Sec. 21. Corporation by estoppel.
- All persons who assume to act as a corporation as may be determined by the Securities and Exchange
corporation knowing it to be without authority to do so shall be liable as
general partners for all debts, liabilities and damages incurred or arising
as a result thereof: Provided, however, That when any such ostensible
corporation is sued on any transaction entered by it as a corporation or
on any tort committed by it as such, it shall not be allowed to use as a
defense its lack of corporate personality.
On who assumes an obligation to an ostensible corporation as such,
cannot resist performance thereof on the ground that there was in fact
no corporation.
 Has no real existence in law.
 It is neither a de jure nor a de facto corporation.
 Stockholders or members of a pretended corporation who
participated in holding it out as a real corporation are precluded
from denying its existence against creditors for the purpose of
escaping the liability.
 Same as for 3rd persons who knew about it being a pretended
corporation.
 Any person who assumes an obligation to a pretended
corporation cannot resist performance on the ground that there
was in fact no corporation.
Sec. 22. Effects on non-use of corporate charter and continuous
inoperation of a corporation. - If a corporation does not formally organize
and commence the transaction of its business or the construction of its
works within two (2) years from the date of its incorporation, its
corporate powers cease and the corporation shall be deemed dissolved.
However, if a corporation has commenced the transaction of its business
but subsequently becomes continuously inoperative for a period of at
least five (5) years, the same shall be a ground for the suspension or
revocation of its corporate franchise or certificate of incorporation. 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
Commission.
 The corporation is deemed as dissolved if it does not formally
organize, commence the transaction of its business or the
construction of its works within 2 years from the date of
incorporation.
 Formal organization includes:
1. Adoption of by-laws and filling it to the SEC
2. Election of directors
3. Meeting of directors to elect corporate officers and other
officers stated in the by-laws
 After commencing business transactions, if a corporation
becomes subsequently inoperative for a period of at least 5 years,
it shall be grounds for the suspension or revocation of the
corporate franchise or certificate of incorporation.
 Failure to organize and commence within 2 years or subsequent
inoperation for at least 5 years will not be grounds for suspension
or revocation of certificate if the reason for the delay is beyond
the control of the corporation.
Sec. 23. The board of directors or trustees. - Unless otherwise provided in
this Code, the corporate powers of all corporations formed under this
Code shall be exercised, all business conducted and all property of such
corporations controlled and held by the board of directors or trustees to
be elected from among the holders of stocks, or where there is no stock,
from among the members of the corporation, who shall hold office for
one (1) year until their successors are elected and qualified. Every
director must own at least one (1) share of the capital stock of the
corporation of which he is a director, which share shall stand in his name
on the books of the corporation. Any director who ceases to be the
owner of at least one (1) share of the capital stock of the corporation of
which he is a director shall thereby cease to be a director. Trustees of
non-stock corporations must be members thereof. a majority of the
directors or trustees of all corporations organized under this Code must
be residents of the Philippines.
  Board of Directors/Trustees is the governing body of the
corporation.
 The directors/trustees must act as a body in a lawful meeting in
order to bind the corporation by their acts.
 Unlike its officers, directors/trustees are not agents of the
corporation thus having no power to individually bind the
corporation.
 The board of directors/trustees shall perform the duties enjoined
on them by law and the by-laws of the corporation. They have the
following principle functions:
1. To exercise corporate powers
2. Conduct corporate business
 Qualifications of a Director/Trustee:
1. Must be the owner of at least 1 share of stock or a member
of the corporation (for non-stock corps). Any director who
ceases to have at least 1 share shall also cease to be a
director
2. Majority of the directors/trustees must be resident of the
Philippines
3. The number must not be less than 5 and must not exceed 15
4. Must not be convicted by final judgment that is punishable by
imprisonment of a period more than 6 years or a violation of
the Corporation Code, committed within 5 years prior to his
election.
5. Other qualifications provided in the by-laws.
 Principle of holdover: Directors/Trustees shall hold office for 1
year until their successor is elected and qualified. Incumbent
directors/trustees do not automatically cease to hold office if
there is no successor yet.
Sec. 24. Election of directors or trustees. - At all elections of directors or
trustees, there must be present, either in person or by representative
authorized to act by written proxy, the owners of 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 corporations which have no capital stock may cast as many
votes as there are trustees to be elected but may not cast more than one
vote for one candidate. Candidates receiving the highest number of votes
shall be declared elected. Any meeting of the stockholders or members
called for an election may adjourn from day to day or from time to time
but not sine die or indefinitely if, for any reason, no election is held, or if
there not present or represented by proxy, at the meeting, the owners of
a majority of the outstanding capital stock, or if there be no capital stock,
a majority of the member entitled to vote.
 Directors/Trustees are elected at a meeting called for the
purpose.
 They must be present in person or by representative authorized
by written proxy:
a. The owners of the majority of the outstanding capital, if a
stock corporation
b. The majority of the members, if non-stock.
 Election is done by ballot if requested. If no such request is made
then it may be through other methods like raising of hands.
 No delinquent shares shall be voted.
 Methods of voting:
a. Stock Corporation
 1. Number of votes to which a stockholder is entitled: No.
of shares owned X no. of directors to be elected.
Formula for votes needed to elect desire no. of directors:
[(AXB)/(C+1)]+1
A =Outstanding shares entitled to vote
B = desire number of directors to be elected
C = total number of directors to be elected.
2. Votes may be cast as follows:
a. Straight Voting – votes may be distributed equally
among the candidates.
b. Cumulative voting – all votes will be in cast on the
candidate that the shareholder wishes to elect.
c. Cumulative Voting by distribution – Shareholder may
distribute the votes to as many candidates as he
wants equally or not.
b. Non-stock Corporation
 A member may cast as many votes as there are
trustees to be elected but they cannot cast more
than one vote on one candidate. Cumulative voting
may be provided in the articles of incorporation.
Sec. 25. Corporate officers, quorum. - Immediately after their election,
the directors of a corporation must formally organize by the election of a
president, who shall be a director, a treasurer who may or may not be a
director, a secretary who shall be a resident and citizen of the
Philippines, and such other officers as may be provided for in the by-
laws. Any two (2) or more positions may be held concurrently by the
same person, except that no one shall act as president and secretary or
as president and treasurer at the same time. The directors or trustees
and officers to be elected shall perform the duties enjoined on them by
law and the by-laws of the corporation. Unless the articles of
incorporation or the by-laws provide for a greater majority, a majority of
the number of directors or trustees as fixed in the articles of
incorporation shall constitute a quorum for the transaction of corporate
business, and every decision of at least a majority of the directors or
trustees present at a meeting at which there is a quorum shall be valid as
a corporate act, except for the election of officers which shall require the
vote of a majority of all the members of the board. Directors or trustees
cannot attend or vote by proxy at board meetings.
 Immediately after their election, the directors must elect the
following officers:
1. President – who must be a director
2. Treasurer – may or may not be a director
3. Secretary – must be a resident and citizen of the Philippines.
4. Other officers provided in the by-laws.
 Any 2 or more positions may be held concurrently by the same
person however no one can be president and secretary or
president and treasurer at the same time.
 Elected officers conduct the daily business of the corporation and
subject to the authority of the board.
 Board of Directors = Broad policies, Corporate officers = performs
the details.
 Quorum – Number of directors/trustees sufficient to transact
business
o General Rule: Majority of the number of
directors/trustees fixed in the articles of incorporation.
o Exception: If articles of incorporation or by-laws provide
for a greater number, i.e. qualified majority.
 To validate a corporate act, a quorum must first be established,
after which majority vote of the quorum shall validate the
corporate act (i.e. if 11 BOD is stated in the articles of
incorporation at least 6 must attend to constitute a quorum and
among the 6, 4 must vote to validate a corporate act.)
 Directors and trustees cannot attend or vote by proxy at board
meetings
 Example: There was a corporation where the number of directors
fixed in the articles of incorpation was 11. Only 9 qualified during
the election out of the 11, 2 did not qualify. There was a board
meeting where 5 attended the board meeting and then they
 passed a resolution approved by majority of the 5 directors (3
voted).
Was there a valid corporate act?
No. There was no quorum in the first place. What constitutes a
quorum is based on what is fixed in the articles in the incorporation (which
is 11) and not based on those elected. A proper quorum would have been
constituted if 6 attended and 4 voted since that is the majority number.
 General rule: to validate corporate acts, majority of what
constitutes a quorum is required.
 Exception: In the election of officers, the majority vote of all the
members of the board are required.
Sec. 26. Report of election of directors, trustees and officers. - Within
thirty (30) days after the election of the directors, trustees and officers of
the corporation, the secretary, or any other officer of the corporation,
shall submit to the Securities and Exchange Commission, the names,
nationalities and residences of the directors, trustees, and officers
elected. Should a director, trustee or officer die, resign or in any manner
cease to hold office, his heirs in case of his death, the secretary, or any
other officer of the corporation, or the director, trustee or officer himself,
shall immediately report such fact to the Securities and Exchange
Commission
 Within 30 days after election. Corporate secretary shall submit the
names, nationalities and residences of the directors/trustees to
the SEC.
 This is to ensure that they comply with the requirement of
majority of the members of the board must reside in the
Philippines
 In case of death or resignation, his heirs in case of death, the
secretary, or other corporate officers shall immediately report
such fact to the SEC.
Sec. 27. Disqualification of directors, trustees or officers. - No person
convicted by final judgment of an offense punishable by imprisonment
for a period exceeding six (6) years, or a violation of this Code committed
within five (5) years prior to the date of his election or appointment, shall
qualify as a director, trustee or officer of any corporation.
 Two grounds for disqualification of Director/Trustee/Officer:
1. If candidate is convicted by final judgment for an offense
that is punishable by imprisonment of more than 6 years.
Final Judgment – judgment is only final if after 15 days of
the promulgation and the Right of Appeal is not
exercised.
2. If candidate commits a violation of the corporation code
within 5 years prior to his election. The penalty is
immaterial. What is important is it happened within 5
years prior to the election.
Sec. 28. Removal of directors or trustees. - Any director or trustee of a
corporation may be removed from office by a vote of the stockholders
holding or representing at least twothirds (2/3) of the outstanding capital
stock, or if the corporation be a non-stock corporation, by a vote of at
least two-thirds (2/3) of the members entitled to vote: Provided, That
such removal shall take place either at a regular meeting of the
corporation or at a special meeting called for the purpose, and in either
case, after previous notice to stockholders or members of the
corporation of the intention to propose such removal at the meeting. A
special meeting of the stockholders or members of a corporation for the
purpose of removal of directors or trustees, or any of them, must be
called by the secretary on order of the president or on the written
demand of the stockholders representing or holding at least a majority of
the outstanding capital stock, or, if it be a non-stock corporation, on the
written demand 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: the same meeting authorizing the increase of directors or trustees if so
Provided, That removal without cause may not be used to deprive stated in the notice of the meeting.
minority stockholders or members of the right of representation to which  Causes of Vacancy:
they may be entitled under Section 24 of this Code. 1. Removal
2. Expiration of Term
 Requisites:
3. Increase in the number of directors
a. The removal must take place in a regular meeting of the
4. Resignation
corporation or a special meeting called for the purpose
5. Death
b. Previous notice of the intention to propose such removal
6. Abandonment
must have been given to the stockholders/members.
7. Disqualification
c. The following vote must have been obtained to effect the
 Filling of Vacancies:
removal:
During a regular or special meeting called for that purpose, a
1. Stock Corporation – atleast 2/3 of the outstanding capital
vacancy in the board may be filled as follows:
stock entitled to vote
a. By the stockholders or members:
2. Non-stock Corporation – 2/3 of the members entitled to
1. If the cause of the vacancy is caused by:
vote
(a.) Removal
 Cause of removal:
(b.) Expiration of term
General Rule: Removal may be with or without cause.
(c.) Increase in the number of directors
Execption: Removal without cause may not be used to deprive
2. If the cause of the vacancy is other than the 3 mentioned
minority stockholders or members of the rights of representation
but the remaining members of the board no longer
in the board of directors/trustees
constitute a quorum for the purpose of filling the vacancy
Directors/Trustees that were elected through cumulative voting
(ex. A plane crashes and 2 of the board members die but
cannot be removed without cause.
3 survive, the remaining 3 may fill the vacancy left by
those who died but if 2 survived instead of 3, then the
Sec. 29. Vacancies in the office of director or trustee. - Any vacancy
vacancy will be filled in a meeting called for that
occurring in the board of directors or trustees other than by removal by
purpose).
the stockholders or members or by expiration of term, may be filled by
b. By the board of directors of trustees:
the vote of at least a majority of the remaining directors or trustees, if
1. If the cause of vacancy is other than the 3 mentioned
still constituting a quorum; otherwise, said vacancies must be filled by
2. The remaining directors or trustees still constitute a
the stockholders in a regular or special meeting called for that purpose. A
quorum.
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 Sec. 30. Compensation of directors. - In the absence of any provision in
to be filled by reason of an increase in the number of directors or the by-laws fixing their compensation, the directors shall not receive any
trustees shall be filled only by an election at a regular or at a special compensation, as such directors, except for reasonable pre diems:
meeting of stockholders or members duly called for the purpose, or in 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 ten (10%) percent of the net income
before income tax of the corporation during the preceding year.
 General Rule: Directors are not entitled to compensation as such
directors
 Exceptions: Directors are entitled to compensation in the
following cases:
a. When fixed in the By-laws
b. When the giving of compensation is approved by the
stockholders representing at least a majority of the
outstanding capital stock.
c. When the compensation refers to reasonable allowance or
per diems (this does not require a provision in the by-laws or
approval of the stockholders; board approval is sufficient.)
 Limitation on Compensation:
o The compensation (excluding per diems) of directors, as
such directors, must not exceed 10% of the net
income before income tax of the corporation during
the preceding year.
o Per Diem will depend on the financial capacity of the
corporation, there is no stated limitation. Only
qualification is that it is Reasonable Per Diem.
 As a General Rule, why are directors not entitled to
compensation?
o The profit that they get from their investment in the
corporation are more than sufficient motive for them to
work without compensation. Corporate officers are
naturally entitled to compensation not as directors but as
officers (such as in the case of the president who must be
a director).
Sec. 31. Liability of directors, trustees or officers. - Directors or trustees
who willfully and knowingly vote for or assent to patently unlawful acts
of the corporation or who are guilty of gross negligence or bad faith in
directing the affairs of the corporation or acquire any personal or
pecuniary interest in conflict with their duty as such directors or trustees
shall be liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and other
persons. When a director, trustee or officer attempts to acquire or
acquires, in violation of his duty, any interest adverse to the corporation
in respect of any matter which has been reposed in him in confidence, as
to which equity imposes a disability upon him to deal in his own behalf,
he shall be liable as a trustee for the corporation and must account for
the profits which otherwise would have accrued to the corporation.
 Grounds for liability to pay for damages:
a. By willingly and knowingly voting or assenting patently
unlawful acts of the corporation
Ex. The corporation is engaged in the trucking business, and
during the directors meeting attended by 5, 3 voted to allow
the corporation, the use of its truck in conveying smuggled
goods. So they passed a resolution voted by the 3, allowing
the use of their trucks to convey the goods. The truck is
intercepted by the authorities, the truck and the smuggled
goods will be subject to confiscation.
Who will be liable for the damages?
Those who voted to allow the truck to a patently unlawful act
of conveying the smuggled goods will be solidarily liable for
damages.
To whom shall they be liable?
To the corporation, its stockholders or members or other
persons who suffer damages resulting from the unlawful act.
b. By being guilty of gross negligence or bad faith in directing
the affairs of the corporation
c. By accepting any personal or pecuniary interest in conflict
with their duty as such directors or trustees.
(Ex. You are a director of Magnolia and Selecta offers you a
consultant position in their corporation. Accepting the
position would be a conflict in you duties as a director in
 magnolia and if as a result damage is cause to magnolia than
you can be held liable for damages).
 Liability for secret profits; Violation of duty:
o A director, trustee or officer shall be liable as trustee for
the corporation and must account for the profits which
otherwise would have been accrued to the corporation
when he attempts to acquire the profit in violation of his
duties.
o Examples: A director was tasked by the corporation to
sell a land for P10M, The director sold the land for P10M
but only gave the corporation P9M because he kept the
P1M for commission. In this case the director is liable as
trustee to the corporation and must account for that
P1M to the corporation because he violated his duties in
favor of the secret profit.
Sec. 32. Dealings of directors, trustees or officers with the corporation. -
A contract of the corporation with one or more of its directors or trustees
or officers is voidable, at the option of such corporation, unless all the
following conditions are present: 1. That the presence of such director or
trustee in the board meeting in which the contract was approved was not
necessary to constitute a quorum for such meeting; 2. That the vote of
such director or trustee was nor necessary for the approval of the
contract; 3. That the contract is fair and reasonable under the
circumstances; and 4. That in case of an officer, the contract has been
previously authorized by the board of directors. Where any of the first
two conditions set forth in the preceding paragraph is absent, in the case
of a contract with a director or trustee, such contract may be ratified by
the vote of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or of at least two-thirds (2/3) of the members
in a meeting called for the purpose: Provided, That full disclosure of the
adverse interest of the directors or trustees involved is made at such
meeting: Provided, however, That the contract is fair and reasonable
under the circumstances.
 A contract of the corporation with one or more of its
directors/trustees or officers is voidable at the option of the
corporation unless all the following requisites are present:
1. The presence of such director/trustee in the board meeting in
which the contract was approved was not necessary to
constitute a quorum.
2. The vote of such director/trustee was not necessary for the
approval of the contract (corporate act).
3. The contract is fair and reasonable under the circumstances.
4. In the case of an officer, the contract with the officer has
been previously authorized by the board of
directors/trustees.
 Conditions for ratification of contract with director/trustee if
voidable because of the absence of the first 2 requirements:
1. The contract must be fair and reasonable under the
circumstances.
2. Full disclosure of the adverse interest of the director/trustee
is made at the meeting called for the purpose.
3. Ratification is made by vote of the stockholders representing
at least 2/3 of the outstanding capital stock or 2/3 of the
members.
 When is a contract valid?
1. If all the requisites of this section is present.
2. If the corporation opted not to question it.
3. If not all of section 32 is not present but it is ratified by the
stockholders representing 2/3 of the outstanding capital
stock.
Sec. 33. Contracts between corporations with interlocking directors. -
Except in cases of fraud, and provided the contract is fair and reasonable
under the circumstances, a contract between two or more corporations
having interlocking directors shall not be invalidated on that ground
alone: Provided, That if the interest of the interlocking director in one
corporation 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 twenty (20%) percent of the
outstanding capital stock shall be considered substantial for purposes of
interlocking directors.
 There is interlocking directorate when one, some, or all of the
directors of one corporation, is/are also the directors of another
corporation. This fact alone is not enough to validate a contract
with the corporations.
 Requisites for the validity of the contract between two or more
corporations with interlocking directors:
o There is no fraud
o The contract is fair and reasonable under the
circumstances.
o If the interest of the interlocking director in one
corporation or corporations is merely nominal, he shall
be subject to the requisites of Sec. 32 in the corporation
where his interest is nominal:
 That his presence in the board meeting in which
the contract was approved was not necessary to
constitute a quorum.
 His vote was not necessary for the approval of
the contract.
o This is so because with to the corporation where his
interest is merely nominal, it was as if it was entered into
a contract with one of its directors represented by the
corporation where his interest is substantial.
 For interest to be considered substantial stockholdings must
exceed 20% of the outstanding capital stock for the purpose of
interlocking directors.
Sec. 34. Disloyalty of a director. - Where a director, by virtue of his office,
acquires for himself a business opportunity which should belong to the
corporation, thereby obtaining profits to the prejudice of such
corporation, he must account to the latter for all such profits by
refunding the same, unless his act has been ratified by a vote of the
stockholders owning or representing at least two-thirds (2/3) of the
outstanding capital stock. This provision shall be applicable,
notwithstanding the fact that the director risked his own funds in the
venture.
 A director is considered disloyal when, by virtue of his officer, he
acquires for himself a business opportunity which should belong
to the corporation, thereby obtaining profits prejudice to the
corporation.
 The disloyal director must account to the corporation all such
profits derived by him from the said business opportunity by
refunding the profits to the corporation.
 The disloyal director may be exempted from liability if his act is
ratified by a vote of the stockholders presenting at least 2/3 of the
outstanding capital stock.
 It is important to note the phrase “by virtue of his office” because
a director will not be considered disloyal if he was able to acquire
the business opportunity not by using his advantage as a director
but as an individual
 Ex.: A parcel of land of offered to X Corporation which is engaged
in real estate where A is a director. The seller offers A the parcel
on behalf of the corporation. A told the seller that he would be
the one to personally buy it instead of the corporation which the
seller agreed. After which A sold the land and made a profit from
it.
Is a not considered a disloyal director?
Yes since by virtue of his office he was able to acquire the
business opportunity in prejudice to the corporation. He is
liable to refund the corporation for the profit that he made
 Suppose the parcel of land was instead to him by his neighbor as
his friend. If A sold the land and made a profit out of it, will he still
be considered a disloyal director?
No. because the business opportunity was not acquired by virtue
of his office.
  Pertaining to the previous example, A would need not to refund
the amount he profited if his action was ratified by the
stockholder representing 2/3 of the outstanding capital stock.
 Doctrine of Corporate Opportunity – this doctrine is to the effect
that when a director 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, or when
by virtue of his office, he acquires for himself a business
opportunity which should belong to the corporation, he must
account for all such profits derived from it by refunding the profits
to the corporation.
Sec. 35. Executive committee. - The by-laws of a corporation may create
an executive committee, composed of not less than three members of
the board, to be appointed by the board. Said committee may act, by
majority vote of all its members, on such specific matters within the
competence of the board, as may be delegated to it in the by-laws or on
a majority vote of the board, except with respect to: (1) approval of any
action for which shareholders' approval is also required; (2) the 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.
 An executive committee is a small group within a corporation
composed of not less than 3 members of the board, the creation
of which is provided in the by-laws. Its purpose is to take
immediate action on important matter without the need of a
board meeting especially when it is difficult to muster a quorum
(difficult to gather majority of the members of the board).
 To 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
 The following may not be delegated to the executive committee:
1. Approval of any action for which shareholders’ approval is
also required.
2. The filling of vacancies in the board
3. Amendment or repeal of by-laws or the adaptation of new
by-laws.
4. Amendment or repeal of any resolution of the board which by
its express terms is not amendable or repealable .
5. The declaration of cash dividends.
Sec.36. Corporate powers and capacity. - Every corporation incorporated
under this Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in
the articles of incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the
provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to
amend or repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and
to sell 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.
 Express Powers of a Corporation: powers expressly provided for
by law
 Implied Powers: powers which are necessary to carry out the
express powers of the corporation.
 Incidental Powers: powers that a corporation may exercise by
reason of its very existence as a corporation.
 Important Notes:
o The power to sue and sued in its corporate name – being
a juridical person, the corporation can sue and sued.
o A de facto corporation may also sue and sued as long as
its corporate existence has not yet been questioned.
o Once a corporation enters liquidation, it is given a period
of 3 years to liquidate. After the period is over the
corporation will no longer have the power to sue and be
sued.
o A corporation being an artificial being cannot sue on the
grounds of physical suffering, mental anguish,
besmirched reputation, wounded feelings, moral shock,
sleepless nights, etc. But if a corporation has a good
reputation in the community and that reputation is
besmirched, then it can file an action for damages for
besmirching its reputation.
o The corporation is empowered to give reasonable
donation to charity. It has to set aside a portion of its
profits for charity. Donations made corporations to
charity and for calamities are deductible to their taxes.
o Corporations are not allowed to donate in aid of a
political party, candidate, or any political activity.
o The corporation is empowered to put up a retirement
plan for the benefit of its employees, directors/trustees,
and officers.
Sec. 37. Power to extend or shorten corporate term. - A private
corporation may extend or shorten its term as stated in the articles of
incorporation when approved by a majority vote of the board of directors
or trustees and ratified at a meeting by the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock or by at least two-
thirds (2/3) of the members in case of non-stock corporations. Written
notice of the proposed action and of the time and place of the meeting
shall be addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally:
Provided, That in case of extension of corporate term, any dissenting
stockholder may exercise his appraisal right under the conditions
provided in this code.
 A corporation may extend or shorten its corporate term provided
it complies with the following requisites:
a. Vote requires – the act must be approved by:
1. Majority vote of the board of directors/trustees
2. Ratified by 2/3 of the outstanding capital stock in a
meeting called for that purpose
b. The articles of incorporation are amended to effect such
change in the corporate term.
 In the case of a stock corporation. Any stockholder who dissents
the extending or shortening of the corporate term may exercise
his appraisal right. Appraisal right is the right of a stockholder to
demand payment of the fair value of his shares when he dissents
from certain corporate acts.
Sec. 38. Power to increase or decrease capital stock; incur, create or
increase bonded indebtedness. - No corporation shall increase or
decrease its capital stock or incur, create or increase any bonded
indebtedness unless approved by a majority vote of the board of
directors and, at a stockholder's meeting duly called for the purpose,
two-thirds (2/3) of the outstanding capital stock shall favor the increase
or diminution of the capital stock, or the incurring, creating or increasing
of any bonded indebtedness. Written notice of the proposed increase or
diminution of the capital stock or of the incurring, creating, or increasing
of any bonded indebtedness and of the time and place of the
stockholder's 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.
A certificate in duplicate must be signed by a majority of the directors of
the corporation and countersigned by the chairman and the secretary of
the stockholders' meeting, setting forth:
(1) That the requirements of this section have been complied with; (2)
The amount of the increase or diminution of the capital stock; (3) If an
increase of the capital stock, the amount of capital stock or number of
shares of no-par stock thereof actually subscribed, the names,
nationalities and residences of the persons subscribing, the amount of
capital stock or number of no-par stock subscribed by each, and the
amount paid by each on his subscription in cash or property, or the
amount of capital stock or number of shares of no-par stock allotted to
each stockholder if such increase is for the purpose of making effective
stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased; (5)
The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock,
or the incurring, creating or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or
increasing of any bonded indebtedness shall require prior approval of the
Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the
corporation and the other shall be filed with the Securities and Exchange
Commission and attached to the original articles of incorporation. From
and after approval by the Securities and Exchange Commission and the
issuance by the Commission of its certificate of filing, the capital stock
shall stand increased or decreased and the incurring, creating or
increasing of any bonded indebtedness authorized, as the certificate of
filing may declare: Provided, That the Securities and Exchange
Commission shall not accept for filing any certificate of increase of capital
stock unless accompanied by the sworn statement of the treasurer of the
corporation lawfully holding office at the time of the filing of the
certificate, showing that at least twenty-five (25%) percent of such
increased capital stock has been subscribed and that at least twenty-five
(25%) percent of the amount subscribed has been paid either in actual
cash to the corporation or that there has been transferred to the
corporation property the valuation of which is equal to twenty-five (25%)
percent of the subscription: Provided, further, That no decrease of the
capital stock shall be approved by the Commission if its effect shall
prejudice the rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or
increase the same, with the approval by a majority vote of the board of
trustees and of at least two-thirds (2/3) of the members in a meeting
duly called for the purpose.
Bonds issued by a corporation shall be registered with the Securities and
Exchange Commission, which shall have the authority to determine the
sufficiency of the terms thereof. (17a)
 Requisites to increase/decrease Capital Stock:
a. Vote Required
1. Majority vote of the board of directors
 2. 2/3 of the outstanding capital stock in a meeting called
for that purpose.
b. The increase or decrease of capital stock must be certified to
in a certificate duly signed by a majority of the directors and
countersigned by the chairman and the secretary of the
stockholder’s meeting.
c. Subscription and paid in capital requirements in case of an
increase in capital stock (treasurer’s sworn statement of the
compliance with the 25% - 25% rule in case there is an
increase in capital stock.
d. The law does not permit a decrease in capital stock if the
result will be prejudice to the corporation’s creditors. (if
capital stock is fully paid and capital stock is decreased,
excess capital is returned to the stockholder’s in the form of
liquidating dividends).
e. Increase of decrease of capital stock must be approved by
SEC.
 Ways of increasing/decreasing capital stock
o Increasing of capital stock
 Increase the no. of share w/o increasing the par
value
 Increase the par value w/o increasing the no. of
shares
 Increase both
o Decreasing of Capital Stock
 Decrease the no. of share w/o decreasing the
par value
 Decrease the par value w/o decreasing the no.
of shares
 Decrease both
 Trust Fund Doctrine – capital stocks and assets of the corporation
are held in trust for creditors. No distribution of assets to
shareholders until the claims of the creditors have been paid or
any appropriation/provision has been made for them. Disposal of
such assets without making any appropriation/provision for the
creditors will be fraudulent to the creditors.
 Requisites to increase/decrease Bonded Indebtedness:
a. Vote Required
1. Majority vote of the board of directors/trustees
2. 2/3 of the outstanding capital stock in a meeting called
for that purpose or 2/3 of the members
b. The increase or decrease of bonded indebtedness must be
certified to in a certificate duly signed by a majority of the
directors and countersigned by the chairman and the
secretary of the stockholder’s meeting.
c. Increasing/Decreasing bonded indebtedness must be
approved with the SEC
d. Bonds issued should be registered with the SEC which shall
have the authority to determine the sufficiency of the term.
Sec. 39. Power to deny pre-emptive right. - All stockholders of a stock
corporation shall enjoy pre-emptive right to subscribe to all issues or
disposition of shares of any class, in proportion to their respective
shareholdings, unless such right is denied by the articles of incorporation
or an amendment thereto: Provided, That such pre-emptive right shall
not extend to shares to be issued in compliance with laws requiring stock
offerings or minimum stock ownership by the public; or to shares to be
issued in good faith with the approval of the stockholders representing
two-thirds (2/3) of the outstanding capital stock, in exchange for
property needed for corporate purposes or in payment of a previously
contracted debt.
 This refers to the right of existing shareholders to purchase or
subscribe to all issuances or disposition of shares of any class in
proportion to their respective shareholdings before the shares are
offered to the public.
 Every time there are new shares, they are first offered to the
current shareholders before selling them to the public.
 This right will enable the stockholders to maintain the
proportionate interest in the corporation.
  Existing shareholder are only given a certain period to exercise the
right. Failure to exercise the right within the period shall waive
the right.
 Shares covered by the Pre-emptive right:
o Shares issued as a result of increase in capital stock
o Shares issued out of the unsubscribed portion of the
authorized capital stock only if not all the authorized
capital stock were offered for subscription at the time of
incorporation.
o Other shares that may be disposed by the corporation
including treasury shares.
 Share not covered by the pre-emptive right:
o When it is denied by the articles of incorporation or an
amendment thereto
o When share are to be issued in compliance with laws
requiring stock offerings or minimum stock ownership by
the public.
o When the share are to be issued in good faith with
approval of 2/3 of the outstanding capital stock:
 In exchange for property needed for corporate
purposes.
 In payment of a previously contracted debt.
 Stockholders cannot compel the corporation to sell them more
share if they were already given the right of pre-emption.
 If pre-emptive right is removed due to amendment, stockholder
may exercise appraisal right.
Sec. 40. Sale or other disposition of assets. - Subject to the provisions of
existing laws on illegal combinations and monopolies, a corporation may,
by a majority vote of its board of directors or trustees, sell, lease,
exchange, mortgage, pledge or otherwise dispose of all or substantially
all of its property and assets, including its goodwill, upon such terms and
conditions and for such consideration, which may be money, stocks,
bonds or other instruments for the payment of money or other property
or consideration, as its board of directors or trustees may deem
expedient, when authorized by the vote of the stockholders representing
at least two-thirds (2/3) of the outstanding capital stock, or in case of
non-stock corporation, by the vote of at least to two-thirds (2/3) of the
members, in a stockholder's or member's meeting duly called for the
purpose. Written notice of the proposed action and of the time and place
of the meeting shall be addressed to each stockholder or member at his
place of residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage prepaid, or
served personally: Provided, That any dissenting stockholder may
exercise his appraisal right under the conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially all the
corporate property and assets if thereby the corporation would be
rendered incapable of continuing the business or accomplishing the
purpose for which it was incorporated.
After such authorization or approval by the stockholders or members, the
board of directors or trustees may, nevertheless, in its discretion,
abandon such sale, lease, exchange, mortgage, pledge or other
disposition of property and assets, subject to the rights of third parties
under any contract relating thereto, without further action or approval
by the stockholders or members.
Nothing in this section is intended to restrict the power of any
corporation, without the authorization by the stockholders or members,
to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of
its property and assets if the same is necessary in the usual and regular
course of business of said corporation or if the proceeds of the sale or
other disposition of such property and assets be appropriated for the
conduct of its remaining business.
In non-stock corporations where there are no members with voting
rights, the vote of at least a majority of the trustees in office will be
sufficient authorization for the corporation to enter into any transaction
authorized by this section.
 Vote Required
1. Majority vote of the board of directors/trustees
 2. 2/3 of the outstanding capital stock in a meeting
called for that purpose or 2/3 of the members.
 Abandonment of the action: The Board of directors/trustees may
abandon such sale or other disposition of all or substantially all of
the corporate property w/o further action or approval from the
stockholders/members subject to the right of the 3 rd person under
any contract relating thereto.
 Sale or other disposition shall be deemed to cover substantially all
of the corporate property if thereby the corporation would be
rendered incapable of continuing the business or accomplishing
the purpose of which it was incorporated.
 Appraisal right of a stockholder may only be exercised if the sale
or disposition was all or substantially all of its corporate assets.
 Ex. X Corporation is engaged in a bus company, it has 100 buses
and decides to sell 5 of them. A, a stockholder in the corporation
dissented the decision to sell the buses. Can A exercise his
appraisal right?
 The answer is No. his appraisal right cannot be exercised because
although the corporation sold its assets w/o him consenting to it,
it did not render the corporation incapable of continuing its
business.
 But what If the corporation sold 99 of its buses? Can he now
exercise his appraisal right?
 Yes, because the sale or disposition rendered the corporation
incapable of continuing its business.
 When the vote of the board of directors/trustees is sufficient (no
need for the approval of the stockholders):
o When the sale, lease, exchange, mortgage, pledge or
other disposition of any of the property of the
corporation is necessary in the usual and regular course
of business. (Ex. If a corporation is engaged in the buy
and sell of land and the corporation sells land, will this
require the stockholder’s approval? No. because it is in
the ordinary course of business.)
 Appraisal right cannot be exercised if the
disposition was in the natural and ordinary
course of business or of the disposition need not
require the approval of the stockholders.
o When the proceeds of such sale or other disposition are
to be appropriated for the conduct of the remaining
business of the corporation.
 Ex. A corporation has 2 branches, one in Manila
and one in Makati, the corporation wants to sell
its branch in Manila so it can use the proceeds
from the sale to conduct the remaining business
that it has which is in Makati. Approval is no
longer required from the stockholders for the
disposition.
Sec. 41. Power to acquire own shares. - A stock corporation shall have
the power to purchase or acquire its own shares for a legitimate
corporate purpose or purposes, including but not limited to the following
cases: Provided, That the corporation has unrestricted retained earnings
in its books to cover the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising
out of unpaid subscription, in a delinquency sale, and to purchase
delinquent shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for
their shares under the provisions of this Code. (n)
 The acquisition must be for a legitimate purpose or purposes such
as, but not limited to the following
o To eliminate fractional shares arising out of dividends.
(Corporation buys back the fraction.)
o To collect or compromise an indebtedness to the
corporation arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares sold
during the said sale (when there is no highest bidder).
 o To pay stockholders who are entitled to the appraisal  Appraisal right of a stockholder can only be exercised if the
right when they dissent from certain corporate acts. purpose of the investment of the funds is any purpose other than
 The corporation must have unrestricted retained earnings to the corporation’s primary purpose, otherwise appraisal right
cover the purchase of the shares. cannot be exercised.
 In the case of fractional shares, fractional script certificates are
Sec. 43. Power to declare dividends. - The board of directors of a stock
issued to the owners of fractional shares so they may sell it to
corporation may declare dividends out of the unrestricted retained
other stockholders who also have fractional shares. If there is no
earnings which shall be payable in cash, in property, or in stock to all
buyer then the corporation purchases the fractional shares.
stockholders on the basis of outstanding stock held by them: Provided,
Sec. 42. Power to invest corporate funds in another corporation or That any cash dividends due on delinquent stock shall first be applied to
business or for any other purpose. - Subject to the provisions of this the unpaid balance on the subscription plus costs and expenses, while
Code, a private corporation may invest its funds in any other corporation stock dividends shall be withheld from the delinquent stockholder until
or business or for any purpose other than the primary purpose for which his unpaid subscription is fully paid: Provided, further, That no stock
it was organized when approved by a majority of the board of directors dividend shall be issued without the approval of stockholders
or trustees and ratified by the stockholders representing at least two- representing not less than two-thirds (2/3) of the outstanding capital
thirds (2/3) of the outstanding capital stock, or by at least two thirds stock at a regular or special meeting duly called for the purpose. (16a)
(2/3) of the members in the case of non-stock corporations, at a
Stock corporations are prohibited from retaining surplus profits in excess
stockholder's or member's meeting duly called for the purpose. Written
of one hundred (100%) percent of their paid-in capital stock, except: (1)
notice of the proposed investment and the time and place of the meeting
when justified by definite corporate expansion projects or programs
shall be addressed to each stockholder or member at his place of
approved by the board of directors; or (2) when the corporation is
residence as shown on the books of the corporation and deposited to the
prohibited under any loan agreement with any financial institution or
addressee in the post office with postage prepaid, or served personally:
creditor, whether local or foreign, from declaring dividends without
Provided, That any dissenting stockholder shall have appraisal right as
its/his consent, and such consent has not yet been secured; or (3) when it
provided in this Code: Provided, however, That where the investment by
can be clearly shown that such retention is necessary under special
the corporation is reasonably necessary to accomplish its primary
circumstances obtaining in the corporation, such as when there is need
purpose as stated in the articles of incorporation, the approval of the
for special reserve for probable contingencies.
stockholders or members shall not be necessary.
 Dividend is the portion of the accumulated profits of a
 Approval from the stockholders or members is not required if the
corporation which is set aside by the directors for distribution to
investments by the corporation is reasonable necessary to
the stockholders.
accomplish its primary purpose.
 The board of directors may declare dividends out of the
 Vote required if the purpose of investment is any purpose other
unrestricted retained earnings in the books of the corporation
than for its primary purpose:
payable either in cash, property or stock in proportion to the
o Majority vote of the board of directors/trustees.
shareholdings of the shareholder.
o 2/3 of the outstanding capital stock or 2/3 of the
members in a meeting called for that purpose.
 It is only the board of directors who can declare dividends out of
the unrestricted earnings of the corporation. The board cannot
declare dividends if there is no unrestricted retained earnings.
 Formula for Retained Earnings: RE = Assets – (Liability + Capital)
 Example: You subscribed to 1000 shares but only paid 50% of it,
then the corporation declared dividends. What will be the basis
for the dividends?
 Answer: the basis will be the no. of share subscribed (1000) and
not the no. of shares paid (500). Why? Because you are required
to pay for the subscribed shares and you became the owner of the
shares upon the subscription of the shares and not upon the
payment. The law states that the dividends will always be based
on proportion of the shareholdings of the shareholder.
 A delinquent stockholder is entitled to dividends, as a matter of
fact that is the only right that a delinquent stockholder has.
 Requirements before a delinquent stockholder can receive the
dividends:
o If it is cash dividends: it will be first applied to the unpaid
subscription plus cost and expenses (cost and expenses
are first deducted from the dividends before it is applied
to the unpaid portion of the subscription).
 Ex. If you become delinquent because you owed
the corporation P10,000 for the remaining
unpaid subscription and the corporation
declared P10,000 dividends. The amount will
not be given to you directly, it will be first
applied to you unpaid balance.
o If it is a stock dividend: the new stocks entitled to you by
virtue of stock dividend will be withheld from you until
you pay the unpaid portion of the subscription.
 Cash dividends can only be declared by the board of directors
provided that there is a quorum. Approval from the stockholders
is not necessary.
 Stock dividends on the other hand are subject to the following
requirements:
o Majority vote of the directors provided there is a quorum
o 2/3 of the outstanding capital stock entitled to vote in a
meeting called for that purpose.
 General Rule: The Corporation cannot be compelled to declare
dividends. The power to declare dividends is discretionary on the
part of the board of directors.
 Exception: The Corporation is prohibited from retaining profits in
excess of 100% of the paid-in capital stock. The moment it
exceeds 100% of the paid-in capital stock, the corporation is
mandatorily required to declare dividends. And if they don’t
declare dividends, the stockholders can file a petition to the SEC
for them to compel the corporation to declare dividends because
it is prohibited.
 Exception to the exception: A corporation may retain profits that
exceed 100% of the paid-in capital in the following cases:
o When it is justified by definite corporate expansion
projects or programs approved by the board of directors
o When the corporation is prohibited from declaring
dividends under any loan agreement whether it is with
domestic or foreign creditors w/o first getting their
consent and such consent has to be given.
o When retention is necessary under special
circumstances, such as when there is a need for special
reserve for contingencies (ex. Calamities)
 The law requires that for dividends to be declared, there must be
actual sufficient assets that the corporation possess for the basis
of the dividends. Therefore money that the corporations expects
to receive but is not yet received cannot be the basis for declaring
dividends.
 Dividends cannot be declared on the basis of borrowed money
but you can temporarily borrow money to declare dividends if
there is actual money but is currently being used and the
corporation expects to recover it.
 Increase in the assets of the corporation cannot be used as basis
for declaration of dividends.
 o Ex. If the corporation purchased parcels of land and their
Fair value appraised, can that be the basis for declaration
of dividends? No because the fair value of that type of
asset is always fluctuating.
 Additional condition for declaration of stock dividends: There
must be available unissued shares. If there is no more available
unissued shares then you can amend the article of incorporation
and increase the no. of share to be approved by the SEC. Once
approved then you may declare stock dividends.
 Declaration of stock dividends adds nothing and takes nothing
from the corporation. You merely increase your no. of shares but
it doesn’t increase your interest (similar to share split).
 Cash dividends on the other hand reduces the assets of the
corporation by reducing its cash to the extent of the amount of
dividends declared.
 Property dividends are dividends payable in property, whether
real or personal. These may include the shares of stock of or
bonds issued by, another corporation.
 The entire consideration received for no par value shares will be
treated as capital and no part thereof shall be available for
distribution as dividends.
Sec. 44. Power to enter into management contract. - No corporation shall
conclude a management contract with another corporation unless such
contract shall have been approved by the board of directors and by
stockholders owning at least the majority of the outstanding capital
stock, or by at least 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 one-
third (1/3) of the total outstanding capital stock entitled to vote of the
managing corporation; or (2) where a majority of the members of the
board of directors of the managing corporation also constitute a majority
of the members of the board of directors of the managed corporation,
then the management contract must be approved by the stockholders of
the managed corporation owning at least two-thirds (2/3) of the total
outstanding capital stock entitled to vote, or by at least two-thirds (2/3)
of the members in the case of a non-stock corporation. No management
contract shall be entered into for a period longer than five years for any
one term.
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.
 Management contract is a contract whereby a corporation
delegates the management or operation of its business to another
corporation. Also known as the service contract or operating
agreement
 Management contract term shall not exceed 5 years for 1 term.
 Vote requirement for the management contract to be approved:
o Majority vote of the board of directors/trustees present
provided there is a quorum
o Majority of the outstanding capital stock or majority of
the members entitled to vote in a meeting called for the
purpose.
o Note: the voting requirement mentioned above applies
to both the managing corporation and the managed
corporation
 The following cases require the vote of at least 2/3 of the
outstanding capital stock or 2/3 of the members of the managed
corporation entitled to vote:
a. Where a stockholder/stockholders representing the same
interest of both the managing and the managed corporations
own or control more than 1/3 of the outstanding capital stock
 entitled to vote in the managing corporation. (The case of
interlocking shareholders).
b. Where the majority of the members of the board of
directors/trustees of the managing corporation also
constitute majority of the members of the board of
directors/trustees of the managed corporation. (The case of
interlocking directors).
c. Note: this rule shall only apply if the management contract
refers to managing all or substantially all of the business of
the managed corporation.
 In case of exploration, development, exploitation or utilization of
natural resources, the term of the management contract is
provided in the law creating it.
 Management Contracts may be renewed upon the expiration of
the 5 years if the service is no yet fully complete by then.
Sec. 45. Ultra vires acts of corporations. - No corporation under this Code
shall possess or exercise any corporate powers except those conferred by
this Code or by its articles of incorporation and except such as are
necessary or incidental to the exercise of the powers so conferred
 Ultra Vires acts are acts outside the express, implied, and
incidental powers of a corporation.
 Are Ultra Vires acts illegal? No, in fact they may be legal. It is only
that the acts were outside the express, implied, and incidental
powers of a corporation. While Illegal acts are acts that are
against the law, morals, public order, and public policy.
 Opposite of Ultra Vires is Intra Vires
Sec. 46. Adoption of by-laws. - Every corporation formed under this Code
must, within one (1) month after receipt of official notice of the issuance
of its certificate of incorporation by the Securities and Exchange
Commission, adopt a code of by-laws for its government not inconsistent
with this Code. For the adoption of by-laws by the corporation the
affirmative vote of the stockholders representing at least a majority of
the outstanding capital stock, or of at least a majority of the members in
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 Securities and
Exchange Commission which shall be attached to the original articles of
incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws may
be adopted and filed prior to incorporation; in such case, such by-laws
shall be approved and signed by all the incorporators and submitted to
the Securities and Exchange Commission, together with the articles of
incorporation.
In all cases, by-laws shall be effective only upon the issuance by the
Securities and Exchange Commission of a certification that the by-laws
are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing the
by-laws or any amendment thereto of any bank, banking institution,
building and loan association, trust company, insurance company, public
utility, educational institution or other special corporations governed by
special laws, unless accompanied by a certificate of the appropriate
government agency to the effect that such by-laws or amendments are in
accordance with law.
 The corporation may file the by-laws before or after incorporation
 Requisites if By-laws are filed prior to incorporation:
o Submitted together with the articles of incorporation, to
the SEC and,
o Approved and signed by all the incorporators
 Requisites if By-laws are filed after incorporation:
o Submitted within 1 month after the receipt of the official
notice of the issuance of certificate of incorporation and,
o Approved by the stockholders representing at least a
majority of the outstanding capital stock or by a majority
of the members.
  If the corporation fails to file the by-laws within the period
required then the SEC may revoke or suspend the certificate of
incorporation.
 By-laws are effective upon the issuance of the SEC of a certificate
of incorporation and the by-laws are not inconsistent with the
corporation code.
Sec. 47. Contents of by-laws. - Subject to the provisions of the
Constitution, this Code, other special laws, and the articles of
incorporation, a private corporation may provide in its by-laws for: 1. The
time, place and manner of calling and conducting regular or special
meetings of the directors or trustees;
2. The time and manner of calling and conducting regular or special
meetings of the stockholders or members;
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 of 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.
 You can place anything you want in the by-laws of the corporation
as long as it is not yet regulated by the law.
 You cannot place in the by-laws a requirement which is less than
what is provided in the Corporation Code.
Sec. 48. Amendments to by-laws. - The board of directors or trustees, by
a majority vote thereof, and the owners of at least a majority of the
outstanding capital stock, or at least a majority of the members of a non-
stock corporation, at a regular or special meeting duly called for the
purpose, may amend or repeal any by-laws or adopt new by-laws. The
owners of two-thirds (2/3) of the outstanding capital stock or two-thirds
(2/3) of the members in a 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 Securities and Exchange Commission the
same to be attached to the original articles of incorporation and original
by-laws.
The amended or new by-laws shall only be effective upon the issuance by
the Securities and Exchange Commission of a certification that the same
are not inconsistent with this Code
 Amendment, repeal, or adoption of new by-laws require the
following votes:
o Majority vote of the board of directors/trustees, and
o Majority of the outstanding capital stock or majority of
the members (voting and non-voting) in a meeting called
for the purpose.
  The owners of 2/3 of the outstanding capital stock or 2/3 of the
members may delegate to the board of directors/trustees the
power to amend or repeal by-laws or adopt new by-laws.
 On the other hand, revocation of the power that was previously
delegated to the board only requires the mere majority votes of
the outstanding capital stock or member for the delegated power
to be revoked.
 It is easier to revoke than to delegate.
Sec. 49. Kinds of meetings. - Meetings of directors, trustees, stockholders,
or members may be regular or special.
 Two kinds of Meetings: Regular and Special meetings.
Sec. 50. Regular and special meetings of stockholders or members. -
Regular meetings of stockholders or members shall be held annually on a
date fixed in the by-laws, or if not so fixed, on any date in April of every
year as determined by the board of directors or trustees: Provided, That
written notice of regular meetings shall be sent to all stockholders or
members of record at least two (2) weeks prior to the meeting, unless a
different period is required by the by-laws.
Special meetings of stockholders or members shall be held at any time
deemed necessary or as provided in the by-laws: Provided, however,
That at least one (1) week written notice shall be sent to all stockholders
or members, unless otherwise provided in the bylaws.
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 Secretaries and Exchange Commission, 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 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. (Usually around summer so that you would have no
reason not to attend the meeting).
 Stockholders/trustees are to be notified about the annual meeting
2 weeks prior to the meeting. Written notice will state the place
and time of the meeting.
 As for special meeting, this may be held at any time if it is deemed
necessary or as provided in the by-laws.
 Written notice must also be sent to the stockholders/members
informing them of the time and place of the special meeting 1
week prior to the date of the meeting.
 In both types of meeting. Notice of any meeting may be waived
expressly, or impliedly, by any stockholder or member.
Sec. 51. Place and time of meetings of stockholders or members. -
Stockholders' or members' meetings, whether regular or special, shall be
held in the city or municipality where the principal office of the
corporation is located, and if practicable in the principal office of the
corporation: Provided, That Metro Manila shall, for 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.
 Meetings should 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.
 For this purpose, Metro Manila shall be considered a city or
municipality.
 If the meeting was improperly held or called all proceedings and
any business transacted shall be valid provided all the
 stockholders/members were present or duly represented at the
meeting. And provided the proceedings and transactions were
within the powers and authority of the corporation (Ultra Vires).
Sec. 52. Quorum in meetings. - Unless otherwise provided for in this Code
or in the bylaws, a quorum shall consist of the stockholders representing
a majority of the outstanding capital stock or a majority of the members
in the case of non-stock corporations.
 To constitute a quorum, majority of the outstanding capital stock
(50% + 1) or majority of the members (50% + 1) must be present
unless a greater majority is provided for in the Corporation Code
or in the by-laws.
Sec. 53. Regular and special meetings of directors or trustees. - Regular
meetings of the board of directors or trustees of every corporation shall
be held monthly, unless the bylaws provide otherwise.
Special meetings of the board of directors or trustees may be held at any
time upon the call of the president or as provided in the by-laws.
Meetings of directors or trustees of corporations may be held anywhere
in or outside of the Philippines, unless the by-laws provide otherwise.
Notice of regular or special meetings stating the date, time and place of
the meeting must be sent to every director or trustee at least one (1) day
prior to the scheduled meeting, unless otherwise provided by the by-
laws. A director or trustee may waive this requirement, either expressly
or impliedly.
 Regular meetings for Directors/Trustees will be held monthly,
unless otherwise stipulate.
 Special meetings may held at any time upon the call of the
president or as provided in the by-laws.
 Meetings may be held anywhere inside or outside of the
Philippines unless the by-laws provide otherwise.
 Notice to the directors/trustees are given 1 day before the
scheduled meeting stating the date, time, and place of the
meeting.
 Any director/trustee may waive this requirement expressly or
impliedly.
Sec. 54. Who shall preside at meetings. - The president shall preside at all
meetings of the directors or trustee as well as of the stockholders or
members, unless the by-laws provide otherwise
 The president shall preside at all meetings of the
directors/trustees and stockholders/members, unless the by-laws
provide otherwise.
Sec. 55. Right to vote of pledgors, mortgagors, and administrators. - In
case of pledged or mortgaged shares in stock corporations, the pledgor or
mortgagor shall have the right to attend and vote at meetings of
stockholders, unless the pledgee or mortgagee is expressly given by the
pledgor or mortgagor such right in writing which is recorded on the
appropriate corporate books. (n) Executors, administrators, receivers,
and other legal representatives duly appointed by the court may attend
and vote in behalf of the stockholders or members without need of any
written proxy.
 General Rule: the pledger or mortgagor of the stockholder shall
have the right to attend and vote at stockholder meetings.
 Exemption: The pledgee or mortgagee may attend and vote in the
stockholders’ meeting if he is expressly given the right in writing
by the pledger or mortgagor and it is recorded in the corporate
books.
 Executors, administrators, receivers, and other legal
representatives of the stockholder may attend and vote in the
meeting without the need of any written proxy.
Sec. 56. Voting in case of joint ownership of stock. - In case of shares of
stock owned jointly by two or more persons, in order to vote the same,
the consent of all the co-owners shall be necessary, unless there is a
written proxy, signed by all the co-owners, authorizing one or some of
them or any other person to vote such share or shares: Provided, That
when the shares are owned in an "and/or" capacity by the holders
thereof, any one of the joint owners can vote said shares or appoint a
proxy therefor.
 In case of shares owned jointly or by two or more persons, the
consent of all co-owners are needed in order to attend and vote in
the stockholders’ meeting except in the following cases:
o There is a written proxy, signed by all the co-owners
authorizing one, or some of them, or any other person to
attend and vote in the meeting.
o There shares are owned in an “and/or” capacity, in which
case any one of the co-owners may attend and vote
without the need to get the consent of the other co-
owners.
Sec. 57. Voting right for treasury shares. - Treasury shares shall have no
voting right as long as such shares remain in the Treasury
 Can treasury shares vote? No, as long as they stay in the Treasury.
Sec. 58. Proxies. - Stockholders and members may vote in person or by
proxy in all meetings of stockholders or members. Proxies shall in
writing, signed by the stockholder or member and filed before the
scheduled meeting with the corporate secretary. Unless otherwise
provided in the proxy, it shall be valid only for the meeting for which it is
intended. No proxy shall be valid and effective for a period longer than
five (5) years at any one time.
 A stockholder or member may attend and vote in a meeting by
proxy.
 Requirements and limitations of proxies:
o It must be in writing and signed by the stockholder or
member and must be filed and submitted to the
corporate secretary one day before the scheduled
meeting.
o The written proxy is only valid for that specific meeting
unless they will be given a status as continuing proxy
which means that the written proxy will be valid and
effective for a period not exceeding 5 years at any one
time.
 Written proxy is revocable any time by the stockholder or
member unless it is an irrevocable proxy.
 Irrevocable proxy contains a consideration by the holder of the
proxy. It is coupled with interest therefore it cannot be revoked.
Sec. 59. Voting trusts. - One or more stockholders of a stock corporation
may create a voting trust for the purpose of conferring upon a trustee or
trustees the right to vote and other rights pertaining to the shares for a
period not exceeding five (5) years at any time: Provided, That in the case
of a voting trust specifically required as a condition in a loan agreement,
said voting trust may be for a period exceeding five (5) years but shall
automatically expire upon full payment of the loan. A voting trust
agreement must be in writing and notarized, and shall specify the terms
and conditions thereof. A certified copy of such agreement shall be filed
with the corporation and with the Securities and Exchange Commission;
otherwise, said agreement is ineffective and unenforceable. The
certificate or certificates of stock covered by the voting trust agreement
shall be canceled and new ones shall be issued in the name of the trustee
or trustees stating that they are issued pursuant to said agreement. In
the books of the corporation, it shall be noted that the transfer in the
name of the trustee or trustees is made pursuant to said voting trust
agreement.
The trustee or trustees shall execute and deliver to the transferors voting
trust certificates, which shall be transferable in the same manner and
with the same effect as certificates of stock.
The voting trust agreement filed with the corporation shall be subject to
examination by any stockholder of the corporation in the same manner
as any other corporate book or record: Provided, That both the
transferor and the trustee or trustees may exercise the right of inspection
of all corporate books and records in accordance with the provisions of
this Code.
Any other stockholder may transfer his shares to the same trustee or
trustees upon the terms and conditions stated in the voting trust
agreement, and thereupon shall be bound by all the provisions of said
agreement.
No voting trust agreement shall be entered into for the purpose of
circumventing the law against monopolies and illegal combinations in
restraint of trade or used for purposes of fraud.
Unless expressly renewed, all rights granted in a voting trust agreement
shall automatically expire at the end of the agreed period, and the voting
trust certificates as well as the certificates of stock in the name of the
trustee or trustees shall thereby be deemed canceled 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.
 Voting trust agreement is a written agreement where one or more
stockholders of a corporation confer to a trustee the voting rights
and other rights pertaining to the shares.
 Two parties to the agreement: The stockholder which is the
trustor and the trustee.
 The purpose of the Voting Trust agreement is to give the trustee
the voting rights or other rights of the shares from the
stockholders which are the trustors. But it is usually the voting
rights that are conferred to the trustee.
 Voting Trust Agreement shall not exceed a period of more than 5
years at any given time.
 Except if a voting trust agreement is required as a condition for a
loan, then the Voting Trust Agreement may be more the 5 years
but the moment the loan is paid, the Voting Trust Agreement is
automatically terminated.
 Ex. 5 stockholders entered into a voting trust agreement with X
who is their creditor. The Voting Trust Agreement calls for the
duration of 6 years? Is this valid?
 Answer: Yes it is valid because it is a condition to a loan.
 But what if the loan was repaid in 4 years, what will happen to the
Voting Trust Agreement?
 Answer: it will automatically expire on the fourth year because
the loan had been terminated.
 To be effective, the Voting Trust Agreement should in writing and
notarized. And a certified true copy of the agreement must be
filed with corporation and with the SEC otherwise it will be
ineffective and unenforceable.
 The original certificate of stock covering the stocks of the
stockholder who are trustors to the agreement shall be cancelled
in the books of the corporation and a new certificate of stock shall
be issued in the name of the trustee pursuant to the voting trust
agreement. The name of the stockholders who are trustors will no
longer appear in the book of the corporation instead the name of
the trustee shall appear there.
 What happens to the stockholders whose shares are entrusted?
The trustee shall issue a voting trust certificate in favor of the
stockholders who are trustors in return.
 The Voting Trust Certificate has the same effect as a Certificate of
Stock and they are also a negotiable instrument.
 Who is now the legal owner of the shares? The trustee shall now
be the legal trustee of the shares which will also entitle them to
the dividends. And they are also entitled to be elected as a
director of the corporation.
 Why would stockholders enter into a Voting Trust Agreement in
favor of a trustee whereby the trustee will be the one to exercise
the voting rights of their shares? The purpose is to have a control
of the corporation and to have a unified policy in the corporation
in the sense that there is a new policy that is introduced, the
stockholders who are trustors can vote as a single unit through
the trustee.
 Another advantage of the Voting Trust Agreement is that the
stockholders can sell their shares to a 3 rd person through the
voting trust certificates and still have control of the corporation
through the trustee. (Ex. 5 stockholders in a voting trust
 agreement sell 98% of their shares to a 3 rd person but they can
still control the corporation because of the trustee).
 The buyer of the said shares in a voting trust agreement cannot
exercise the rights of the shares not until the voting trust
agreement period is over.
 What happens after the expiration of the term of the Voting Trust
Agreement? The certificate of stock that was issued in the name
of the trustee shall be cancelled in the books of the corporation
and the voting trust certificates that were given to the
stockholders shall also be cancelled. The new certificates of stock
shall be issued in the name of the respective stockholders and
they shall be reinstated in the books of the corporation. (The
certificates of stock will be returned to the owners).
 The voting trust agreement may be renewed after the expiry of
the term by entering into a new one.
 No voting trust agreement shall be entered into to circumvent
laws against monopolies and illegal combinations in restraint of
trade or used for the purposes of fraud.
 Any stockholder may join an existing voting trust agreement, the
procedure shall apply.
Sec. 60. Subscription contract. - Any contract for the acquisition of
unissued stock in an existing corporation or a corporation still to be
formed shall be deemed a subscription within the meaning of this Title,
notwithstanding the fact that the parties refer to it as a purchase or some
other contract
 A Subscription Contract is a contract for the acquisition of
unissued shares in an existing corporation or a corporation still to
be formed even if the parties called it purchase or sale.
Sec. 61. Pre-incorporation subscription. - A subscription for shares of
stock of a corporation still to be formed shall be irrevocable for a period
of at least six (6) months from the date of subscription, unless all of the
other subscribers consent to the revocation, or unless the incorporation
of said corporation fails to materialize within said period or within a
longer period as may be stipulated in the contract of subscription:
Provided, That no pre-incorporation subscription may be revoked after
the submission of the articles of incorporation to the Securities and
Exchange Commission.
 Pre-incorporation subscriptions are irrevocable for a period of six
months from the date of subscription. Except in the following
cases:
o If all the other subscribers consented to the revocation,
or
o The corporation failed to materialize within 6 months
from the date of subscription or within a period longer as
may be stipulated in the contract of subscription.
 No pre-incorporation subscriptions shall be revoked the moment
the articles of incorporation have been filled with the SEC even if
it is already more than six months. Why? Because this is to assure
the public that there is already an operation capital.
Sec. 62. Considering for stocks. - Stocks shall not be issued for a
consideration less than the par or issued price thereof. Consideration for
the issuance of stock may be any or a combination of any two or more of
the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation
and necessary or convenient for its use and lawful purposes at a fair
valuation equal to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness 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 or conversion.
Where the consideration is other than actual cash, or consists of
intangible property such as patents of copyrights, the valuation thereof
shall initially be determined by the incorporators or the board of
directors, subject to approval by the Securities and Exchange
Commission.
Shares of stock shall not be issued in exchange for promissory notes or
future service.
The same considerations provided for in this section, insofar as they may
be applicable, may be used for the issuance of bonds by the corporation.
The issued price of no-par value shares may be fixed in the articles of
incorporation or by the board of directors pursuant to authority
conferred upon it by the articles of incorporation or the by-laws, or in the
absence thereof, by the stockholders representing at least a majority of
the outstanding capital stock at a meeting duly called for the purpose.
 No shares of stock shall be issued for a consideration less than par
value or below the issue price of the corporation. This only refers
to the original issuance of the shares. Subsequent issuance
(treasury shares) may be issued below par as long as it is
reasonable.
 Consideration for the issuance of shares may be a combination of
any of the following:
a. Actual cash paid
b. Property; tangible or intangible
c. Labor performed or services actually rendered to the
corporation.
d. Previously incurred indebtedness by the corporation.
e. Amounts transferred from unrestricted earnings to stated
capital.
 When the consideration for the issuance of share are intangible
property such as patents and copyrights, the valuation of the
property shall be initially determined by the incorporators or the
board of directors subject to the approval of the SEC.
 Prohibited considerations:
o Promissory Notes
o Future Services
 The issue price for no par value share may be fixed as follows:
1. In the article of Incorporation
2. By the board of directors pursuant to authority conferred
upon by the articles of incorporation.
3. By the stockholders representing majority of the outstanding
capital stock in a meeting called for that purpose if both of
the first two requisites are absent.
Sec. 63. Certificate of stock and transfer of shares. - The capital stock of
stock corporations shall be divided into shares for which certificates
signed by the president or vice president, countersigned by the secretary
or assistant secretary, and sealed with the seal of the corporation shall
be issued in accordance with the by-laws. Shares of stock so issued are
personal property and may be transferred by delivery of the certificate or
certificates endorsed by the owner or his attorney-in-fact or other person
legally authorized to make the transfer. No transfer, however, shall be
valid, except as between the parties, until the transfer is recorded in the
books of the corporation showing the names of the parties to the
transaction, the date of the transfer, the number of the certificate or
certificates and the number of shares transferred.
No shares of stock against which the corporation holds any unpaid claim
shall be transferable in the books of the corporation.
 Certificate of stock is a written acknowledgement by the
corporation of the stockholder’s interest in the management,
profits and assets of the corporation.
 The certificate of stock when issued requires the following:
o Signature of the President or Vice-President and
countersigned by the secretary or asst. secretary.
o Sealed with the seal of the corporation.
 It is a personal property of the stockholder and it is the evidence
of ownership for the shares.
 Certificate of stocks is transferrable to a 3 rd person. The certificate
of stock may be endorsed by the owner in the back of the
certificate and then he will deliver it to the 3 rd person who
purchased it. Such sale is valid as between the parties.
 The sale of the certificate of stock is not yet binding to the Sec. 64. Issuance of stock certificates. - No certificate of stock shall be
corporation and the corporation’s creditors even if the sale issued to a subscriber until the full amount of his subscription together
between the parties was valid not until it is recorded in the books with interest and expenses (in case of delinquent shares), if any is due,
of the corporation. has been paid
 In order for the transaction to binding on the corporation:
 No certificate of stocks shall be issued to a subscriber until the
1. The transferee (the one who bought the certificate and the
following is paid:
shares) must present to the corporate secretary, the
o The full amount of the subscription
endorsed certificate signed in the back by the original owner
o The interest and expenses (in the case of delinquent
and the signature of the transferee.
share), if any, is due.
2. Upon verification of the corporate secretary, the old
 Ex. A subscribed to 5 shares with par value of P100. He paid P300,
certificate of stock shall be cancelled and a new certificate of
is he entitled to a certificate of stocks?
stock shall be issued in the name of the transferee.
 Answer: No, he is not yet entitled because of the P200 unpaid
 Is there another way of transferring the certificate of stocks other
balance of his subscription.
than endorsement? Yes, by deed of assignment. It is a separate
 Cont. of Ex. Supposing A told the corporation to give him a
assignment that the seller must prepare assigning his shares to a
certificate of stock for 3 shares since he already paid P300 and
3rd person. Assignor-assignee relationship between the parties but
each share has P100 pas. Is this valid?
it is not yet recorded in the books of the corporation.
 Answer: No it is not valid, the P300 peso payment is applied to the
 Being the stockholder of the corporation, it is your absolute right
5 shares equally and not to each share individually. So basically A
to transfers your shares to a 3rd person. No one can stop you from
has yet to fully pay a single share.
selling it or transferring it. Supposed a provision in the by-laws
 Derivative Suit – A suit brought by one or more stockholders or
that states before a stockholder can his share to a 3 rd person it
members in the name and on behalf of the corporation to redress
must first be approved by the board of directors and the president
wrongs committed against the corporation or to protect
of the corporation. What is the legal effect of the provision in the
corporate rights whenever the officials of the corporation refuse
by-laws? That provision is void because it is an undue restriction
to sue or are the ones to be sued or hold control of the
on the right of ownership. Same goes for certificate of stock that
corporation.
has a stamp of “Non-transferrable”, that is void because of undue
 Individual Suits – a shareholder can file a suit in his own name
restriction on the right of ownership.
against the corporation for direct violation of his contractual
 However there is no prohibition to provide in the articles of
rights as a shareholder.
incorporation that before a stockholder can sell his shares to 3 rd
 Representative Suit – A group of stockholders may bring direct
persons, he must first sell it to the existing stockholders. The
suits against a corporation in the form of a representative suit or
provision is valid provided that the option/term is short (1
class action.
month).
 No shares of stock against which the corporation holds any unpaid Sec. 65. Liability of directors for watered stocks. - Any director or officer
claim shall be transferrable in the books of the corporation. of a corporation consenting to the issuance of stocks for a consideration
less than its par or issued value or for a consideration in any form other
than cash, valued in excess of its fair value, or who, having knowledge
thereof, does not forthwith express his objection in writing and file the
same with the corporate secretary, shall be solidarily, liable with the
stockholder concerned to the corporation and its creditors for the
difference between the fair value received at the time of issuance of the
stock and the par or issued value of the same.
 Watered stocks are stocks issued for a consideration less than the
par value or its issue price and yet the payment is considered fully
paid. (Ex. You pay P4 for a P5 share and they will consider it fully
paid.)
 Grounds for the liability of directors and stockholders for watered
stocks:
o By consenting to the issuance of stocks for a
consideration less than its par or issue price or for a
consideration in any form other than cash, valued in
excess of its fair value
o By not expressing his objection in writing and filing the
same with the corporate secretary despite having
knowledge of such issuance.
 Nature of Liability:
o Such director or officer shall be solidarily liable with the
stockholder concerned for the difference between the
fair value received at the time of issuance of stock and
the par or issue price.
 To whom is the director or officer liable:
o To the corporation and its creditors.
 This provision only applies to the original issuance (issuance from
the corporation/ unissued shares) and not subsequent issuance.
Sec. 66. Interest on unpaid subscriptions. - Subscribers for stock shall pay
to the corporation interest on all unpaid subscriptions from the date of
subscription, if so required by, and at the rate of interest fixed in the by-
laws. If no rate of interest is fixed in the by-laws, such rate shall be
deemed to be the legal rate.
 Subscribers shall pay interest on unpaid subscriptions from the
date of subscription if so required by the by-laws. The rate of
interest shall be at the:
o Rate fixed in the by-laws,
o If no rate is fixed, at the legal rate which is.
Sec. 67. Payment of balance of subscription. - 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 thirty (30)
days from the said date no payment is made, all stocks covered by said
subscription shall thereupon become delinquent and shall be subject to
sale as hereinafter provided, unless the board of directors orders
otherwise.
 If the stockholder fails to pay subscription on due date the entire
balance of the subscription shall become due and demandable
and the stockholder shall be liable for interest at the legal rate
(12% per annum by virtue of the Central Bank) unless a different
rate of interest is provided in the by-laws computed from such
date until full payment.
 If stockholder fails to pay subscription on due date he is not
automatically considered a delinquent subscriber, he is given 30
days from due date to pay for the amount plus interest. If after
the 30 days from the due date, no payment is made, stocks
covered by the subscription shall become delinquent and shall be
 subject to delinquency sales, unless the board of directors orders
otherwise.
 In the absence of a due date, the board may declare due and
payable in its call the payment for the subscription in either of the
following:
o The whole balance of the subscription. Or
o A percentage of the unpaid balance of the subscription
Sec. 68. Delinquency sale. - The board of directors may, by resolution,
order the sale of delinquent stock and shall specifically state the amount
due on each subscription plus all accrued interest, and the date, time and
place of the sale which shall not be less than thirty (30) days nor more
than sixty (60) days from the date the stocks become delinquent.
Notice of said sale, with a copy of the resolution, shall be sent to every
delinquent stockholder either personally or by registered mail. The same
shall furthermore be published once a week for two (2) consecutive
weeks in a newspaper of general circulation in the province or city where
the principal office of the corporation is located.
Unless the delinquent stockholder pays to the corporation, on or before
the date specified for the sale of the delinquent stock, the balance due
on his subscription, plus accrued interest, costs of advertisement and
expenses of sale, or unless the board of directors otherwise orders, said
delinquent stock shall be sold at public auction to such bidder who shall
offer to pay the full amount of the balance on the subscription together
with accrued interest, costs of advertisement and expenses of sale, for
the smallest number of shares or fraction of a share. The stock so
purchased shall be transferred to such purchaser in the books of the
corporation and a certificate for such stock shall be issued in his favor.
The remaining shares, if any, shall be credited in favor of the delinquent
stockholder who shall likewise be entitled to the issuance of a certificate
of stock covering such shares.
Should there be no bidder at the public auction who offers to pay the full
amount of the balance on the subscription together with accrued
interest, costs of advertisement and expenses of sale, for the smallest
number of shares or fraction of a share, the corporation may, subject to
the provisions of this Code, bid for the same, and the total amount due
shall be credited as paid in full in the books of the corporation. Title to all
the shares of stock covered by the subscription shall be vested in the
corporation as treasury shares and may be disposed of by said
corporation in accordance with the provisions of this Code.
 Procedure of delinquency sale:
o The board of directors, by a resolution, orders the sale of
the delinquent stock
o Notice of the sale and a copy of the resolution are given
to the delinquent subscriber. The same shall also be
published in a newspaper of general circulation in the
province or city where the principal office of the
corporation is located.
o If the delinquent subscriber still fails to pay on or before
the date of the sale, the balance due on his subscription,
accrued interest, cost of advertisement, and other
expenses related to the sale, then the delinquent stock
shall be sold at a public auction to the highest bidder.
 Highest bidder is the one who offers to pay the full amount of the
balance of the subscription, accrued interest, and cost of
advertisement and expenses of sale for the smallest number of
shares.
 Example: Supposed A subscribed to 5 shares at P100 and he only
managed to pay P300. After a few weeks the board called for the
payment of 50% of the balance which A was not able to pay,
automatically the full amount of the balance becomes due and
demandable. A was given 30 days from the due date to pay the
balance, but after 30 days he was still not able to pay the balance.
The board through a resolution considered his subscription as
delinquent and the unpaid share will be sold in a public auction
and the corporation incurred a cost of P50 in relation to the
auction. During the public auction, 3 people bided. X bided for 2
shares at P250, Y bided for 3 share at P250, and Z bided for 4
shares at P250. Who is now considered the highest bidder?
  Answer: X is the highest bidder because he offered the smallest
amount of shares but offered to pay the full amount of the
balance. What happens now is that the 2 shares shall be named
under X and the 3 shares shall be named under A.
 Now what if no one offered to pay the full amount for the least
number of shares? Then there is a failure of auction. If there is no
highest bidder then the corporation may bid for the delinquent
shares, and the total amount due shall be credited as paid in full
in the books of the corporation. Title to the shares shall be vested
as Treasury Shares.
Sec. 69. When sale may be questioned. - No action to recover delinquent
stock sold can be sustained upon the ground of irregularity or defect in
the notice of sale, or in the sale itself of the delinquent stock, unless the
party seeking to maintain such action first pays or tenders to the party
holding the stock the sum for which the same was sold, with interest
from the date of sale at the legal rate; and no such action shall be
maintained unless it is commenced by the filing of a complaint within six
(6) months from the date of sale.
 Rights of a subscriber to recover the shares that were illegally
sold:
o Grounds:
 Irregularity or defect in the notice of sale of the
delinquent stock.
 Irregularity in the sale of the delinquent stock.
o Requisites for recovery:
 The party seeking recovery must pay or tender
to the party holding the stock the sum of which
it was bought with interest from the date of sale
at the legal rate.
 The complaint must be filed within 6 months
from the date of sale.
Sec. 70. Court action to recover unpaid subscription. - Nothing in this
Code shall prevent the corporation from collecting by action in a court of
proper jurisdiction the amount due on any unpaid subscription, with
accrued interest, costs and expenses.
 A corporation can enforce the payment of the contract of
subscription by filling a court action to collect the amount due on
the unpaid subscription with accrued interest, and cost and
expenses instead of going through the process of delinquency
sale.
Sec. 71. Effect of delinquency. - No delinquent stock shall be voted for be
entitled to vote or to representation at any stockholder's 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 .
 Effects of Delinquency:
o The delinquent stock shall not be voted.
o It shall not be entitled to vote or to representation at any
stockholders’ meeting
o The holder shall not be entitled to any rights of a
stockholder except the right to dividends.
Sec. 72. Rights of unpaid shares. - Holders of subscribed shares not fully
paid which are not delinquent shall have all the rights of a stockholder .
Sec. 73. Lost or destroyed certificates. - 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 2. Publication of the loss for 3 consecutive weeks by
the books of the corporation, said corporation shall publish a notice in a the corporation at the expense of the stockholder.
newspaper of general circulation published in the place where the 3. One year from the last publication, the old certificate
corporation has its principal office, once a week for three (3) consecutive is cancelled in the books of the corporation and a
weeks at the expense of the registered owner of the certificate of stock new certificate will be issued if no contest is
which has been lost, stolen or destroyed. The notice shall state the name presented.
of said corporation, the name of the registered owner and the serial  A new certificate may be issued before the lapse of the 1 year
number of said certificate, and the number of shares represented by such period provided the stockholder files a bond or other security in
certificate, and that after the expiration of one (1) year from the date of protection of the corporation.
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 one
(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 one (1) year period
provided herein: Provided, That if a contest has been presented to said
corporation or if an action is pending in court regarding the ownership of
said certificate 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. (R.
A. 201a)
 Lost or Destroyed certificate of stock:
1. Execution of affidavit of loss by the stockholder
detailing how the certificate was lost or destroyed
and then presenting it to the corporate secretary.