgee/mortgagee
exercise the right to vote?
A: General Rule: No. The right to
vote remains to the owner thus, it is
the pledgor/mortgagor that can
exercise it.
Exception: If there is an agreement
that the pledgee/mortgagee can
exercise the right to vote.
Case: Calapatia
*Administrator/executor/heirs have
the right to vote even without prior
proxy. But the SEC requires them to
submit letters of appointment or
documents showing that he has been
duly instituted as
executor/administrator of the
deceased.
6. Shares Jointly Owned
Sec. 56 of the Corporation Code
provides that: “In case of shares of
stock owned jointly by two or more
persons, in order to vote the same,
the consent of all the co-owners shall
be necessary, unless there is a
written proxy, signed by all the co-
owners, authorizing one or some of
them or any other person to vote
such share or shares: Provided, That
when the shares are owned in an
“and/or” capacity by the holders
thereof, any one of the joint owners
can vote said shares or appoint a
proxy therefor.”
D. Concept of Proxy and Voting Trust
Agreement
Proxy is a written authorization given by one
person to another so that the second person
can act for the first.
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*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: “Stockholders and members may vote
in person or by proxy in all meetings of
stockholders or members. Proxies shall be in
writing, signed by the stockholder or member
and filed before the scheduled meeting with
the corporate secretary. Unless otherwise
provided in the proxy, it shall be valid only for
the meeting for which it is intended. No proxy
shall be valid and effective for a period
longer than 5 years at any one time.”
Requisites:
1. Must be in writing
2. Filed before the scheduled meeting;
under the SEC rule, 10 days before the
scheduled meeting
*Proxy ensures presence of a quorum and
also approval of corporate acts.
General Rule: Proxy is revocable.
Exception: If proxy is coupled with interest.
Ways to revoke proxy:
1. By execution of subsequent proxy.
2. If the stockholder concerned would
appear in the scheduled meeting.
Voting Trust Agreement is an agreement
whereby one or more stockholders transfer
their shares of stocks to a trustee, who
thereby acquires for a period of time the
voting rights (and/or any other rights) over
such shares; and in return, trust certificates
are given to the stockholders, which are
transferable like stock certificates, subject
however, to the trust agreement.
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PROXY VOTING TRUST
AGREEMENT
The stockholder The stockholder
remains the ceases to be a
stockholder of stockholder of record
record
Revocable Irrevocable
General Rule: 5
years
Exception: If coupled
with interest
*The transfer includes the transfer of legal
title.
Sec. 59 of the Corporation Code provides
that: “One or more stockholders of a stock
corporation may create a voting trust for the
purpose of conferring upon a trustee or
trustees the right to vote and other rights
pertaining to the shares for a period not
exceeding 5 years at any time: Provided,
That in the case of a voting trust specifically
required as a condition in a loan agreement,
said voting trust may be for a period
exceeding 5 years but shall automatically
expire upon full payment of the loan. A voting
trust agreement must be in writing and
notarized, and shall specify the terms and
conditions thereof. A certified copy of such
agreement shall be filed with the corporation
and with the SEC; otherwise, said agreement
is ineffective and unenforceable. The
certificate or certificates of stock covered by
the voting trust agreement shall be cancelled
and new ones shall be issued in the name of
the trustee or trustees stating that they are
issued pursuant to said agreement. In the
books of the corporation, it shall be noted
that the transfer in the name of the trustee or
trustees is made pursuant to said voting trust
agreement. The trustee or trustees shall
execute and deliver to the transferors voting
trust certificates, which shall be transferable
in the same manner and with the same effect
as certificates of stock. The voting trust
agreement filed with the corporation shall be
subject to examination by any stockholder of
the corporation in the same manner as any
other corporate book or record: Provided,
That both the transferor and the trustee or
trustees may exercise the right of inspection
of all corporate books and records in
accordance with the provisions of this Code.
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Any other stockholder may transfer his
shares to the same trustee or trustees upon
the terms and conditions stated in the voting
trust agreement, and thereupon shall be
bound by all the provisions of said
agreement. No voting trust agreement shall
be entered into for the purpose of
circumventing the law against monopolies
and illegal combinations in restraint of trade
or used for purposes of fraud. Unless
expressly renewed, all rights granted in a
voting trust agreement shall automatically
expire at the end of the agreed period, and
the voting trust certificates as well as the
certificates of stock in the name of the
trustee or trustees shall thereby be deemed
cancelled and new certificates of stock shall
be reissued in the name of the transferors.
The voting trustee or trustees may vote by
proxy unless the agreement provides
otherwise.”
Consequence: The stockholder entering
into a voting trust agreement ceases to be a
stockholder of record.
*In case of Lee v CA, the SC held that the
stockholder concerned loses his legal title to
the shares so that if the stockholder is, at the
same time, a director of the corporation,
automatically he is disqualified to continue
performing the duties of a director because
the law requires each and every director to
have legal, not beneficial title to at least one
share.
E. Derivative Suit; Concept and Requisites
Derivative Suit is a suit brought by any
stockholder, usually a minority shareholder,
to redress a wrong committed against the
corporation whenever the responsible
officers refuse to take any action thereon or
are the very person to be sued.
*This prerogative is developed through
jurisprudence.
*This is expressly mandated by Sec. 31 of
the Corporation Code.
Q: Why derivative?
A: From the word derive. The one bringing
the suit derives the cause of action from the
corporation.
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Q: Who brings the suit?
A: Any stockholder/member usually minority
stockholder.
Q: Whose cause of action?
A: It is the corporation’s cause of action.
Q: Are we in violation of the Code?
A: No. Because the power to sue lies on the
board thus when the board refuses to take
action in order to protect the corporation
derivative suit may be allowed.
Compelling Reason: Inaction of the officers.
Failure to discharge their responsibilities.
Requisites:
1. The stockholder bringing the suit must be
one of record as of the time the cause of
action accrues as well as of the time the
action is brought unless the cause of
action is a continuing offer.
*The stockholder must implead the real
party in interest, i.e. the corporation.
*In Chua v CA, the SC held that the
corporation must be impleaded since it is
the real party in interest.
2. The action must be named under the
corporation’s 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
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personal to the stockholder. The party
injured is the stockholder himself.
Representative suit is a suit filed by a group
of stockholders that suffered common injury.
SUBSCRIPTION CONTRACT:
A. Ways to become a Stockholder of a
Corporation
1. Subscription contract with the
corporation.
2. Purchase or acquisition of shares from
existing stockholders.
3. Purchase of treasury shares from the
corporation.
*All of them involve shareholdings.
*Subscription is unique because it involves
unissued shares.
B. Concept of Subscription Contract
Subscription Contract is, under Sec. 60 of
the Corporation Code, “any contract for the
acquisition of unissued stock in an existing
corporation or a corporation still to be formed
shall be deemed a subscription within the
meaning of this Title, notwithstanding the fact
that the parties refer to it as a purchase or
some other contract.”
*This is strictly regulated by the Corporation
Code.
C. Kinds of Subscription
1. Pre-incorporation subscription – one
entered into before incorporation.
Sec. 61 of the Corporation Code
provides that: “A subscription for shares
of stock of a corporation still to be formed
shall be irrevocable for a period of at
least 6 months from the date of
subscription, unless all of the other
subscribers consent to the revocation, or
unless the incorporation of said
corporation fails to materialize within said
period or within a longer period as may
be stipulated in the contract of
subscription: Provided, That no pre-
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incorporation subscription may be
revoked after the submission of the
articles of incorporation to the SEC.”
*Contracts between the subscribers.
2 Fold Characteristics:
a. It is a contract between subscribers.
b. May be regarded as continuing offer
on the part of the subscriber
concerned which the corporation may
accept upon acquisition of juridical
personality.
Reason: The corporation is not yet in
existence.
2. Post incorporation subscription – one
entered into after the incorporation for
the acquisition of unissued stock.
*Contracts between the subscribers and
the corporation.
*Creates a creditor-debtor relationship.
D. Consideration for the Issuance of Shares
Sec. 62 of the Corporation Code provides
that: “Stocks shall not be issued for a
consideration less than the par or issued
price thereof. Consideration for the issuance
of stock may be any or a combination of any
two or more of the following: 1. Actual cash
paid to the corporation; 2. Property, tangible
or intangible, actually received by the
corporation and necessary or convenient for
its use and lawful purposes at a fair valuation
equal to the par or issued value of the stock
issued; 3. Labor performed for or services
actually rendered to the corporation; 4.
Previously incurred indebtedness of the
corporation; 5. Amounts transferred from
unrestricted retained earnings to stated
capital; and 6. Outstanding shares
exchanged for stocks in the event of
reclassification of conversion. Where the
consideration is other than actual cash, or
consists of intangible property such as
patents of copyrights, the valuation thereof
shall initially be determined by the
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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
• When shares are considered delinquent
section, insofar as they may be applicable,
may be used for the issuance of bonds by
the corporation. The issued price of no-par
value shares may be fixed in the articles of
incorporation or by the board of directors
pursuant to authority conferred upon it by the
articles of incorporation or the by-laws, or in
the absence thereof, by the stockholders
representing at least a majority of the
outstanding capital stock at a meeting duly
called for the purpose.”
Valid considerations for the subscription
agreements:
1. Cash
2. Property
3. Labor or services actually rendered to
the corporation
4. Prior corporate obligations
5. Amounts transferred from unrestricted
retained earnings to stated capital
6. Outstanding shares in exchange for
stocks in the event of reclassification or
conversion.
E. Payment of Subscription
Q ： When payment of the subscription is
made?
A: Look into the subscription agreement. If
subscription agreement is silent as to when
the amount of subscription to be paid, the
board of directors may call on all the unpaid
subscribers to pay the remaining balance of
their subscription.
• Remedies to enforce payment of
subscription
F. Certificate of Stock
1. By Extra-judicial sale at public
auction.
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2. By judicial action.
3. Collection from cash dividends and
withholding of stock dividends.
Sec. 67 of the Corporation Code
provides that: “Subject to the provisions
of the contract of subscription, the board
of directors of any stock corporation may
at any time declare due and payable to
the corporation unpaid subscriptions to
the capital stock and may collect the
same or such percentage thereof, in
either case with accrued interest, if any,
as it may deem necessary. Payment of
any unpaid subscription or any
percentage thereof, together with the
interest accrued, if any, shall be made on
the date specified in the contract of
subscription or on the date stated in the
call made by the board. Failure to pay on
such date shall render the entire balance
due and payable and shall make the
stockholder liable for interest at the legal
rate on such balance, unless a different
rate of interest is provided in the by-laws,
computed from such date until full
payment. If within 30 days from the said
date no payment is made, all stocks
covered by said subscription shall
thereupon become delinquent and shall
be subject to sale as hereinafter
provided, unless the board of directors
orders otherwise.”
*If there was no date as to payment of
subscription stated in the subscription
agreement, the board may call on all the
unpaid subscribers to pay the remaining
balance of their subscription. Failure to
pay within 30 days from the said date, all
stocks covered by said subscription shall
thereupon become delinquent and shall
be subject to sale unless the board of
directors orders otherwise.
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Certificate of Stock is a written evidence of
the shares of stock but it is not the share
itself.
*Does not represent credit.
Q: How important is a stock certificate?
A: It is an evidence of ownership of stocks.
Q: Who issue stock certificate?
A: Stock certificates must be signed by the
president or vice-president, countersigned by
the secretary or assistant secretary.
Q: When certificate of stock may be issued?
A: Sec. 64 of the Corporation Code states
that: “No certificate of stock shall be issued
to a subscriber until the full amount of his
subscription together with interest and
expenses (in case of delinquent shares), if
any is due, has been paid.”
• Doctrine of Indivisibility of Subscription
Contract
Doctrine of Indivisibility of
Subscription Contract: Failure to pay
any of the installments due would
necessarily affect all the other
installments because the subscription is
to be treated as one, whole, entire,
indivisible contract. Upon default of
payment on any of the installment results
to entire subscription due and
demandable.
*The Certificate of Stock cannot be
divided into portions.
*No certificate of stock shall be issued
until the full payment of the subscription.
*The corporation has an automatic lien
over the shares.
Q: What will happen to the payment
already made by the subscriber?
A: The payment partially made shall be
applied proportionately to all the shares
covered by the subscription.
Example:
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P10 per share; payment made is P6000
covering 1000 shares. The P6000 shall
be allocated equally to all shares. P6 per
share has been paid. P4 per share is the
liability.
• Certificate of Stock, 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.
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.
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H. Lost and Destroyed Certificate of Stock
Sec. 73 of the Corporation Code provides
that: “The following procedure shall be
followed for the issuance by a corporation of
new certificates of stock in lieu of those
which have been lost, stolen or destroyed: 1.
The registered owner of a certificate of stock
in a corporation or his legal representative
shall file with the corporation an affidavit in
triplicate setting forth, if possible, the
circumstances as to how the certificate was
lost, stolen or destroyed, the number of
shares represented by such certificate, the
serial number of the certificate and the name
of the corporation which issued the same. He
shall also submit such other information and
evidence which he may deem necessary; 2.
After verifying the affidavit and other
information and evidence with the books of
the corporation, said corporation shall
publish a notice in a newspaper of general
circulation published in the place where the
corporation has its principal office, once a
week for 3 consecutive weeks at the
expense of the registered owner of the
certificate of stock which has been lost,
stolen or destroyed. The notice shall state
the name of said corporation, the name of
the registered owner and the serial number
of said certificate, and the number of shares
represented by such certificate, and that
after the expiration of 1 year from the date of
the last publication, if no contest has been
presented to said corporation regarding said
certificate of stock, the right to make such
contest shall be barred and said corporation
shall cancel in its books the certificate of
stock which has been lost, stolen or
destroyed and issue in lieu thereof new
certificate of stock, unless the registered
owner files a bond or other security in lieu
thereof as may be required, effective for a
period of 1 year, for such amount and in
such form and with such sureties as may be
satisfactory to the board of directors, in
which case a new certificate may be issued
even before the expiration of the 1 year
period provided herein: Provided, That if a
contest has been presented to said
corporation or if an action is pending in court
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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
certificate of stock in lieu of those lost, stolen
or destroyed pursuant to the procedure
above-described.”
CORPORATE BOOKS AND RECORDS:
A. Books required to be kept by a Corporation
Sec. 74 of the Corporation Code provides
that: “Every corporation shall keep and
carefully preserve at its principal office a
record of all business transactions and
minutes of all meetings of stockholders or
members, or of the board of directors or
trustees, in which shall be set forth in detail
the time and place of holding the meeting,
how authorized, the notice given, whether
the meeting was regular or special, if special
its object, those present and absent, and
every act done or ordered done at the
meeting. Upon the demand of any director,
trustee, stockholder or member, the time
when any director, trustee, stockholder or
member entered or left the meeting must be
noted in the minutes; and on a similar
demand, the yeas and nays must be taken
on any motion or proposition, and a record
thereof carefully made. The protest of any
director, trustee, stockholder or member on
any action or proposed action must be
recorded in full on his demand. The records
of all business transactions of the
corporation and the minutes of any meetings
shall be open to inspection by any director,
trustee, stockholder or member of the
corporation at reasonable hours on business
days and he may demand, writing, for a copy
of excerpts from said records or minutes, at
his expense. Any officer or agent of the
corporation who shall refuse to allow any
director, trustee, stockholder or member of
the corporation to examine and copy
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excerpts from its records or minutes, in *Keeping of books and records are
accordance with the provisions of this Code, mandatory.
shall be liable to such director, trustee,
stockholder or member for damages, and in Books required to be kept:
addition, shall be guilty of an offense which 1. Book of minutes – reflects the decisions
shall be punishable under Section 144 of this and actions of the Board of
Code: Provided, That if such refusal is made Directors/Stockholders.
pursuant to a resolution or order of the board
of directors or trustees, the liability under this 2. Record of all business transactions
section for such action shall be imposed
upon the directors or trustees who voted for 3. Stock and Transfer Book/Membership
such refusal: and Provided, further, That it Book
shall be a defense to any action under this
4. Books of Proceedings
section that the person demanding to
examine and copy excerpts from the
corporation’s records and minutes has
improperly used any information secured B. Right to Inspect Corporate Books
through any prior examination of the records
• Basis and Extent of the Right of
or minutes of such corporation or of any
Inspection
other corporation, or was not acting in good
faith or for a legitimate purpose in making his Q: Is the keeping of these books
demand. Stock corporations must also keep mandatory?
a book to be known as the “stock and
transfer book,” in which must be kept a A: YES. Section 144 of the Corporation
record of all stocks in the names of the Code provides penalty for any violation of
stockholders alphabetically arranged; the the provision of the Code.
installments paid and unpaid on all stock for
which subscription has been made, and the Rationale: Right of inspection would be
date of payment of any installment; a futile. Right of inspection would not be
statement of every alienation, sale or transfer exercised.
of stock made, the date thereof, and by and
• Limitations on the Right of Inspection
to whom made; and such other entries as the
by-laws may prescribe. The stock and 1. The books and records shall be open
transfer book shall be kept in the principal to inspection at reasonable hours on
office of the corporation or in the office of its business days.
stock transfer agent and shall be open for
inspection by any director or stockholder of 2. The books and records shall not be
the corporation at reasonable hours on improperly used any information
business days. No stock transfer agent or secured through any prior
one engaged principally in the business of examination of the books or records.
registering transfers of stocks in behalf of a
3. The stockholder’s demand must be in
stock corporation shall be allowed to operate
good faith or for a legitimate purpose.
in the Philippines unless he secures a
*Inspection can be done personally or
license from the SEC and pays a fee as may
through agent.
be fixed by the Commission, which shall be
• Remedies to Enforce Right of Inspection
renewable annually: Provided, That a stock
corporation is not precluded from performing *In case of refusal to exercise the right of
or making transfer of its own stocks, in which inspection, the stockholder concerned
case all the rules and regulations imposed may file an action for mandamus before
on stock transfer agents, except the payment the RTC.
of a license fee herein provided, shall be
applicable.” *Can also claim damages.
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MERGER AND CONSOLIDATION:
A. Concept of Merger and Consolidation
Merger is one where a corporation absorbs
the other and remains in existence while the
others are dissolved.
*There is a continuous flow of juridical
personality.
Examples:
A+B=B
A+B+C=C
A+B+C=A
A+B+C=B
Consolidation is one where a new
corporation is created, and consolidating
corporations are extinguished.
Examples:
A+B=C
C. Effects of Merger or Consolidation
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.
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Maria Zarah Villanueva - Castro
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.
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.
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Remedy of the dissenting stockholder:
The dissenting stockholder may exercise his
appraisal right.
RIGHT OF APPRAISAL:
A. Concept of Appraisal Right
Appraisal Right is the right to withdraw from
the corporation and demand payment of the
fair value of his shares after dissenting from
certain corporate acts involving fundamental
changes in corporate structure.
C. Requirements for
*Demanding for the reasonable return of
investment.
*Stockholders cannot exercise this right at
his pleasure.
Requisites:
1. The Stockholder has dissented
2. Corporate change must have been
approved by the SEC.
*Any changes that affect the
stockholders’ right.
*Any changes that concern the
corporation’s 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 provides
that: “Any stockholder of a corporation shall
have the right to dissent and demand
payment of the fair value of his shares in the
following instances: 1. In case any
amendment to the articles of incorporation
has the effect of changing or restricting the
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Maria Zarah Villanueva - Castro
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. In
case of merger or consolidation.”
a Valid Exercise of
Appraisal Right
Sec. 82 of the Corporation Code provides
that: “The appraisal right may be exercised
by any stockholder who shall have voted
against the proposed corporate action, by
making a written demand on the corporation
within 30 days after the date on which the
vote was taken for payment of the fair value
of his shares: Provided, That failure to make
the demand within such period shall be
deemed a waiver of the appraisal right. If the
proposed corporate action is implemented or
affected, the corporation shall pay to such
stockholder, upon surrender of the certificate
or certificates of stock representing his
shares, the fair value thereof as of the day
prior to the date on which the vote was
taken, excluding any appreciation or
depreciation in anticipation of such corporate
action. If within a period of 60 days from the
date the corporate action was approved by
the stockholders, the withdrawing
stockholder and the corporation cannot
agree on the fair value of the shares, it shall
be determined and appraised by 3
disinterested persons, one of whom shall be
named by the stockholder, another by the
corporation, and the third by the two thus
chosen. The findings of the majority of the
appraisers shall be final, and their award
shall be paid by the corporation within 30
days after such award is made: Provided,
That no payment shall be made to any
dissenting stockholder unless the corporation
has unrestricted retained earnings in its
books to cover such payment: and Provided,
further, That upon payment by the
corporation of the agreed or awarded price,
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the stockholder shall forthwith transfer his
shares to the corporation.”
Requisites:
1. Any of the instances set forth by law
must be present.
2. Dissenting stockholder must have voted
against the proposed action.
*Abstaining stockholder cannot claim or
exercise his appraisal right.
3. Demand for payment must be made
within 30 days from the date vote is
taken thereon. Failure to make demand
shall be deemed a waiver.
4. Price must be based on fair value as of
day prior to date on which vote was
taken
5. Submission by withdrawing stockholder
of his shares to the corporation for
notation of being a dissenting
stockholder within 10 days from written
demand.
6. Payment must be made only when the
corporation has unrestricted retained
earnings in its books.
7. Stockholder must transfer his shares to
the corporation upon payment by the
corporation.
D. Effects of Exercising Appraisal Right
Sec. 83 of the Corporation Code provides
that: “From the time of demand for payment
of the fair value of a stockholder’s shares
until either the abandonment of the corporate
action involved or the purchase of the said
shares by the corporation, all rights accruing
to such shares, including voting and dividend
rights, shall be suspended in accordance
with the provisions of this Code, except the
right of such stockholder to receive payment
of the fair value thereof: Provided, That if the
dissenting stockholder is not paid the value
of his shares within 30 days after the award,
his voting and dividend rights shall
immediately be restored.”
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Maria Zarah Villanueva - Castro
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:
A. Definition and Purposes of a Non-Stock
Corporation
Sec. 87 of the Corporation Code states
that: “For the purposes of this Code, a non-
stock is one where no part of its income is
distributable as dividends to its members,
trustees, or officers, subject to the provisions
of this Code on dissolution: Provided, That
any profit which a non-stock corporation may
obtain as an incident to its operations shall,
whenever necessary or proper, be used for
the furtherance of the purpose or purposes
for which the corporation was organized,
subject to the provisions of this Title. The
provisions governing stock corporations,
when pertinent, shall be applicable to non-
stock corporations, except as may be
covered by specific provisions of this Title.”
*Sec. 87 should be read in harmony with
Sec. 94.
*A Non-stock corporation is not precluded
from engaging in profit-business related.
Sec. 88 of the Corporation Code provides
that: “Non-stock corporations may be formed
or organized for charitable, religious,
educational, professional, cultural, fraternal,
literary, scientific, social, civic service, or
similar purposes, like trade, industry,
agricultural and like chambers, or any
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combination thereof, subject to the special such conditions which may be prescribed by,
provisions of this Title governing particular the SEC.”
classes of non-stock corporations.” General Rule: Sec. 58
Exception: Sec. 89. This provision allows
*The purpose of a non-stock corporation denial of proxy.
is related to public welfare. Reason: To promote camaraderie,
togetherness, unity and familiarity.
*A member is entitled to 1 vote. However,
B. Distinguished from Stock Corporation such right may be limited, broadened or
denied in the Articles of Incorporation or By-
Non- stock Stock Corporation Laws. Thus, the By-laws of a non-stock
Corporation corporation may provide for the desired
Public welfare For profit
voting rights of members including the
Board of Trustees Board of directors
number of votes.
Generally, the term 1 year subject to
of office of trustees is hold-over principle Sec. 90 of the Corporation Code provides
3 years that: “Membership in a non-stock corporation
By-laws can provide City or municipality and all rights arising therefrom are personal
for a different venue where the principal and non-transferable, unless the articles of
as long as it is within office is located incorporation or the by-laws otherwise
the Philippines provide.”
Member may be Proxy is allowed
General Rule: Membership is non-
deprived of their right
to designate proxies transferable.
by provisions in the Exception: If the Articles of Incorporation or
articles of the By-laws provide otherwise.
incorporation or by- Sec. 91 of the Corporation Code provides
laws that: “Membership shall be terminated in the
Reason: To promote manner and for the causes provided in the
camaraderie,
articles of incorporation or the by-laws.
togetherness, unity
and familiarity. Termination of membership shall have the
Generally, members Election is vested effect of extinguishing all rights of a member
could directly elect upon Board of in the corporation or in its property, unless
officers. Except Directors otherwise provided in the articles of
unless AOI provides incorporation or the by-laws.”
otherwise. Rules on Place of Meeting:
General Rule: Sec. 51
C. Membership in a Non-Stock Corporation Exception: Sec. 93

Sec. 89 of the Corporation Code provides D. Rule on Distribution of Assets

that: “The right of the membership of any
Sec. 94 of the Corporation Code provides
class or classes to vote may be limited,
that: “In case dissolution of a non-stock
broadened or denied to the extent specified
corporation in accordance with the provisions
in the articles of incorporation or the by-laws.
of this Code, its assets shall be applied and
Unless so limited, broadened or denied,
distributed as follows: 1. All liabilities and
each member, regardless of class, shall be
obligations of the corporation shall be paid,
entitled to one vote. Unless otherwise
satisfied and discharged, or adequate
provided in the articles of incorporation of the
provision shall be made therefor; 2. Assets
by-laws, a member may vote by proxy in
held by the corporation upon a condition
accordance with the provisions of this Code.
requiring return, transfer or conveyance, and
Voting by mail or other similar means by
which condition occurs by reason of the
members of non-stock corporations may be
dissolution, shall be returned, transferred or
authorized by the by-laws of non-stock
conveyed in accordance with such
corporations with the approval of, and under
requirements; 3. Assets received and held by
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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 5.
In any other case, assets may be distributed
to such persons, societies, organizations or
corporations, whether or not organized for
profit, as may be specified in a plan of
distribution adopted pursuant to this
Chapter.”
Order of distribution:
1. All its creditors shall be paid;
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 providing for the distribution of
assets, not inconsistent with the provisions of
this Title, may be adopted by a non-stock
corporation in the process of dissolution in
the following manner: The board of trustees
shall, by majority vote, adopt a resolution
recommending a plan of distribution and
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Maria Zarah Villanueva - Castro
directing the submission thereof to a vote at
a regular or special meeting of members
having voting rights. Written notice setting
forth the proposed plan of distribution or a
summary thereof and the date, time and
place of such meeting shall be given to each
member entitled to vote, within the time and
in the manner provided in this Code for the
giving of notice of meetings to members.
Such plan of distribution shall be adopted
upon approval of at least 2/3 of the members
having voting rights present or represented
by proxy at such meeting.”
Q: Would it be possible for a non-stock
corporation to be converted into a stock
corporation by mere amendment of the
Articles of Incorporation?
A: NO. Because it would violate Section 87
of the Corporation Code which prohibits
distribution of income as dividends to
members.
Reason: Fraudulent to donors
Q: Can a stock corporation be converted to a
non-stock corporation by mere amendment
of the Articles of Incorporation?
A: YES.
Requirements:
1. Approval of 2/3 of the members
2. Approval of the SEC
Q: What was relinquished?
A: Proprietary rights.
*Appraisal right is available.
CLOSE CORPORATIONS:
A. Concept; Distinguished from Open
Corporations
Sec. 96 of the Corporation Code states
that: “A corporation, within the meaning of
this Code, is one whose articles of
incorporation provide that: (1) All the
corporation’s issued stock of all classes,
exclusive of treasury shares, shall be held of
record by not more than a specified number
of persons, not exceeding 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
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corporation shall not list in any stock Distinctions from Open Corporations:
exchange or make any public offering of any
of its stock of any class. Notwithstanding the Open Corporation Close Corporation
foregoing, a corporation shall not be deemed Its articles of Its articles must
incorporation need contain the special
a close corporation when at least 2/3 of its only contain the matters prescribed
voting stock or voting rights is owned or general matters by Section 97 aside
controlled by another corporation which is enumerated in from the general
not a close corporation within the meaning of Section 14 of the matters in Section
this Code. Any corporation may be Corporation Code 14. Failure to do so
incorporated as a close corporation, except precludes a de jure
close corporation
mining or oil companies, stock exchanges,
status
banks, insurance companies, public utilities,
Its status as an 2/3 of its voting stock
educational institutions and corporations ordinary stock or voting rights must
declared to be vested with public interest in corporation is not not be owned or
accordance with the provisions of this Code. affected by the controlled by another
The provisions of this Title shall primarily ownership of its corporation which is
govern close corporations: Provided, That voting stock or voting not a close
rights corporation
the provisions of other Titles of this Code
Its articles cannot Its articles may
shall apply suppletorily except insofar as this
classify its directors classify its directors
Title otherwise provides.” Business of the Business of the
corporation is corporation may be
*Whether open or close corporation depends managed by the managed by the
on its charter. board of directors stockholders if the
articles so provide,
Case: San Juan Structural but they are liable as
directors
The following must be stated in the The corporate Its articles may
Articles of Incorporation: officers and provide that any or all
employees are of the corporate
1. Membership is limited to 20 elected by a majority officers or employees
vote of all the may be elected or
2. Transfer or disposition of shares is members of the appointed by the
subject to specified restrictions board of directors stockholders
The pre-emptive right The pre-emptive right
3. Prohibition against offering to the public is subject to the is subject to no
of the shares or listing in the stock exceptions found in exceptions unless
exchange. Section 39 of the denied in the articles
Corporation Code
General Rule: Any corporation may be The appraisal right The appraisal right
incorporated as close corporation. may be exercised by may be exercised
a stockholder only in and compelled
Exceptions: the cases provided in against the
Sections 81 and 42 corporation by a
1. Mining or oil companies of the Corporation stockholder for any
Code reason
2. Stock exchanges Except as regards In case of an
redeemable shares, arbitration of an
3. Banks the purchase by the intracorporate
corporation of its own deadlock by the
4. Insurance companies stock must always be SEC, the corporation
made from the may be ordered to
5. Public utilities
unrestricted retained purchase its own
earnings shares from the
6. Educational institutions
stockholders
7. Corporations declared to be vested with regardless of the
availability of
public interest
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unrestricted retained
earnings
Arbitration of Arbitration of
intracorporate intracorporate
deadlock by the SEC deadlock by the SEC
is not a remedy in is an available
case the directors or remedy in case the
stockholders are so directors or
divided respecting stockholders are so
the management of divided respecting
the corporation. 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: “The articles of incorporation of a close
corporation may provide: 1. For a
classification of shares or rights and the
qualifications for owning or holding the same
and restrictions on their transfers as may be
stated therein, subject to the provisions of
the following section; 2. For a classification
of directors into one or more classes, each of
whom may be voted for and elected solely by
a particular class of stock; and 3. For a
greater quorum or voting requirements in
meetings of stockholders or directors than
those provided in this Code. The articles of
incorporation of a close corporation may
provide that the business of the corporation
may provide that the business of the
corporation shall be managed by the
stockholders of the corporation rather than
by a board of directors. So long as this
provision continues in effect: 1. No meeting
of stockholders need be called to elect
directors; 2. Unless the context clearly
requires otherwise, the stockholders of the
corporation shall be deemed to be directors
for the purpose of applying the provisions of
this Code; and 3. The stockholders of the
corporation shall be subject to all liabilities of
directors. The articles of incorporation may
likewise provide that all officers or
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employees or that specified officers or
employees shall be elected or appointed by
the stockholders, instead of by the board of
directors.”
C. Restrictions on Transfer of Shares
Sec. 98 of the Corporation Code provides
that: “Restrictions on the right to transfer
shares must appear in the articles of
incorporation and in the by-laws as well as in
the certificate of stock; otherwise, the same
shall not be binding on any purchaser thereof
in good faith. Said restrictions shall not be
more onerous than granting the existing
stockholders or the corporation the option to
purchase the shares of the transferring
stockholder with such reasonable terms,
conditions or period stated therein. If upon
the expiration of said period, the existing
stockholders or the corporation fails to
exercise the option to purchase, the
transferring stockholder may sell his shares
to any third person.”
Option Restriction – this restriction
provides that no disposition of shares will be
made unless the shares are offered first to
the corporation or the stockholders.
*Pre-emptive right is exercisable or available.
*This restriction is valid and allowed.
Reason: it is the one contemplated by law.
*Restriction derogates private rights.
Consent Restriction – this restriction
provides that no disposition of shares will be
made without the consent of directors.
*This restriction is not valid.
Reason: It is more onerous and
burdensome.
CORPORATE DISSOLUTION/LIQUIDATION:
A. Methods of Voluntary Corporate Dissolution
and the Requirements therefor
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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
• Voluntary dissolution where no creditors
are affected
Sec. 118 of the Corporation Code
provides that: “If dissolution of a
corporation does not prejudice the rights
of any creditor having a claim against it,
the dissolution may be effected by
majority vote of the board of directors or
trustees, and by a resolution duly
adopted by the affirmative vote of the
stockholders owning at least 2/3 of the
outstanding capital stock or of at least
2/3 of the members of a meeting to be
held upon call of the directors or trustees
after publication of the notice of time,
place and object of the meeting for 3
consecutive weeks in a newspaper
published in the place where the
principal office of said corporation is
located; and if no newspaper is published
in such place, then in a newspaper of
general circulation in the Philippines,
after sending such notice to each
stockholder or member either by
registered mail or by personal delivery at
least 30 days prior to said meeting. A
copy of the resolution authorizing the
dissolution shall be certified by a majority
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of the board of directors or trustees and
countersigned by the secretary of the
corporation. The SEC shall thereupon
issue the certificate of dissolution.”
Requisites:
1. A meeting must be held on the call of
the directors or trustees;
2. Notice of the meeting should be
given to the stockholders by personal
delivery or registered mail at least 30
days prior to the meeting;
3. The notice of meeting should also be
published for 3 consecutive weeks in
a newspaper published in the place;
4. The resolution to dissolve must be
approved by the majority of the
directors/trustees and approved by
the stockholders 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
• Voluntary dissolution where creditors are
affected
Sec. 119 of the Corporation Code
provides that: “Where the dissolution of a
corporation may prejudice the rights of
any creditor, the petition for dissolution
shall be filed with the Securities and
Exchange Commission. The petition shall
be signed by a majority of its board of
directors or trustees or other officers
having the management of its affairs,
verified by its president or secretary or
one of its directors or trustees, and shall
set forth all claims and demands against
it, and that its dissolution was resolved
upon by the affirmative vote of the
stockholders representing at least two-
thirds (2/3) of the outstanding capital
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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. 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 corporation.”
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
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consecutive weeks in 3 public places
is sufficient;
5. Objections must be filed no less than
30 days nor more than 60 days after
the entry of the order;
6. After the expiration of the time to file
objections, a hearing shall be
conducted upon prior 5 day notice to
hear the objections;
7. Judgment shall be rendered
dissolving the corporation and
directing the disposition of assets; the
judgment may include appointment of
a receiver.
• Shortening of term of existence
Sec. 120 of the Corporation Code
provides that: “A voluntary dissolution
may be effected by amending the articles
of incorporation to shorten the corporate
term pursuant to the provisions of this
Code. A copy of the amended articles of
incorporation shall be submitted to the
Securities and Exchange Commission in
accordance with this Code. Upon
approval of the amended articles of
incorporation of the expiration of the
shortened term, as the case may be, the
corporation shall be deemed dissolved
without any further proceedings, subject
to the provisions of this Code on
liquidation.”
B. Concept of Involuntary Dissolution and the
Grounds therefor
Sec. 121 of the Corporation Code provides
that: “A corporation may be dissolved by the
Securities and Exchange Commission upon
filing of a verified complaint and after proper
notice and hearing on the grounds provided
by existing laws, rules and regulations.”
*This must be done with substantive and
procedural due process.
Grounds:
1. Failure to submit by-laws within the
prescribed period
2. Fraud in the procurement of Certificate of
Registration
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3. Misrepresentation as to the activities that
the corporation will undertake
4. Treasurer’s affidavit is false
5. Continued inoperation for 5 years
6. Failure to commence business
transactions within 2 years from issuance
of certificate of registration
7. To some cases, performance of ultra
vires act since it is a violation to the
franchise but depending on the
seriousness or gravity of the offense
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
D. Methods of Liquidation or Winding Up
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: “Every corporation whose charter
expires by its own limitation or is annulled by
forfeiture or otherwise, or whose corporate
existence for other purposes is terminated in
any other manner, shall nevertheless be
continued as a body corporate for three (3)
years after the time when it would have been
so dissolved, for the purpose of prosecuting
and defending suits by or against it and
enabling it to settle and close its affairs, to
dispose of and convey its property and to
distribute its assets, but not for the purpose
of continuing the business for which it was
established. At any time during said three (3)
years, the corporation is authorized and
empowered to convey all of its property to
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trustees for the benefit of stockholders,
members, creditors, and other persons in
interest. From and after any such
conveyance by the corporation of its property
in trust for the benefit of its stockholders,
members, creditors and others in interest, all
interest which the corporation had in the
property terminates, the legal interest vests
in the trustees, and the beneficial interest in
the stockholders, members, creditors or
other persons in interest. Upon the winding
up of the corporate affairs, any asset
distributable to any creditor or stockholder or
member who is unknown or cannot be found
shall be escheated to the city or municipality
where such assets are located. Except by
decrease of capital stock and as otherwise
allowed by this Code, no corporation shall
distribute any of its assets or property except
upon lawful dissolution and after payment of
all its debts and liabilities.”
1. By Board of Directors
2. Through a trustee to whom the properties
are conveyed
3. By management committee or
rehabilitation receiver
Q: Can the 3 year period be extended?
A: NO.
Reason: Beyond the 3 year period, there is
no corporate existence for all purposes
subject to doctrine of relation.
Remedy: Before the expiration of the 3 year
period, appoint a trustee/receiver.
Q: During the 3 year period, does the
corporation enjoy corporate existence?
A: YES. But for limited purpose only, i.e., for
liquidation purposes only. (Limited existence)
Q: May such corporation sue during the 3
year period?
A: YES. But only when the subject matter is
related to liquidation and winding up of its
remaining affairs.
*In case trustee/receiver is appointed, he is
not bound by the 3 year period.
*In Gelano v CA, the SC held that the lawyer
of the corporation can be considered as
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trustee. The term trustee must be considered
in its generic sense. Anyone who has been
designated by the corporation to act on its
behalf could be considered as trustee for
purposes of pursuing a claim for and on
behalf of the corporation. A lawyer falls
within the ambit of the word “trustee.”
*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.
FOREIGN CORPORATIONS:
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
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otherwise whether enforcement is by court or
not, until rehabilitation proceedings are
terminated.
Cases: PAL v Garcia; Sobrejuanite;
Lingkod Manggagawa ng Rubberworld v
Rubberworld Philippines; RCBC v IAC
*In PAL v Garcia, the SC held that stay
order suspends all enforcement in all stages
of the proceedings.
*In Lingkod Manggagawa sa Rubberworld
v Rubberworld Philippines, the SC held
that labor claims are likewise affected by the
Stop order.
*In RCBC v IAC, the SC held that whether
creditors are secured or not, stay order will
still affect them. The preference still remains
it is just the enforcement that is suspended.
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: “For the purposes of this Code, a
foreign corporation is one formed, organized
or existing under any laws other than those
of the Philippines and whose laws allow
Filipino citizens and corporations to do
business in its own country or state. It shall
have the right to transact business in the
Philippines after it shall have obtained a
license to transact business in this country in
accordance with this Code and a certificate
of authority from the appropriate government
agency.”
Reciprocity Clause provides that the foreign
laws allow Filipino citizens and corporations
to do business in its own country or state.
B. Tests to Determine Nationality of a
Corporation
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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 “Doing Business” and the
License Requirement therefor
Substance Test provides that: a foreign
corporation is doing business in the country if
it is continuing the body or substance of the
enterprise of business for which it was
organized.
Continuity Test provides that: doing
business implies a continuity of commercial
dealings and arrangements, and
contemplates to some extent the
performance of acts or works or the exercise
of some functions normally incident to and in
progressive prosecution of, the purpose and
object of its organization.
*Foreign Corporation is required to obtain
license from the SEC to enable them to do
business in the Philippines.
*The foreign corporation must appoint a
resident agent so that court may acquire
jurisdiction over the foreign corporation
*License is essential if there is an intention to
maintain main or substance of the business
in the Philippines or to continue the same.
*Lack of license does not affect the validity of
the transaction.
*License is for regulatory purposes.
*License requirement does not prevent
performance of acts that are isolated from
the main business of the corporation and
there is no intent to continue the same in the
Philippines.
*If the foreign corporation is not licensed to
do business in the Philippines, General
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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:
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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.

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