CORPORATION

 LAW  REVIEWER  (2013-­‐2014)            ATTY.  JOSE  MARIA  G.  HOFILEÑA    

 
• The   rule   is   that   by-­‐law   provisions   must   be   “reasonable   and   bidder.   PAMBUSCO   through   3   of   5   directors   (the   only   ones   present   at  
calculated   to   carry   into   effect   the   objects   of   the   corporation”   that   meeting)   resolved   to   authorize   Briones   (one   of   the   directors)   to  
comes   from   the   theory   that   by-­‐laws,   as   a   basic   contract   execute   a   deed   of   assignment   of   their   right   of   redemption   in   favor   of  
document,   has   the   sole   purpose   of   regulating   the   relationship   Marcelino  Enriquez,  who  thereafter  sold  the  same  to  Spouses  Yap.  Peña  
between   and   among   the   parties   within   the   intra-­‐corporate   contends  that  there  could  be  no  valid  sale  to  the  spouses  Yap  because  
relationship.   Consequently,   any   by-­‐law   provision   that   does   not   the  deed  of  assignment  in  favor  of  Enriquez  was  void  for  being  executed  
fulfill  such  objective  is  deemed  to  be  unreasonable  and  void.     ultra   vires   and   against   the   by-­‐laws   of   the   corporation   which   provided  
o General   Rule:   The  validity  or  reasonableness  of  a  by-­‐law   that   a   quorum   requires   that   at   least   4   directors   be   present   at   the  
provision  is  a  question  of  law.   meeting,   otherwise   the   meeting   may   be   invalidated   by   failure   or  
o Exception:   This   rule   is   subject   to   the   limitation   that   irregularity  of  notice.  
"where  the  reasonableness  of  a  by-­‐law  is  a  mere  matter    
of   judgment,   and   one   upon   which   reasonable   minds   Issue:   Whether  or  not  the  act  of  the  board  was  against  the  corporation’s  
must  necessarily  differ,  a  court  would  not  be  warranted   by-­‐laws,  and  consequently,  void.  
in   substituting   its   judgment   instead   of   the   judgment   of    
those   who   are   authorized   to   make   by-­‐laws   and   who   Held:  YES.  Section  4  of  PAMBUSCO’s  by-­‐laws  provided  that  at  least  four  
have  exercised  their  authority."1   directors   should   be   present   to   constitute   a   quorum.   According   to   the  
Example:   Corporation   Code   any   action   resolved   by   the   board   with   less   than   the  
• By-­‐law  provisions  on  the  required  quorum  for  special  meetings   number   provided   in   the   by-­‐laws   of   the   corporation   to   constitute   a  
of   the   Board   have   the   force   of   law   and   are   binding   even   on   quorum   would   not   bind   the   corporation.   When   a   quorum   is   not  
third-­‐parties   who   deal   with   the   properties   of   the   corporation.   reached,  all  the  present  directors  could  do  is  to  adjourn.  Moreover,  the  
Peña  v.  Court  of  Appeals,  193  SCRA  717  (1991).   purported  directors  who  attended  the  meeting  and  voted  in  favor  of  the  
  assignment   were   bogus   directors   as   they   were   not   listed   in   the   SEC   as  
Peña  v.  Court  of  Appeals   directors,  nor  were  they  stockholders  of  the  company.  
   
Facts:   Pampanga   Bus   Co.   (PAMBUSCO)   owned   several   mortgaged   lots.   Doctrine:   The   by-­‐laws   of   a   corporation   are   its   own   private   laws   which  
The   lots   were   foreclosed   and   were   sold   to   Rosita   Peña,   as   highest   substantially  have  the  same  effect  as  the  laws  of  the  corporation.  In  this  
sense   they   become   part   of   the   fundamental   law   of   the   corporation   with  
                                                                                                                which  the  corporation  and  its  directors  and  officers  must  comply.  
1
 Ibid,  at  pp.  361-­‐362,  citing  People  ex  rel.  Wildi  v.  Ittner,  165  Ill.  App.  360,  367    
(1911).  
 
NOTES  BY  RACHELLE  ANNE  GUTIERREZ  (UPDATED  APRIL  3,  2014)  
CORPORATION  LAW  REVIEWER  (2013-­‐2014)            ATTY.  JOSE  MARIA  G.  HOFILEÑA    
 
WHAT   IF:   Atty.   Hofileña   à   if   the   other   two   directors   showed   up   and   Issue:  Whether  or  not  the  by-­‐laws  of  VGCCI  can  affect  CBC.  
agreed   to   what   the   three   others   had   initially   made,   would   judgment    
have  been  different?  NO.     Held:  NO.  VGCCI  only  began  sending  notices  of  delinquency  to  Calapatia  
  after  it  was  informed  by  CBC  of  its  foreclosure  proceedings.  Also,  even  
• Non-­‐Binding   Effects   of   By-­‐Laws   to   “Outsiders.”   The   nature   of   though   VGCCI   acknowledged   the   pledge   agreement   between   Calapatia  
by-­‐laws   being   intramural   instruments   would   mean   that   they   are   and   CBC,   it   completely   disregarded   CBC’s   rights   as   a   pledgee   by   not  
not   binding   on   third-­‐   parties,   except   those   who   have   actual   informing  it  of  the  public  auction  it  initiated.    
knowledge   of   their   contents.   China   Banking   Corp.   v.   Court   of    
Appeals,  270  SCRA  503  (1997).   VGCCI   contended   that   CBC   had   actual   knowledge   of   the   club’s   by-­‐laws  
  and   therefore   must   be   bound.   However,   in   order   to   be   bound,   the   third  
China  Banking  Corp.  v.  Court  of  Appeals   party   must   have   acquired   knowledge   of   the   by-­‐laws   at   the   time   the  
  agreement   was   entered   into   between   him   and   the   shareholder.   In   the  
Facts:   Galicano   Calapatia,   Jr.   is   a   stockholder   of   private   respondent   case   at   bar,   CBC   was   only   informed   of   the   by-­‐laws   after   it   informed  
Valley  Golf  &  Country  Club,  Inc.  (VGCCI).  He  pledged  his  Stock  Certificate   VGCCI   of   the   public   auction.   Also,   VGCCI   could   have   easily   informed  
to   petitioner   China   Banking   Corp.   (CBC)   to   secure   a   debt.   This   was   petitioner  of  its  by-­‐laws  when  it  sent  notice  formally  recognizing  CBC  as  
recorded  in  the  corporate  books  with  VGCCI’s  consent.  Calapatia  failed   pledge  of  one  of  its  shares  registered  in  Calapatia’s  name.  
to  pay  his  obligations,  so  CBC  filed  a  petition  for  extrajudicial  foreclosure    
and   informed   VGCCI   asking   that   the   pledged   stock   be   transferred   to   Doctrine:  
CBC’s  name.  However,  VGCCI  also  informed  CBC  that  it  will  not  be  able   General   Rule:   Third   persons   are   not   bound   by   the   by-­‐laws   of   a  
to   do   so   because   Calapatia   has   unsettled   accounts   with   the   club.   corporation  since  they  are  not  privy  thereto.  
Subsequently,   because   of   Calapatia’s   unsettled   accounts   with   the   club,   Exception:   When   third   persons   have   actual   knowledge   or   constructive  
VGCCI  sold  the  stocks  in  a  public  auction  in  accordance  with  Section  3,   knowledge   of   the   same.   However,   this   knowledge   of   the   by-­‐laws   must  
Article  VIII  of  its  By-­‐Laws.  Three  years  after,  CBC  informed  VGCCI  that  it   be   present   at   the   time   of   the   perfection   of   the   contract,   and   not   only  
was   the   new   owner   by   virtue   of   the   auction   sale,   however,   VGCCI   during  the  proceedings.  
replied  that  for  reason  of  delinquency,  the  same  share  of  stock  was  sold    
at  the  public  auction.  So  of  course,  CBC  protested  and  filed  a  case  with   • “Neither   can   we   concede   that   such   contract   would   be   invalid  
the   RTC   of   Makati   for   the   nullification   of   the   auction   sale   and   the   just   because   the   signatory   thereon   was   not   the   Chairman   of   the  
issuance  of  a  new  stock  certificate  in  its  name.   Board  which  allegedly  violated  the  corporation’s  by-­‐laws.  Since  
  by-­‐laws   operate   merely   as   internal   rules   among   the  

 
NOTES  BY  RACHELLE  ANNE  GUTIERREZ  (UPDATED  APRIL  3,  2014)  
CORPORATION  LAW  REVIEWER  (2013-­‐2014)            ATTY.  JOSE  MARIA  G.  HOFILEÑA    
 
stockholders,  they  cannot  affect  or  prejudice  third  persons  who   stockholders   or   members   during   office   hours.   A   copy   thereof,   duly  
deal   with   the   corporation,   unless   they   have   knowledge   of   the   certified  to  by  a  majority  of  the  directors  or  trustees  countersigned  by  
same.”  PMI  Colleges  v.  NLRC,  277  SCRA  462  (1997).   the  secretary  of  the  corporation,  shall  be  filed  with  the  Securities  and  
  Exchange   Commission   which   shall   be   attached   to   the   original   articles  
C.  Principle  of  Waiver  of  Applicable  to  By-­‐Laws   of  incorporation.  
• A  by-­‐law  may  be  waived  by  a  stockholder  or  member  when  it  is    
he   whose   individual   rights   are   advanced   or   protected   by   its   Notwithstanding   the   provisions   of   the   preceding   paragraph,   by-­‐laws  
provisions.  If  a  corporation  acts  or  contracts  in  disregard  of  a  by-­‐ may  be  adopted  and  filed  prior  to  incorporation;  in  such  case,  such  by-­‐
law   with   the   consent   or   acquiescence   of   the   stockholders   or   laws   shall   be   approved   and   signed   by   all   the   incorporators   and  
members,   there   is   a   waiver   of   the   by-­‐laws,   at   least   pro   hac   vice,   submitted   to   the   Securities   and   Exchange   Commission,   together   with  
whether   it   is   afterwards   sought   to   set   up   the   by-­‐laws   against   the  articles  of  incorporation.  
strangers  or  as  against  its  stockholder  or  members.1    
  In   all   cases,   by-­‐laws   shall   be   effective   only   upon   the   issuance   by   the  
II.  Adoption  Procedure  (Section  46)   Securities   and   Exchange   Commission   of  a  certification  that  the  by-­‐laws  
  are  not  inconsistent  with  this  Code.  
Section  46.  Adoption  of  by-­‐laws.    
Every   corporation   formed   under   this   Code   must,  within   one   (1)   month   The  Securities  and  Exchange  Commission  shall  not  accept  for  filing  the  
after   receipt   of   official   notice   of   the   issuance   of   its   certificate   of   by-­‐laws   or   any   amendment   thereto   of   any   bank,   banking   institution,  
incorporation   by   the   Securities   and   Exchange   Commission,   adopt   a   building   and   loan   association,   trust   company,   insurance   company,  
code  of  by-­‐laws  for  its  government  not  inconsistent  with  this  Code.  For   public   utility,   educational   institution   or   other   special   corporations  
the   adoption   of   by-­‐laws   by   the   corporation   the   affirmative   vote   of   the   governed   by   special   laws,   unless   accompanied   by   a   certificate   of   the  
stockholders  representing  at  least  a  majority  of  the  outstanding  capital   appropriate   government   agency   to   the   effect   that   such   by-­‐laws   or  
stock,   or   of   at   least   a   majority   of   the   members   in   case   of   non-­‐stock   amendments  are  in  accordance  with  law.  (20a)  
corporations,   shall   be   necessary.   The   by-­‐laws   shall   be   signed   by   the    
stockholders   or   members   voting   for   them   and   shall   be   kept   in   the   • There   can   be   no   automatic   dissolution   simply   because   the  
principal   office   of   the   corporation,   subject   to   the   inspection   of   the   incorporators   failed   to   file   the   required   by-­‐laws   under   Section  
                                                                                                                46   of   Corporation   Code.   There   is   no   outright   “demise”   of  
1
 “SEC   Opinion   No.   22,   series   of   2003,   addressed   to   Flores   Ladia   Bacalla   Law   corporate   existence.   Proper   notice   and   hearing   are   cardinal  
Firm”   as   cited   in   “Villanueva,   C.   L.,   &   Villanueva-­‐Tiansay,   T.   S.   (2013).   Philippine   components   of   due   process   in   any   democratic   institution,  
Corporate  Law.  (2013  ed.).  Manila,  Philippines:  Rex  Book  Store.”  
 
NOTES  BY  RACHELLE  ANNE  GUTIERREZ  (UPDATED  APRIL  3,  2014)  
CORPORATION  LAW  REVIEWER  (2013-­‐2014)            ATTY.  JOSE  MARIA  G.  HOFILEÑA    
 
  as   in   the   certificate   of   stock;   otherwise,   the   restriction   shall   not   be  
(b)   Providing   for   a   higher   quorum   requirement   for   a   valid   binding  on  any  purchaser  thereof  in  good  faith.8  
board  meeting;1    
  D.  Matters  That  Cannot  Be  Provided  for  in  By-­‐Laws  
(c)  Limiting,  broadening  or  denial  of  the  right  to  vote,  including    
2
voting  by  proxy,  for  members  in  non-­‐stock  corporations;   On  the  other  hand,  under  the  provisions  of  the  Corporation  Code,  the  
  following  matters  must  be  provided  for  in  the  articles  of  incorporation,  
(d)  Transferability  of  membership  in  a  non-­‐stock  corporations;3       and  consequently  cannot  be  governed  by  the  corporation's  by-­‐laws:  
   
(e)  Termination  of  membership  in  non-­‐stock  corporations;4   (a)   Classification   of   shares   of   stock   and   preferences   granted   to  
  preferred  shares;9  
(f)   Manner   of   election   and   term   of   office   of   trustees   and    
5
officers  in  non-­‐stock  corporations;   (b)  Provisions  on  founder's  shares;10  
   
(g)  Manner  of  distribution  of  assets  in  non-­‐stock  corporations   (c)  Providing  for  redeemable  shares;11  
upon  dissolution;6  and    
  (d)  Provisions  on  the  purposes  of  the  corporation;12  
(h)  Providing  for  staggered  board  in  educational  institutions;7    
  (e)  Providing  for  the  corporate  term  of  existence;13  
In   a   close   corporation,   restrictions   on   the   right   to   transfer   shares   must    
appear   both   in   the   articles   of   incorporation   and   in   the   by-­‐laws,   as   well   (f)  Capitalization  of  stock  corporations;14  
 
(g)  Corporate  name;1  and  
                                                                                                                                                                                                                               
1 8
 Section  25.  ibid.    Section  98.  ibid.  
2 9
 Section  89.  ibid.    Section  6,  Corporation  Code.  
3 10
 Section  90.  ibid.    Section  7,  ibid.  
4 11
 Section  91.  ibid.    Section  8,  ibid.  
5 12
 Section  92.  ibid.    Sections  14,  15,  36(11)  and  45,  ibid.  
6 13
 Section  94.  ibid.    Sections  11,  14  and  37,  ibid.  
7 14
 Section  108.  ibid.    Sections  13  and  14,  ibid..  
 
NOTES  BY  RACHELLE  ANNE  GUTIERREZ  (UPDATED  APRIL  3,  2014)  
CORPORATION  LAW  REVIEWER  (2013-­‐2014)            ATTY.  JOSE  MARIA  G.  HOFILEÑA    
 
  the   same   to   be   attached   to   the   original   articles   of   incorporation   and  
(h)  Denial  of  pre-­‐emptive  rights;2   original  by-­‐laws.  
   
IV.  Amendments  and  Revisions  of  By-­‐Laws  (Section  48)   The  amended  or  new  by-­‐laws  shall  only  be  effective  upon  the  issuance  
  by  the  Securities  and  Exchange  Commission  of  a  certification  that  the  
Section  48.  Amendments  to  by-­‐laws.   same  are  not  inconsistent  with  this  Code.  (22a  and  23a)  
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   SUMMATION  
least   a   majority   of   the   members   of   a   non-­‐stock   corporation,   at   a   à   Although   the   law   provides   a   1-­‐month   lee-­‐way   where   a   corporation  
regular  or  special  meeting  duly  called  for  the  purpose,  may  amend  or   can  submit  their  by-­‐laws.    
repeal   any   by-­‐laws   or   adopt   new   by-­‐laws.   The   owners   of   two-­‐thirds   • However,   in   practice,   the   by-­‐laws   are   submitted   with   the  
(2/3)   of   the   outstanding   capital   stock   or   two-­‐thirds   (2/3)   of   the   articles   of   incorporation.   This   practice   has   been   around   so  
members   in   a   non-­‐stock   corporation   may   delegate   to   the   board   of   much  that  the  SEC  may  sometimes  reject  your  application  if  the  
directors   or   trustees   the   power   to   amend   or   repeal   any   by-­‐laws   or   by-­‐laws  are  not  attached.  
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   à  Articles  +  By-­‐Laws  =  Company’s  Constitutive  Documents  
by-­‐laws  shall  be  considered  as  revoked  whenever  stockholders  owning   • Hierarchy:  Law  à  Articles  of  Incorporation  à  By-­‐Laws  
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  

                                                                                                                                                                                                                                                       
1
 Sections  14  and  18,  ibid..  
2
 Section  39,  ibid..  
 
NOTES  BY  RACHELLE  ANNE  GUTIERREZ  (UPDATED  APRIL  3,  2014)