CORPORATION LAWS
Midterm Compilation
2017
Historical Background
It was not until 1888 that we formalized our business organizations. We were then under
the Spanish regime, so, naturally, adopted the system which was then existing. Very
similar to the partnership were informal joint ventures called sociedad anonima. Another
one, which was very similar to a limited partnership, was the cuentas de participacion.
Some were active members, known to the public, but some were silent partners who
never dealt with the public, mere investors.
Towards the end of the Spanish regime, changes were introduced by the Americans. By
1906, the formal corporation law was introduced. But within the years of 1906-1980,
issues in the business community produced jurisprudence that called for a revision of the
existing law. The Corporation Code of the Philippines was then passed in 1980. It
incorporated jurisprudence and legislation. It was also due to the Constitutional
provision on national economy and patrimony. From this provision, it is clear that the
State reserves the right to grant franchises to businesses. The State is the creator of any
business entity involving corporations.
Since it is the State that has the power to grant that privilege, then only the State can
take back that privilege.
Being a creature of law, the corporation must be operating within the limits of the law.
Section 1. Title of the Code. – This Code shall be known as "The Corporation Code of the
Philippines." (n)
Corporate Law
- Based on the Corporation Code of the Philippines which refers to the legislative
act of congress approved in 1980.
- It is a body of laws, rules and regulations of the SEC, and jurisprudence of the
Supreme Court.
- The doctrines are the result of some commercial practices which ripened into
law or interpreted by the SC, always having in mind the promotion of foreign or
domestic business.
- It is a highly technical law.
- It is a special law, a copy of the US version. The US Version was just a recopy of
the European plus some amendments along the way
Section 2. Corporation defined. - A corporation is an artificial being created by
operation of law, having the right of succession and the powers, attributes and
properties expressly authorized by law or incident to its existence.
Corporation As An Artificial Being
What is the difference between an artificial being and a natural person?
 An artificial being is created by law while a natural being is created by God.
 A creation of the law has no physical appearance. It does not have a mind.
Could a creation of the law commit a crime?
 Generally, they cannot, because there needs to be intention to commit a
crime.
 As a creature of the law, because it does not have a mind, it cannot be
determined what its intention is.
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Can it go to jail?
 No, because it does not have a mind and not capable of committing a crime,
therefore, it can never be liable for a crime.
 No artificial person may be sent to jail. It has no corporal or physical existence.
Instances When A Corporation May Be Liable
1. When the crime is punishable by a special law
o Criminal intent is not necessary
o No imprisonment but made to pay a fine
o The special law must specify that it imposes penalties on the officers.
They are not automatically liable.
o In criminal cases, the criminal intent must be established, not only
that, even if the intention of the corporation is not indicated, still we
cannot convict and penalize the officers because in criminal, cases
we establish guilt beyond reasonable doubt.
2. Acts under the Anti-Money Laundering Act (AMLA)
o It specifies ―any person, natural or artificial…‖
o AMLA is specific. If the corporation violates the AMLA, the officers can
be personally liable. There is also revocation of license.
Veil of Corporate Fiction
- A corporation is an artificial being, separate and distinct from its stockholders
and officers.
- Insofar as the stockholders are concerned, you do not deal with the
stockholders, you deal with the corporation itself.
- In partnership, there is no such thing as veil of corporate fiction. Although it has
a separate juridical personality, its dealings are with the general partners. The
moment there is a liability, the partners continue to be liable, even beyond
their contribution.
- Here is the difference in a corporation; the stockholders do not deal with the
public. Insofar as the public is concerned, they need not know who the
stockholders are.
Management Judgment Rule
The only function of the stockholders would be to elect the board. Beyond that, the
stockholders have nothing to do. The moment the board is elected, the stockholders
cannot even interfere with the decision of the former. The latter cannot even revise or
change the decision. Not even the courts can change the decision.
There are some acts specified in the code which will require the affirmation or the
ratification of the stockholders, but it is limited to only on those acts. In other words, if the
board will perform those particular acts and the stockholders do not ratify, then it
cannot be carried out. But other than those, the stockholders cannot interfere with the
powers of the board.
The board has full authority to decide on how the corporation shall be managed. They
are supposed to represent the stockholders in the decision-making. They are presumed
to be the best people who could manage the corporation. It is not the stockholders that
gave them the powers. It is the law that vested the board such powers.
Rights of a Corporation
1. Right to property
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2. Right to sue and be sued
3. Right to due process and equal protection of the law
4. Right against unreasonable searches and seizures
Because they are persons as we say, the fact that the stockholders organize themselves
as a corporation does not mean that the stockholders have surrendered their rights. The
rights of the stockholders are still recognized. They never abandoned their constitutional
rights. They never abandoned their bill of rights. Although the corporation is an artificial
person, the law recognizes certain rights under the Constitution, not because an
artificial person is supposed to enjoy these bill or rights, but because the corporation,
whether we like it or not, is still composed of natural persons to whom the constitution
has granted certain rights. Although the corporation owns a particular property, these
properties indirectly is represented by shares of stocks which are owned by stockholders.
They have certain investments; they have certain exposures as a stockholder. Therefore,
when we say, the corporation enjoys the right against illegal searches and seizure, this is
not because that artificial person is supposed to enjoy this right directly but this is
because the people that constitutes the corporation enjoy that right.
Rights Not Available To Corporations
May a corporation vote during elections?
 No. The right to vote during elections is only vested to natural persons
 There are certain rights that are personal and can only be exercised, for all
practical intents and purposes, by natural persons.
Does a corporation enjoy the right to life?
 No. The right to life refers only to natural persons
What does the Constitution provide?
 Article III, Section 1. No person shall be deprived of life, liberty, or property
without due process of law, nor shall any person be denied the equal
protection of the laws.
Does a corporation have the right to liberty?
 No. It does not
 Right to liberty means a person cannot be arbitrarily detained
 Only a natural persons can enjoy
 Being a juridical person it now enjoys certain rights and powers but a creature
of the law it does not enjoy all the rights accorded to a natural person.
Damages
- Incurred when the rights of a person are violated
- E.g. besmirched reputation, mental anguish, sleepless nights
Kinds of Damages (MENTAL)
1. Moral
2. Exemplary
3. Nominal
4. Temperate
5. Actual
6. Liquidated
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Can an artificial person demand for damages because of its reputation being
besmirched?
 Yes.
What about mental anguish? Can an artificial being demand for damages?
 No. An artificial being cannot suffer mental anguish. As earlier said, it does not
have the mental faculties that it is supposed to suffer.
Partnership v. Corporation
How is partnership organized?
 Partnership is created by mutual agreement of the parties. It is perfected by
mere consent.
 In corporation, it is not by mere consent, rather it must comply with certain
requirements provided for the Corporation Code and it must have a
Certificate of Incorporation.
Illustration:
Five incorporators wanted to organize a corporation, but for reasons unknown to them,
it cannot be approved and yet they went ahead in engaging certain businesses
without being incorporated. Can we at least say that they were partners because they
have agreed to engage in business?
 No. They cannot be considered as partners because there was no intention to
form a partnership.
 Their intention was to form a corporation. There is a difference between
corporation and partnership. In partnership, there is trust and confidence
between the partners.
But you will notice that there is a provision in the Corporation Code involving
corporation by estoppel. Any idea how that could come about?
 There is a corporation by estoppel when a group of people misrepresents
themselves to the public that they are a corporation when in fact they are not.
In this case, if they incur liabilities, what does the law say?
 They will still be held liable. The liability will be similar to that of general partners
 That is why other authors claim that they may be considered to be a
partnership because the Corporation Code itself recognizes a situation such as
this
Going back to the first situation, where a group of persons acting as a corporation, they
cannot be considered a partnership. It is important that there is an intention to be
related to each other as partners. Otherwise, if there is no such intention, then they
could just be co-owners or they may just be under some other relationship other than
that of a partnership.
In a partnership, the delectus personae principle is present, where partners are
supposed to trust each other. This principle is not required in a corporation. There is no
such relationship or trust and confidence required among the stockholders. There can
never be an instance when that situation will become a partnership.
May a partnership own shares of stocks?
 Yes. Anyone can own shares of stocks, natural or juridical.
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that you’re franchise is only to operate trains and does not give you the power to
expropriate private properties. Supreme Court says it is incidental to its being a railroad
Can a corporation be a partner in a partnership? company.
 No. There is the presence of fiduciary relationship, which means that there  So incidental therefore may be interpreted to mean to the power that is
must be trust and confidence among the partners composing the partnership. necessary to carry out the express powers of the corporation.
It only means that everybody needs to know every partner in the partnership.
However, you would not know every stockholder in a corporation unless there Advantages and Disadvantages of Business Organizations
are probably only 5 or few stockholders. But most corporations are composed
of hundreds or even thousands of stockholders. You can never expect the
stockholders to know all others. That’s why there can be no trust and ADVANTAGES DISADVANTAGES
confidence in a corporation. On that issue, there can be no corporation as a
partner in a partnership.  Earn all profits
 However, there are authors who would say, otherwise, but the authorities  As to manner of creation, it is
would always say that there can be no partner corporation in a contract of  Sustain all loses
easier. Only one person will
partnership. Sole  Once you die the
apply for the creation of the
Proprietorship company dies with
company
Incomplete Incorporation Papers you
 Easy to dissolve
A group of incorporators failed to complete their incorporation papers. Would they be  Proprietor alone will manage
treated as a partnership if not completely incorporated?
 No. They are still treated as a corporation because there must be an intention
to enter into a partnership.  Because of the
 Easy to form shorter life of a
Incidental Powers  Trust and confidence among partnership the
- Activities necessary to carry out the express powers of the corporation. partners credit is weakened
 Does not need high capital in  There has to be
What are the limitations of its rights or to what extent may it exercise such rights? order to form a partnership dissolution of the
 Only the powers and attributes expressly authorized by law and incidental to Partnership  If you are a general partner, partnership
its existence you have the right to between the
 Other than that, it cannot do anything else manage the partnership partners
 As to manner of creation, it is  When a partner
Cement Factory + Electricity Illustration easier because created by dies, partnership
A cement factory was operating a factory in its own power. Where at that time, it was mere agreement from the will be dissolved
beyond the reach of the power supplier, that cement factory decided to provide partners  Unlimited liability
electric power to its workers living nearby in the community and it was questioned since
their express power was only to manufacture cement and not the power to distribute
electricity to the community. Supreme Court said that it is incidental to its being a
 Your investment will stay in
cement factory and operating a power plant is incidental to operating a cement
the family or in your estate
factory. Because how could a cement factory operate without its own power.
 You have a legal capacity to
act or contract with the
Mining + Postal Service Illustration  More technical
public
It was a mining corporation. In the mountains and beyond the reach of postal office because of the
 Because of the right of
services, the mining company operated its own postal service for its employees where requirements that
succession your credit is
all mails by their employees are brought and served by the company itself because it has to be
strengthened
was considered necessary for them to be able to communicate to their loved ones who complied with
Corporation  If the stockholder will die, the
are staying far from the place where the mining company was located and so the according to the
juridical personality of the
company operated its own parcel services or mail services. So it was questioned corporation code
corporation will not end and
because it was only a mining corporation, however Supreme Court said that it is  The dissolution
there’s a successional right,
incidental to its being a mining company in the mountains. must be granted
his share will be transmitted to
by the state
his heirs
Railroad Company + Acquisition of Lands Illustration
 Bigger capital
A railroad company licensed to operate a train stations and railroad services. So they
 During dissolution, it is easier
started acquiring properties along the railway, perhaps from Manila to Bicol, so they
to manage because it must
were acquiring lands where the railway will pass. Some landowners protested, saying
be set out in terms as stated
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 Being a juridical person, a corporation is a creation of the State. Thus, the latter
gives the power and can take away such power.
in their articles of  It is a special privilege given by the State to exist as a corporation and to act
incorporation as a corporation.
 Transferability of interest  The Certificate of Incorporation is the birth certificate of a Corporation. It is the
 There is no need of dissolution official document that grants it the privilege to exist. It is given by the SEC after
if one shareholder no longer complying with all the requirements.
wants to continue business,
he can sell his shares to Section 3. Classes of corporations. – Corporations formed or organized under this Code
another person shareholder may be stock or non-stock corporations. Corporations which have capital stock divided
 Has a life of 50 years into shares and are authorized to distribute to the holders of such shares dividends or
renewable for another 50 allotments of the surplus profits on the basis of the shares held are stock corporations. All
years compared to the life of other corporations are non-stock corporations.
a sole proprietor and
partnership (longer than Stock and Non-Stock Corporations
human life ) 1. Stock Corporations - are corporations that distribute shares of stocks and are
authorized to do so.
2. Non-Stock Corporations - are corporations that do not issue shares of stocks
IOW for a corporation, and are not for profit.
 Capital - may be unlimited so long as there is interested investors anyone is
welcome What’s the sole purpose of dividing the capital into shares of stock?
 Successional rights - even if a stockholder dies the corporation continues  It is for the purpose of determining the distribution of dividends.
 Transferability or assignability - no need to secure consent of the other
stockholders you can transfer it anytime you want unlike in a General Determination of Classes of Shares of Stocks
Partnership all the other general partners must agree before a new partner is The classes of shares to be issued by the corporation are determined by:
allowed to join  Incorporators – The classes and number of shares which a corporation shall
issue are first determined by the incorporators as stated in the Articles of
Illustration: Incorporation files with SEC
There were 5 stockholders of a corporation. At the 1 st year of business, they gained huge  Board of Directors and Stockholders – May be altered by the BOD and the SH
profits, and so they were very happy and decided to reward themselves. They booked by amending the articles of incorporation
a cruise somewhere in the Mediterranean with their family. In their trip, there was a leg
of that trip where only husbands and wives are will go aboard the vessel for that Various Types of Corporations
particular part, leaving behind the children (infants). Then the vessel hit an iceberg, and
all the stockholders died, leaving behind the children who were still infants. So what 1. Public corporations - the purpose of which is to perform acts necessary to
happens to the stockholders and their successional rights, does the corporation govern a portion of the State, such as municipalities, cities and barangays.
continue to exist?
a. A corporation which was granted a certificate of incorporation has the right to 2. Publicly-owned corporation
exist for 50 years. So, if it is still within the 50 year term, it will continue to exist.
The heirs of stockholders will inherit the shareholdings. “Public corporation” which is also for profit. It is a confusing term because San
Miguel and PLDT are public corporations. Are they really public corporations?
What happens when there is a stockholders meeting, given that the heirs are still infants?  No. They are publicly-listed corporations because the shares of stocks
b. They shall be represented by their legal guardians. are listed in the public – in the Philippine Stocks Exchange. The
correct term, therefore, should be publicly-listed corporation, when
If there are no guardians, what happens? your shares of stocks are listed in the Stocks Exchange.
c. There could be the administrator or executor.
Therefore, be careful. While we do not talk about public corporations, we may
How A Corporation Is Organized touch sometimes on publicly-listed corporations.
 Corporation is not an ordinary contract
 It requires the execution of Articles of Incorporation, and therefore, not just by If the price of a share of stock is 2 centavos in the morning and it will be sold in
mere consent the afternoon for 10 centavos, you have a gain of 8 centavos. Very small, but
 The SEC must issue the Certificate of Incorporation in order for the corporation we are now talking of millions of shares. 1 million shares x 7 centavos, how
to start acting as a juridical person. much? It’s 70,000. Not bad for a day’s income. You earn 70,000 for 1 day. If
you are good at watching these prices, that’s how much you earn.
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3. Quasi-Public corporations
- A private corporation granted by the State a franchise and performing
public duties.
- Intended for profit
- Usually provide public services or utilities such as MCWD, LRT, VECO, etc.
For example, VECO, which was a private corporation, was owned before by
one group, the Escaños. They had monopoly of the power business in Cebu –
the Visayan Electric Company. Perhaps, it went down to the next generation,
and the next generation of Escaños cannot agree on how to run their business,
so some members decided to sell. Aboitiz bought these shares from the selling
Escaños. They did not know that the Aboitizes went on to buy some more, until
one day, they woke up knowing that the Aboitizes were now the majority
shareholders of VECO. These things happen in a corporation. It’s now the
Aboitizes controlling VECO. That is also a lesson to learn that you must make
sure that the corporation that you nurture will survive the 1st, the 2nd and even
the 3rd generation. That’s why corporations have successional rights and
that’s the intention of the law – to allow and to enable a corporation as a
person to survive for generations.
One advantage of a corporation is stability of the business. Even if the
incorporators are long gone, the corporation lives on, unlike a partnership,
where a general partner dies, the partnership dies as well.
How about the Department of Health? It performs public service. Is it a
corporation?
 No. It’s an agency of the government, specifically under the
executive branch.
 The DOH, Department of Finance, Department of Agriculture,
Department of National Defense are not corporations. These are
merely agencies or instrumentalities.
 They are not considered as corporations because a corporation has
a juridical personality.
Department or Agency
 Does not have a juridical entity
 Merely attach to the government carrying out governmental
functions
 Part of a particular branch of government
4. Private corporations - for a private purpose, benefit or intention (private ends),
which could be for profit or a charitable institution or an educational institution.
5. GOCC
How about the GSIS? Is it a corporation?
 Yes, it is a corporation, a government-owned and controlled
corporation (GOCC). It is a special private corporation, created by a
special law.
5
 The GSIS collects their membership dues and manages these funds.
The GSIS administers this fund. Whoever becomes qualified, the GSIS
will process your retirement and give you your benefit.
 Similar to it is the SSS. The SSS is intended for the benefits of i ts
members which are private employees.
Public Corporations v. Private Corporations
Is the City of Cebu a corporation?
 Yes. It has juridical personality.
 We do not take it up here because it is a public corporation, although it is
important to know the distinction between private corporations under the
Corporation Code and public corporations created by special charter and for
a special purpose which is to govern a portion of the state for the public
welfare.
Types of Corporation:
1. Under the Corporation Code
a. Stock Corporation – has capital stock divided into shares and are authorized to
distribute to the holders of such shares dividends and allotments of surplus
profits on the basis of the shares held
b. Non-stock Corporation – do not issue shares and does not distribute profits to its
members
2. As to number of corporators
a. Corporation Sole – one member or corporator
b. Corporation Aggregate – consisting of more than one corporator or member
3. As to legal or corporate existence:
a. De jure Corporation – corporation existing in fact or in law
b. De facto Corporation – existing in fact but not in law
4. Whether it is private or public:
a. Private Corporation – formed for some private purpose
b. Public Corporation – formed to organize for the government of a portion of the
State
5. Whether it is open or close:
a. Open Corporation – open to any person who may wish to become
shareholders
b. Close Corporation – limited to selected persons or members of a family
Open Corporation - anyone could come in. The certificate of stock is transferable.
You could transfer it to anyone, the transferee becomes the shareholder. Unlike in
partnership, the assignee does not become a general partner unless all the other
general partners consent. Of course it is different from a limited partner, because a
limited partner is just an investor. Here, a stockholder can pass on the certificate of
stock to anyone. The certificate of stock is important. You should not lose it because
if you do, the process is tedious.
Close Corporations – as the name indicates, is closed, not everyone is welcome. It is
closed to the existing stockholders. To keep it close, such shall be provided in the
by-laws, the articles, and even in the certificate itself, that the shareholder of that
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particular certificate cannot sell his shares to anyone else without first offering his
shares to the existing stockholders. The existing stockholders should have the priority
in acquiring those shares. As much as possible, only the existing stockholders can
acquire. There is no chance that others, who are not existing stockholders, can
acquire.
However, that is only a relative condition/prohibition, because you cannot tell the
stockholders that he must sell to no one else but existing stockholders. Otherwise,
the rights of an owner are infringed. If there is an absolute prohibition not to sell,
that becomes illegal or improper.
The law on close corporation comes out with a qualified condition. You are not
prevented from selling it. Your right as an owner is still respected, but it is required
that you sell it to others only if there is no existing stockholder willing to buy. Absolute
prohibition is not allowed. Qualified or relative prohibition, however, may be
allowed.
Transfer of shares of stocks - by merely indorsing the certificate of stocks.
Can we say that that a certificate of stock is a negotiable instrument?
 No. The fact that you are able to transfer it to someone else by
indorsement does not make it negotiable. A negotiable instrument refers
only to sum certain in money. Here it involves shares of stocks; it can never
be a negotiable instrument. It can be transferred, but not negotiated.
How to maintain a close corporation?
 The shares of stocks before selling it to third parties, must be offered first to
the existing shareholders (as shown in the Articles of Incorporation). And if
none of the existing shareholders are interested, then it may be sold to
outsiders (as shown in the Articles of Incorporation). IOW, the prohibition to
sell to outsiders is merely RELATIVE / QUALIFIED. Otherwise, if it’s absolute it
will violate the rights of an owner (right to dispose).
6. Whether it is for religious purposes or not:
a. Ecclesiastical Corporation – for religious purposes
b. Lay Corporation – purpose other than religion.
7. As to formation:
a. Domestic Corporation – incorporated under the laws of the Philippines
b. Foreign Corporation – formed under any laws other than those of the
Philippines
8. As to their relation to another corporation:
a. Holding or Parent Corporation — a corporation which has the power to control
or elect the majority of the directors of other corporations called subsidiaries
b. Subsidiary Corporation — a corporation whose majority of directors can be
election by the holding or parent corporation
c. Affiliated corporation or one related to another by owning or being owned by
common management. An affiliation exists between a holding or parent
company and its subsidiary or between two corporations owned or controlled
by a third
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Take Note: The holding corporation is the one which owns the majority of the stocks
of another corporation, the subsidiary. Thus it is in a position to elect the directors of
the subsidiary. The subsidiary in effect, follows orders from and is controlled by the
holding or parent company. A holding company which controls several subsidiaries
owns majority of the stocks of those subsidiaries, which can call themselves ―sister
companies‖ because they have a common parent, the holding company.
Sister companies, where both of them are owned by the parent corporation, or a
fellow subsidiary with respect to the other subsidiary company.
Shipping Companies Illustration
Shipping corporations face the problem of having porters get the bags of the
customers without the latter’s consent. The shipping company then may purchase
the majority of stocks of the corporation who employs the porters, so it now
becomes a subsidiary. Another problem is with regard to the repairs of their ships.
They may buy another company so that they no longer have to wait for their turn to
have their ships repaired. In this example, the shipping company is the parent
company and the arrastre company and the engineering company are subsidiary
companies.
The mother company, which is the shipping company, owns the arrastre company.
When the vessels need dry-docking, there is a need to queue at the shipyards.
There’s a long line of vessels because the shipyards are not enough. They have to
schedule and the moment they lose a few trips, there will be big damage to
revenue. In order to avoid it, the shipping company have to own its dry-docking
company.
At the pier, the cargoes are not moved out because you don’t have trucks. If you
hire trucks, they charge high, but if you don’t transport your cargoes, then other
vessels cannot unload their cargo. Thus, the turnaround time for the shipments and
voyages will be delayed. Thus, if you see your vessel is anchored, it’s a problem.
Now you have to organize a trucking company.
You have all of these controlled and the mother company will appoint directors
and will own a majority of these stocks. All you have to give your directors is 1 share
each. That’s the only number required to be a director.
The arrastre, shipyard, and trucking are sister companies and subsidiaries of the
shipping company. All of them are affiliated to each other, and thus, are affiliates.
Section 4. Corporations created by special laws or charters. – Corporations created by
special laws or charters shall be governed primarily by the provisions of the special law
or charter creating them or applicable to them, supplemented by the provisions of this
Code, insofar as they are applicable. (n)
Section 5. Corporators and incorporators, stockholders and members. – Corporators are
those who compose a corporation, whether as stockholders or as members.
Incorporators are those stockholders or members mentioned in the articles of
incorporation as originally forming and composing the corporation and who are
signatories thereof.
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Corporators in a stock corporation are called stockholders or shareholders. Corporators
in a non-stock corporation are called members. (4a)
Who Constitute The Corporation
Incorporators
The original parties who decided to gather together and incorporate. They are the ones
who joined and participated in the organization of the corporation. They were the ones
who signed the basic contract, the Articles of Incorporation.
The law requires at least 5 incorporators.
While all the incorporators are stockholders, not all stockholders are incorporators. A
stockholder can never become an incorporator because he was not there when it all
started.
Who constitute the corporation?
 The incorporators are the persons who signed the Articles of Incorporation and
they are the persons who first initiated to form the corporation.
 The corporators are the persons who are incorporators, shareholders, members
of the corporation.
 The members are those persons who have an interest in a non-stock
corporation. In a stock corporation, they are called shareholders or
stockholders.
Take Note: So shareholders in a stock corporation and members of a stock corporation –
all of them are corporators. As distinguished from the incorporators who are those who
participated in the organization of the corporation.
Liability of Stockholders
Being a juridical personality separate and distinct from the stockholders, in event any
liabilities are incurred, the stockholders will only be liable only to the extent of their
investment.
How To Become A Stockholder
1. Subscribe to newly issued shares
2. Buy from the existing stockholders
Section 6. Classification of shares. – The shares of stock of stock corporations may be
divided into classes or series of shares, or both, any of which classes or series of shares
may have such rights, privileges or restrictions as may be stated in the articles of
incorporation: Provided, That no share may be deprived of voting rights except those
classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in
this Code: Provided, further, That there shall always be a class or series of shares which
have complete voting rights. Any or all of the shares or series of shares may have a par
value or have no par value as may be provided for in the articles of incorporation:
Provided, however, That banks, trust companies, insurance companies, public utilities,
and building and loan associations shall not be permitted to issue no-par value shares of
stock.
Preferred shares of stock issued by any corporation may be given preference in the
distribution of the assets of the corporation in case of liquidation and in the distribution
7
of dividends, or such other preferences as may be stated in the articles of incorporation
which are not violative of the provisions of this Code: Provided, That preferred shares of
stock may be issued only with a stated par value. The board of directors, where
authorized in the articles of incorporation, may fix the terms and conditions of preferred
shares of stock or any series thereof: Provided, That such terms and conditions shall be
effective upon the filing of a certificate thereof with the Securities and Exchange
Commission.
Shares of capital stock issued without par value shall be deemed fully paid and non-
assessable and the holder of such shares shall not be liable to the corporation or to its
creditors in respect thereto: Provided; That shares without par value may not be issued
for a consideration less than the value of five (P5.00) pesos per share: Provided, further,
That the entire consideration received by the corporation for its no-par value shares shall
be treated as capital and shall not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring compliance
with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the
certificate of stock, each share shall be equal in all respects to every other share.
Where the articles of incorporation provide for non-voting shares in the cases allowed
by this Code, the holders of such shares shall nevertheless be entitled to vote on the
following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other
corporations;
7. Investment of corporate funds in another corporation or business in
accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary to
approve a particular corporate act as provided in this Code shall be deemed to refer
only to stocks with voting rights. (5a)
Outstanding Capital Stock
- Refers to the subscribed capital stock
- These are the stocks issued to and paid by the subscribers of the corporation.
They are already in the hands of individuals. It is no longer within the
corporation. Therefore, it is already subscribed and could no longer be issued
to somebody else.
Legal Capital
- Composed of the stockholders’ equity and it represents the aggregate value
of the shares. In a par value share, it is the par value times the number of
shares. In a non-par value, all of the issued value of the shares
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Classes of Shares of Stocks

- Aggregate value of all the shares – composed of the total number of shares A. Par value v. Non-par value Shares
times the par value a. Par value shares – these refer to shares of stocks which have an
- It is a fixed value. amount prescribed equivalent to such share; they have a declared
value but not less than 5 pesos per share. The value may go up and
Shareholders’ Equity down but at least, there is a floor value of at least 5 pesos.
- That portion of the capital of the corporation that is composed of all the b. Non-par value shares – refer to stocks which have no associated
investments all the subscribers put in value to it but the law prescribes that it must not be issued for a
- It is also the subscribed capital consideration less than the value of five (P5.00) pesos per share

TERMS: B. Common v. Preferred Shares

 OUTSTANDING a. Common shares – those which entitle the holder thereof to a pro-rata
 SUBSCRIBED division of the profits, if there are any, and in its assets upon
 STOCKHOLDER’S EQUITY dissolution, without any preference or advantage in that respect over
 LEGAL CAPITAL other stockholders except preferred stockholders.
 ALL THE SAME
Holder enjoys no preference over other shareholders (Enjoys the right
Illustration: to dividends as to all other shareholders)
Authorized Capital Stock = 100M, 25% is 25M, 25% is 6.250M
b. Preferred shares – those with stated par values which entitle the
What is the legal capital? holder thereof to certain preferences over the holders of common
 25M stocks as to dividends and assets

What is the outstanding capital? Entitle holder certain preferences (Entitled first as to the time of
 25M receipt of dividends, preferred as to the share of the assets during
dissolution) but cost of preferred share is higher than common share
What is the stockholders’ equity?
 25M C. Voting v. Nonvoting Shares
a. Voting shares – shares with right to vote; the holder can participate in
What is the aggregate number of shares times value? any meeting and on any issue that may be raised during the
 Subscribed capital meeting, the holder can vote.

How do distinguish legal capital from capital of the corporation? b. Nonvoting shares – no right to vote
 Capital = Total Assets – Total Liabilities General rule: The holder cannot vote, cannot elect directors.
 Capital fluctuates at any given time, while legal capital is fixed. Effect: Insofar as management is concerned, the holder of a non-
voting share has no right to management at all because he cannot
Fair Market Value participate in the elections. And management of the corporation is
- Value which a seller is willing to sell and a buyer is willing to buy vested with the Board of Directors.
- Fluctuates from time to time depending upon the perception of the public
and other attending circumstances Except on the following matters:
a. Amendment of articles of incorporation
Book Value b. Adoption and amendment of by-laws
- Value as determined in the books c. Substantial disposition of assets
- Assets of the Corporation d. Incurring bonded indebtedness
No. of shares e. Increase or decrease of capital stock
f. Merger/consolidation
Illustration:
Assets = 50M Number of shares = 100 Book Value = 0.50 per share Common denominator: Deviation from the original agreement

Par Value D. Other shares

- Value as stated in the Articles of Incorporation a. Shares in escrow - is a share subject to an agreement by virtue of
which the share is deposited by the grantor or his agent with a third
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person to be kept by the depositary until the performance of a
certain condition.
Those shares which are structured to the agreement that it should be
deposited to a depositary and that share will only be transferred
upon the occurrence of certain events or fulfilment of a condition.
These are shares temporarily deposited, most of the time in the bank.
In the bank, you have what you call the escrow accounts or you may
have some deposit boxes where things are deposited in escrow.
When you say in escrow, it simply means that the thing deposited is
temporarily held by a third party pending fulfilment or compliance by
of condition that the two contracting parties may have entered into.
A corporation may issue shares to another subscriber subject to
certain conditions. Perhaps the corporation would say that it will issue
these shares only if you produce proof that you are a Filipino citizen,
but the shares are already reserved. The corporation may then give
you 90 days to produce evidence that you are a qualified Filipino
citizen. Then these shares will be deposited with the bank or any third
party. The moment you could prove that you are a citizen, and then
the corporation may now release and instruct the bank, the
depositary, to release the shares now in favour of the subscriber. That
is the essence of an escrow. It is like escrow money. Transaction has
been pending while waiting for compliance with certain conditions
and both parties want to be sure that the money will be ready when
the condition is fulfilled. All you have to do is take out that money
from your account, deposit it in an escrow and once the condition is
complied with, parties will agree and instruct the bank to release the
money.
b. Promotion share - shares issued to promoters, for incorporating the company,
or for services rendered in launching or promoting the welfare of the
company, such as advancing the fees for incorporating, advertising,
attorney’s fees, surveying, etc.
When you start a big corporation, you might need capital. You may have to
engage the services of promoters. These are the people who promote the
organization, these are the people who solicit subscriptions and they are
entitled for some incentives and they may be issued the promoter’s shares, so
that these promoter’s shares may be enjoying again certain benefits not
enjoyed by common share. They may enjoy some additional incentives in
terms of bonus dividends or bonuses when there are extra profits. So very
similar to a preferred share but here these are limited to promoters, people
who started the incorporation, people who went around promoting the
business of the corporation.
Section 7. Founders’ shares. – Founders’ shares classified as such in the articles of
incorporation may be given certain rights and privileges not enjoyed by the owners of
other stocks, provided that where the exclusive right to vote and be voted for in the
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election of directors is granted, it must be for a limited period not to exceed five (5)
years subject to the approval of the Securities and Exchange Commission. The five-year
period shall commence from the date of the aforesaid approval by the Securities and
Exchange Commission. (n)
c. Founders' shares – provided to the founders with the right to vote and be
voted for in the election of directors, it must be for a limited period not to
exceed five (5) years
What could be the reason why these founders’ shares are issued?
 The reason could be that this is an incentive for forming the
corporation so that at the start of the corporation, there will be no
difficulty as to who will be the board of directors
Why should they be assured that they will be the board?
 Because they form the corporation
 It is not enough that promoter’s shares are issued. Founders’ shares
are issued so that the corporation can start immediately.
Founders are given to the founders because they are the people who usually
form the corporation. They know exactly how to manage the corporation.
Moreover, they are the persons who are reliable to manage the corporation,
so that the corporation will not be in bankruptcy or immediately be dissolved
during its first years of operation.
These are the founders of the corporation and these are the people who have
the vision on how the business will be undertaken, how the business will be
carried out. These are the people who have the plan as to the nature of the
business, the strategy that they will take in order to be successful in the
business.
What are the privileges given to founders’ shares?
 Right to vote and be voted for in the Board of Directors
 These are privileges given to these persons to make sure that the
corporation can grow. For the corporation to be able to establish at
least, given five years, to nurture the corporation and be able to
achieve the purpose which the corporation was formed.
 Only the founders can vote and be voted upon. The stockholder’s
are not allowed to vote initially.
Section 8. Redeemable shares. – Redeemable shares may be issued by the corporation
when expressly so provided in the articles of incorporation. They may be purchased or
taken up by the corporation upon the expiration of a fixed period, regardless of the
existence of unrestricted retained earnings in the books of the corporation, and upon
such other terms and conditions as may be stated in the articles of incorporation, which
terms and conditions must also be stated in the certificate of stock representing said
shares. (n)
d. Redeemable shares – shares, usually preferred, which are redeemable at a
fixed date or at the option of either the issuing corporation or the stockholder
or both at a certain redemption price
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ORDINARY CREDITOR / PROMISSORY
REDEEMABLE SHAREHOLDER
NOTE HOLDER
Purpose of Redeemable Shares: protection of incorporators, investment and
capital purposes
May demand payment on the date of May demand payment from the debtor
redemption (Redemption price) on the maturity date
What do you mean by investment and capital?
 In a redeemable share, the corporation is allowed to redeem what it
had previously issued. Also, it is for the purpose that if the corporation
The holder of a redeemable share may demand for the redemption price on
lacks capital, then the stocks that they previously own can just be
the date of the redemption, while an ordinary creditor may demand payment
sold.
on the date of maturity.
 As an investor, it could be advantageous to buy redeemable shares
because you can compel the company to return back the money
that you used in paying for the redeemable share. ADVANTAGES DISADVANTAGES

What is the purpose of issuing on the part of the corporation these redeemable Also an investor
shares?  Evidenced by a temporary
 Because the corporation would want to get more capital so it offers certificate of redeemable
Not allowed to vote in elections and
to the public redeemable shares shares.
during meetings
 Only a limited stockholder, in
How will you get more capital? What are your options? the sense that before the
 Loan or borrow money from a bank Entitled to dividends
redemption, the redeemable
 Issuance of bonds  Additional benefit that a
shareholder is merely a
creditor does not enjoy, since
creditor. The redeemable
Issue bonds to the public, meaning, you sell pro-notes to the public. When we a creditor is entitled only to
shareholder’s investment is just
say bonds, actually these are promissory notes. I could sell to the public I will interests in addition to the
treated as an extension of
have to secure consent of the SEC. These are what we call bonded money borrowed, but a
credit.
indebtedness. I issue several promissory notes to whoever would want to lend stockholder of a redeemable
the corporation. I could borrow from the individuals and I could issue that share is entitled to other
individual a promissory note. I promise to pay you, the 1M that I borrowed benefits as a stockholder
under this pro-note with 10% interest so when the pro-note becomes due, the
corporation does not pay only 1M but plus 10% now 1,100,000.00. And if you
have some idle funds, then you may buy these promissory notes from the Advantages of Holding Redeemable Shares
corporation. In other words, you are borrowing not from the banks but from the  Holder thereof is an investor
public. Anyone who wants to lend me, here is my promissory note plus 10%  Entitled to dividends, unlike an ordinary creditor who is only entitled to
when it becomes due. Darlene: I can also issue stocks. interests

 Issuance of additional common stocks. Anyone who wants to Disadvantage of Holding Redeemable Shares
subscribe and become a stockholder.  Holder thereof has no voting rights (limited stockholder, mere creditor
 Offer redeemable shares prior to redemption, in a sense)

What is the nature of a redeemable share?
 A redeemable share is like a combination of being a creditor and an
investor.
 As a creditor, you will get premiums from what you have given. As an
investor, you are entitled to the profits.
 You are a creditor but you have an advantage over an ordinary
creditor. An ordinary creditor, like a holder of a promissory note, can
ask the payment once the note becomes due and demandable the
holder. That’s the normal debtor-creditor relationship.
Earlier we said that another option for the corporation will be to issue shares of
stocks. When an individual subscribes to shares of stocks, he not likened to a
creditor, because you invested something in the corporation so you have a
right through or base in his share holdings. Unlike a creditor who has no right to
the corporation.
Would you want to be a creditor or stockholder?
 It depends, because if I would be a creditor then I will also gain
interest on the money that I lent to the corporation. However, I don’t
have a right to the corporation if they earn more as to their profits. It is
also advantageous for me because even if they incur losses, then
they will still be liable to me for the money that they borrowed.
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 As a subscriber, I am entitled to the profits. However, if there are loses,
then the corporation cannot distribute profits. No profits, no
dividends.
 Whereas, as a creditor, loss or profit, you have to pay me with
interest. That’s the difference. A subscriber, being an investor, we
said, will be entitled to the return of his investments only if there are
profits. But a creditor, whether the corporation is earning profits or
suffering from losses, they have to pay a liability which has become
due and demandable with interest.
As a creditor, if you have a redeemable share, you are entitled not only to the
balance or the money that you lend but also get a premium from the
corporation.
What would you prefer a creditor or mere ordinary subscriber?
 NEITHER. In between.
 As a holder of a redeemable share, while it is outstanding, not yet
due and demandable, you are a shareholder entitled to certain
rights and benefits, among others, DIVIDENDS
 As a creditor, you are also entitled to the value of the investment and
premium.
Nature of a Redeemable Share
 It is in the nature of a PROMISSORY NOTE
 It is also a CERTIFICATE OF STOCK, an evidence of ownership being a
stockholder
 A GUARANTEED CREDITOR, loss or profit the corporation is supposed to
redeem upon the arrival of the period.
Risk in Redeemable Share
 The corporation is INSOLVENT.
 The assets are less than liabilities.
 The corporation cannot redeem the share meanwhile.
 It cannot be compelled to redeem meanwhile.
Section 9. Treasury shares. – Treasury shares are shares of stock which have been issued
and fully paid for, but subsequently reacquired by the issuing corporation by purchase,
redemption, donation or through some other lawful means. Such shares may again be
disposed of for a reasonable price fixed by the board of directors. (n)
e. Treasury shares – outstanding shares which are reacquired by the corporation
either by purchase, redemption, donation, forfeiture or other lawful means.
- Example: Redeemable shares
o Once redeemed, the corporation will now own the shares and
will cease to being redeemable shares and shall now become
treasury shares and shall be part of the treasury of the
corporation. The corporation may buy back the redeemable
shares for a premium in lieu of interest because they are not
ordinary creditors. (From 1 peso per share to 1.20 per share, 20
centavos or 20% premium)
- Do not have the right to vote
11
o Can be abused in a way that the board of directors may use it
to perpetuate their position by voting for themselves
f. Par value shares – one that has an assigned value for the purpose of
distributing the profits
a. If you invest P100,000 in a P1 par value share, you will get 100,000
shares
o If the company has profit of P1million and will declare dividends at
P.01/shares, you will get P1,000
g. Convertible shares - are changeable as to class or type of share. They can be
changed from one class of share to another.
Perhaps, a share is initially a common share, but you have an option. If you
would want to pay some more, we could convert this into a preferred share.
Purpose of Dividing Capital into Stocks
- Distribution of Dividends
Take Note: The purpose is merely for distribution of profits so therefore we could say that
a stock corporation as distinguished from a non-stock corporation, is for profit. Whereas
a non-stock corporation is a non-profit corporation because there are no stocks to talk
about – no profits to distribute.
Stock Corporation Illustration
If we have 5 million capital and there are 5 stockholders and they have subscribed to
2.5 million equal shares so each investor is investing 500,000. They subscribed to 500,000
each. The total subscription is 2.5 million divided into shares of stocks at 1peso per share
so that each would have 500,000 shares because each share is 1peso. Your capital is
now converted into shares; in other words, distributed into shares. So that 1 year later if
they have a profit of 500,000pesos it will be distributed based on their number of shares.
Each of the shareholders have 500,000shares therefore they will have 100,000 pesos
each as based on their shareholding. A profit of 100,000 each and 500,000 pesos
investment, how much dividend did he earn? 100,000 / 500,000 = 0.20. He earned from
his investment 20 centavos per share. So he has 100,000pesos, dividend for the 1st year.
Non-stock Corporation Illustration
If all the 5 members decided to contribute 500,000 pesos each then the corporation will
have 2.5 million and if they have decided to open a Ping-Pong Center and buy 10 Ping-
Pong tables and all income from the ping-pong games will go to the corporation. Other
than the ping-pong however, there were restaurants beside so that those who were
waiting for their turn to play will stay in the restaurants and order drinks with beautiful
promo girls. So they also earn 100,000 on year 1 of their operation of ping-pong tables
and restaurants. The 100,000 will go to the corporation and it can be used for the
expenditures for the improvement of the facilities. They cannot divide it into dividends
and distribute it to the members. All profits earned will remain within the corporation and
the money will be applied based on the purpose of that corporation. If the purpose is to
give and operate a Rehabilitation Center then they can donate 50% of their profits to
the Rehabilitation Center. That’s a good purpose for a non-stock corporation.
Under the Constitution, may foreigners own real properties?
 No.
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Can a foreigner engage in a business which may require ownership of a parcel of land?
 Yes, through a corporation, provided that at least 60% of the capital of such
corporation is owned by citizens of the Philippines.
Nationalized Business
- Either owned by Filipino individuals or at least by a Filipino corporation
(majority or at least 60% of which is owned by Filipinos and so 40% of that
corporation may be owned by foreigners and still that Corporation being
a domestic corporation may engage on those type of nationalized
business)
- Example:
o Corporation engaged for exploration, development, and
utilization of natural resources like mining corporations (this are
reserved for Filipinos or at least by a corporation so long as at
least 60% of the capital will be owned by Filipinos)
So we have to monitor at any given time only 40% of the shareholdings are being held
by foreigners. No way should that ownership by foreigners exceed 40%. So we should
always monitor and it might not be easy because there might be Filipino names but
they are actually already US citizens, there are American names but actually they are
Filipinos. That’s why when you make a report to the SEC, you are annually required to
submit a General Information Sheet (GIS) which should indicate ownership by Filipinos
and foreigners and the citizenship of the latter.
By having the authority to classify shares, how would we easily know that foreign
ownership is limited to 40%?
 The BOD can classify shares into Class A and Class B. Class A shares shall be
owned only by Filipinos and then put limitations on foreign ownership on Class
B. By your power to classify shares you can find a way how to easily limit
ownership by foreigners.
Illustration:
Class A - Filipinos 600,000 shares or 60%
Class B - Foreigners 400,000 shares or 40%
Total Shares 1,000,000 shares or 100%
So that if all of the Class B shares are already sold out that would mean that all shares
intended for foreigners have now been fully subscribed. There’s no more way a
foreigner can subscribe for additional shares otherwise it will now exceed. So by giving
the corporation the authority to classify shares it could limit and could easily come up
with a system to determine the constitutional limitation of foreign ownership.
Nationalized Corporations
Constitutional provision in ascertaining foreign ownership – in nationalized businesses,
foreigners should only own, at most, 40%.
What types of stocks should be included in computing the votes?
 Only voting shares should be included in computing. Nonvoting shares are
irrelevant insofar as these types of limitations are concerned.
General rule: Holders of nonvoting shares cannot vote, except on the following matters:
12
1) Amendment of the Articles of Incorporation
2) Adoption and amendment of by-laws
3) Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property
o The guide is when such sale already affects the operations of the
corporation. When the corporation could no longer carry out its
business, then that will be the point when it will have to be open for
voting, including nonvoting shares.
o SC said that 80% is considered substantially all
4) Incurring bonded indebtedness
5) Increase or decrease of capital stock
6) Merger/consolidation
Foreign Stockholders Illustrations
Can Gocuan, who has Chinese relations, be a stockholder?
 Yes, because he is a resident of the Philippines.
 The law does not require one to be a citizen in order for him to be a
stockholder; it only requires him to be a resident.
 The law also requires that only the majority of stockholders should be residents
of the Philippines, not all.
An Indian, a Chinese, an American, an Arabic and a Japanese decide to create a
corporation. Can they incorporate one here in the Philippines?
 Yes, so long as majority of them are residents.
The Indian, a non-resident, owned 90% of the stocks, the others, 10%. Can they still
incorporate?
 Yes. ―Majority‖ refers to the number of incorporators, not their respective
interests in the corporation.
 The Indian can sign the AOI through a duly authorized representative. A
Special Power of Attorney (SPA) may be executed.
Par Value Shares
- Shares which has a stated value appearing in the Stock Certificate and
the Articles of Incorporation
- Purpose: To fix the minimum amount
May a corporation issue shares below the par value?
 No, because the purpose of the par value is to fix the minimum amount, which
would be used for protecting the investment of the corporation.
What do we mean by subscribed?
 Subscription means that the amount that the subscriber will be liable. It is the
amount that the subscribers committed to pay and commitments become
liabilities.
Since the law only requires 25% of the subscribed capital to be paid, when do we pay
the balance of the subscribed capital?
 At the date designated according to the subscription agreement, because
when you subscribe, you will sign a subscription agreement wherein you
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commit to subscribe for such an amount, and out of your subscription you
commit to pay on the date agreed.
 If no such date is indicated, when the board decides to call the balance.
o Call - the term used when the board decides to demand payment of
the balance
Par Value and Watered Stock Illustration
The Articles of Incorporation will say that the capital of the corporation shall be divided
into shares of stocks and each share shall be worth 1 peso par value. If your par value is
1 peso per share, we expect to issue 100M shares because your par value is related to
the authorized capital stock. So if you sell your shares of stock to someone else, 100
shares for 50 centavos per share, he pays 50 pesos.
Would the 50 pesos represent the true value of the share?
 No. The true value is 100 pesos for the 100 shares. That is the purpose of
establishing the par value, you have a fixed minimum amount for each share
that the corporation issues. This is to make sure that if the corporation issues
100M shares, the corporation would realize a total of 100M pesos
 But as for the shares sold at 50 centavos per share, they are called watered
stock. They do not reflect the true value of the share in relation to the capital.
They are shares sold at less than par value.
May the Board change the par value?
 No.
If the board decides to reduce its par value, in effect, what is it doing?
 It is in effect issuing watered stocks, which is punishable and the directors can
be held liable.
Watered Stock Illustration
Assuming now that all of the 100M shares are sold, they will only get 12,500,000 instead
of 25M which does not anymore reflect the true structure of the corporation. What was
invested was only 12.5M instead of 25M. It is misleading the public, because to the
public they thought they have 25M. If I was able to extend credit to the corporation, it
doesn’t protect the creditor/public but rather it deceives. Thus, the moment you reduce
the par value, you are deceiving the public.
However, there’s one instance where the board may reduce the par value.
 Stock Split
How? (Following the two aforementioned illustrations)
 In that case we said the authorized capital stock is 100M pesos divided into
100M shares so we have 1peso par value per share. So when we split the stocks
it merely means that you increased the number of shares of stocks but
reducing the par value. So now we have 100M pesos divide it by 200M shares =
50centavos per share. We did not reduce the capital stock, it stayed at 100M
pesos but we double the number of shares although we reduce the value per
share.
That is not illegal because we are not reducing the authorized capital stock. We are just
changing or reducing the par value but increasing the number of shares. Stock splitting
13
is not watered stock which is when a share of stock is sold at a lesser value than the par
value. In effect, if you feel that your par value is higher and only few is subscribing, you
could split that and sell it at half the price but you need to issue more so more will be
attracted to buy because it is half the price already. That is stock split.
Non-Par Value Shares
- Shares that do not have a stated value but they always have an issued
value which must not be less than P5 per share
When we issue NPV shares, would it mean that that share has no value?
 No, it has an issued value which is not less than 5 pesos.
If I am a holder of NPV in relation to the assets of a corporation, how will I determine the
true value of my share?
 That would be in proportion to the whole assets of the corporation. For
example, if 100M shares are issued, if you have NPV shares of 100,000 you will
own 100,000/100M ownership over the company. If the assets of the
corporation are established at 100,000,000, since there is no par value issued in
relation to that, then we can determine my aliquot part or how much of the
total assets I own based on my NPV.
Between PV shares and NPV shares, which do you think is more representative of my
ownership in so far as the assets are concerned?
 Non-par value would be a better indicator because you own a certain
percentage of the company as opposed to the par value share where you
only own up to the value of the shares you own. In par value, the amount is
already fixed but it doesn’t tell you how much of the company you own while
in non-par value, if you own 10% of that company, then it would be a better
representation
If the total assets of the corporation are now 25M and I have a non-par value share but I
have 10% participation or number of shares, how much do I own? What is the value of
my share insofar as the 25M is concerned?
 2.5M.
 In the event it dissolves, and the assets are distributed to the stockholders, I am
guaranteed to collect 10%.
 In a par value share, your investment in the company will only depend as to
the remaining value of your shares.
In other words, it does not represent my ownership over the assets; it represents only the
value of my investment. The value of the investment in relation to the assets has no
direct bearing because the par value may be different from the other values.
Fair Market Value
- The price at which a willing seller would sell and a willing buyer would buy.
Somebody may be willing to buy it at 10 pesos when its par value is only 1 peso but due
to good business, the public perceives it to be a good investment. The 10 pesos is the
FMV.
While par value is fixed in the Articles, how about the FMV?
 FMV will depend upon the circumstances and fluctuates from time to time.
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Capital Structure of a Corporation
Book Value
- BV/ share = Total Stockholders Equity/ Outstanding shares
It could mean that a company has total assets of 100M but liability of 25M then the
book value of the shares will be 75M pesos. So if your book value is 75M and the
outstanding shares are 25M, the book value is 3 pesos per share. Therefore, like in market
value, it is not fixed; it fluctuates depending on the value of your assets.
Section 10. Number and qualifications of incorporators. – Any number of natural persons
not less than five (5) but not more than fifteen (15), all of legal age and a majority of
whom are residents of the Philippines, may form a private corporation for any lawful
purpose or purposes. Each of the incorporators of s stock corporation must own or be a
subscriber to at least one (1) share of the capital stock of the corporation. (6a)
Incorporators
- Those who originally form the corporation
- Those who execute and sign the Articles of Incorporation
- Not less than 5 but not more than 15
- Majority must be residents of the Philippines
- Must be of legal age
Can the incorporators agree among themselves that no one should be an incorporator
unless he/she has a girlfriend or boyfriend?
 No, it is not a valid stipulation.
 It is the law that determines the qualifications of incorporators, not the
incorporators themselves, nor the stockholders.
Section 11. Corporate term. – A corporation shall exist for a period not exceeding fifty
(50) years from the date of incorporation unless sooner dissolved or unless said period is
extended. The corporate term as originally stated in the articles of incorporation may be
extended for periods not exceeding fifty (50) years in any single instance by an
amendment of the articles of incorporation, in accordance with this Code; Provided,
That no extension can be made earlier than five (5) years prior to the original or
subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as
may be determined by the Securities and Exchange Commission. (6)
Section 12. Minimum capital stock required of stock corporations. - Stock corporations
incorporated under this Code shall not be required to have any minimum authorized
capital stock except as otherwise specifically provided for by special law, and subject
to the provisions of the following section.
Section 13. Amount of capital stock to be subscribed and paid for the purposes of
incorporation. - At least twenty-five percent (25%) of the authorized capital stock as
stated in the articles of incorporation must be subscribed at the time of incorporation,
and at least twenty-five (25%) per cent of the total subscription must be paid upon
subscription, the balance to be payable on a date or dates fixed in the contract of
subscription without need of call, or in the absence of a fixed date or dates, upon call
for payment by the board of directors: Provided, however, That in no case shall the
paid-up capital be less than five Thousand (P5,000.00) pesos.
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 Authorized Capital Stock (AOS) – is the ceiling, the maximum amount that the
corporation can invest. (Any amount)
 Subscribed Capital Stock (SCS) - at least 25% of the AOS needed for
incorporation. Out of the ceiling or authorized capital stock however, the
actual investment is indicated. It is the commitment of the incorporators. The
law does not require you to immediately pay what you committed.
 Paid-up Capital - at least 25% of the SCS needed for incorporation; not just a
commitment, but actual payment of the part of which you have committed
o Must not be less than P5,000
o Shall be paid as stipulated in the subscription agreement, if there be
no such stipulation, it shall be paid on call by the BOD, or upon their
demand
o The state or government will be interested if indeed the paid-up
capital has been received by the corporation. The treasurer has to
execute a treasurer’s affidavit which will indicate, among others, the
fact that such amount is the authorized capital stock, that 25% of the
authorized capital stock has been subscribed as appearing in the
earlier page of the AOI, and that 25% of the subscription has been
duly paid as proven by a bank certificate which will have to be
attached to the AOI. In that case, the state is now assured that there
is now an actual amount which constitutes as an initial capital of the
corporation.
o The SEC would require you to execute another document which will
authorize the SEC or its representative to go to the bank and verify
the bank deposit.
o The paid-up subscription may be in the form of property, and not
necessarily in the form of cash. You have to prove that that property
is owned by you and you are willing to assign it to the corporation
and the value reflected truly represents the market value of the
property. The SEC, in lieu of the bank certificate, will require an
Appraiser's Report.
Capital Structure Illustration
Out of the authorized capital stock, let us assume the corporation will invest
100M. It is just a promise. The state cannot compel you to make good on that
promise. However, out of that promise, you have to commit to something,
which you will really invest. So out that promised amount, there is a committed
amount. The law allows you to make a commitment, not necessarily
everything, but even lower than the 100M. It puts up, however, a floor. You can
commit, but not lower than 25% of your promise. Only 25% will be what we call
subscribed capital stock. Sooner or later, that will form part of the committed
capital of the corporation.
Of the 100M, 25M must be subscribed. If there are 5 incorporators, the 25M
could be distributed in any manner they want. They may agree that each may
subscribe 5M.
The 5 stockholders, A, B, C, D, & E, each subscribe 5M, for a total of 25M which
is 25% of the 100M, which is the minimum subscription the law requires. Sooner
or later, that 25M will have to be paid.
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When will it become due? It depends. If in your commitment, there was a
date indicated, you will have to pay the balance on that date.
Out of the subscription of 25% of the authorized capital stock, you are only
required to pay a minimum of 25% of your subscription.
25% of 25M is 6.25M, which is the minimum amount that is to be paid.
Out of the subscribed capital stock, only 25% is required to be paid. If each
subscribed for 5M, you only need to put up a paid-up capital stock of 25% of
the subscription. You only need to pay 1.25M. The balance of 3.75M shall be
paid depending on the subscription agreement. It must be paid on the due
date. If there is no due date, it will be due and payable when the board of
directors makes a call. They will call for the payment of the balance. The board
may declare that certain unpaid subscriptions will have to be paid.
The paid-up capital stocks must be actually remitted to treasurer of the
corporation. The law allows the appointment of an acting treasurer pending
approval of the incorporation papers.
Section 14. Contents of the Articles of Incorporation. - All corporations organized under
this code shall file with the Securities and Exchange Commission articles of incorporation
in any of the official languages duly signed and acknowledged by all of the
incorporators, containing substantially the following matters, except as otherwise
prescribed by this Code or by special law:
1. The name of the corporation;
2. The specific purpose or purposes for which the corporation is being
incorporated. Where a corporation has more than one stated purpose, the
articles of incorporation shall state which is the primary purpose and which
is/are the secondary purpose or purposes: Provided, That a non-stock
corporation may not include a purpose which would change or contradict its
nature as such;
3. The place where the principal office of the corporation is to be located, which
must be within the Philippines;
4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the incorporators;
6. The number of directors or trustees, which shall not be less than five (5) nor
more than fifteen (15);
7. The names, nationalities and residences of persons who shall act as directors or
trustees until the first regular directors or trustees are duly elected and qualified
in accordance with this Code;
8. If it be a stock corporation, the amount of its authorized capital stock in lawful
money of the Philippines, the number of shares into which it is divided, and in
case the share are par value shares, the par value of each, the names,
nationalities and residences of the original subscribers, and the amount
subscribed and paid by each on his subscription, and if some or all of the
shares are without par value, such fact must be stated;
9. If it be a non-stock corporation, the amount of its capital, the names,
nationalities and residences of the contributors and the amount contributed by
each; and
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10. Such other matters as are not inconsistent with law and which the
incorporators may deem necessary and convenient.
The Securities and Exchange Commission shall not accept the articles of incorporation
of any stock corporation unless accompanied by a sworn statement of the Treasurer
elected by the subscribers showing that at least twenty-five (25%) percent of the
authorized capital stock of the corporation has been subscribed, and at least twenty-
five (25%) of the total subscription has been fully paid to him in actual cash and/or in
property the fair valuation of which is equal to at least twenty-five (25%) percent of the
said subscription, such paid-up capital being not less than five thousand (P5,000.00)
pesos.
How A Corporation Is Organized
 Corporation is not an ordinary contract
 It requires the execution of Articles of Incorporation, and therefore, not just by
mere consent
 The SEC must issue the Certificate of Incorporation in order for the corporation
to start acting as a juridical person.
 Being a juridical person, a corporation is a creation of the State. Thus, the latter
gives the power and can take away such power.
 It is a special privilege given by the State to exist as a corporation and to act
as a corporation.
 The Certificate of Incorporation is the birth certificate of a Corporation. It is the
official document that grants it the privilege to exist. It is given by the SEC after
complying with all the requirements.
Contents of the Articles of Incorporation
1. Name of the corporation
o The name is important in order to distinguish it from other
organizations. A corporation is recognized but its name that it can be
held liable; it can sue and be sued.
o Its intention and purpose it not to misguide nor mislead the public.
o The SEC protects the public. Otherwise, the public might be misled
into believing that the products produced by this corporation are just
as good because the public thought that such came from the same
company or corporation.
o No two corporations in the Philippines would bear the same name. To
make the process faster, if you wish, the SEC will require you to
execute the authority to change name and choose any of the
alternative names that you proposed. The SEC may now process your
Articles of Incorporation.
Mom’s Inasal Illustration
There was a corporation named Mang Inasal Corporation. Another
corporation, named Mom’s Inasal, applied for approval with the SEC. Can
such name be approved?
 No, it is confusingly similar with an existing corporation.
 That is the importance of the name, it will guide the public as to who
the stockholders and directors involved are, etc.
 A confusingly similar name with an established corporation with
goodwill, perhaps, may be taken advantage by some people.
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What may that name carry with it?
 It will carry with it such liabilities and obligations to the public.
Although in a recent case, the patents office approved Mom’s Inasal for selling
popcorn, for example, while Mang Inasal sells lechon, chicken, etc. The
patents office said the word ―inasal‖ is generic, therefore, anyone can use it.
You cannot appropriate for yourself a word which has been used in its generic
sense.
2. Specific purpose or purposes for which the corporation is being incorporated
o Shall state the primary purpose and the secondary purpose, if there
be more than one stated purpose
o The primary purpose must indicate the basic business of the
corporation intends to pursue.
o It lays down what kind of powers the corporation can exercise
o For purposes of knowing whether or not the corporation is acting
within its authority or powers as indicated in the Articles of
Incorporation granted by law. Otherwise, it becomes an ultra vires
act.
o ―Selling Joy‖ is not a valid purpose.
o The purpose must be specific and tangible.
o The State wants to know what kind of business you want to pursue
because it might not be morally or legally allowed.
o ―The pursuit of happiness‖ must be within the bounds of the law.
Wellness Services Illustration
While you cannot sell joy, you can offer wellness services. When you work, you
can apply for wellness leave, as offered by some companies. However, there
could be a secondary purpose, which is the standard.
What could be the secondary purpose? Maybe, after offering wellness
services, you could add a coffee shop, so that while waiting for the wellness
services, you could serve coffee. Or you could also secure the privilege to
borrow money. You use that money in carrying out your wellness business or
other secondary business which could supplement or related to the primary
purpose.
Mejica Illustrations:
The Board has decided to borrow from the bank ten million pesos. It authorized
the President to borrow on its behalf. In the board resolution, it was indicated
that ―In the meeting of the Board of Directors held last November 1, 2016, the
Board has decided to authorize and empower Ms. Mejica, Jade in her
capacity as President of the Corporation to apply for and borrow from the
bank the sum of ten million pesos‖ She went to the bank and borrowed twelve
million pesos.
Is it a valid loan executed by the corporation?
 Yes, the act of borrowing money from the bank is valid because such
act is within the powers of the corporation. It is not an ultra vires act.
 An ultra vires act is one where the corporation goes beyond the
power or authority granted to it.
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 The corporation has the power to borrow money.
 It was only the President who acted beyond the power given by the
corporation.
 When a corporation is authorized under its Articles of Incorporation or
by law to do a specific act, then it is deemed to be a corporate act,
but if it goes beyond its authority or power, then it becomes an ultra
vires act.
 There is a difference between an ultra vires act of a corporation and
an unauthorized act of an officer.
 Only a corporation can be guilty of an ultra vires act.
 If an act is not within the powers granted to a corporation, even if the
Board unanimously approved of it, such act will never be binding.
In the articles of the corporation, it was indicated that the purpose of the
corporation is to establish a new republic where there is no more corruption
and all drug addicts are sent to jail. Is it valid?
 No. The purpose of a corporation must be lawful. Hence, it should not
be against the Constitution.
 It is not anymore a lawful purpose if you establish a new republic
because we already have the Republic of the Philippines.
 It is contrary to the sovereignty of the Philippines and might even be a
ground for you to be charged for sedition or rebellion.
If the purpose of a corporation is to manufacture, distribute, sell, deal with and
trade joy, fun and happiness. Is there anything wrong?
 Yes. It is too broad that you cannot really specify what its purpose is. If
the purpose is happiness or joy, it is subjective to a person, so you
cannot have it as purpose.
3. Place where the principal office is to be located
o It is important because any notice or communication or any letters
that the government will issue or send to you will be addressed or
directed to that address that you have indicated.
4. Term for which the corporation is to exist
o Not to exceed 50 years, renewable for another 50 years
5. Names, nationalities and residences of the incorporators
6. Number of directors or trustees
o Not less than five nor more than 15
7. Names, nationalities and residences of acting directors or trustees
8. For stock corporations
a) Authorized capital stock in lawful money of the Philippines
b) Number of shares into which it is divided
c) If shares are par value shares, the par value of each
d) Names, nationalities and residences of the original subscribers
e) Amount subscribed and paid by each subscriber
f) If there are non-par value shares, such fact must be stated
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9. For non-stock corporations
a) Amount of its capital
b) Names, nationalities and residences of the contributors
c) Amount contributed by each contributor
10. Such other matters as are not inconsistent with law which the incorporators
may deem necessary and convenient
Submission of AOI
Together with the Articles of Incorporation, you have the option to submit your by-laws.
Either you submit your by-laws later or submit it together with the Articles of
Incorporation to save on time and effort. SEC has express forms and all you have to do is
fill up the blanks.
The by-laws – is an internal procedure among the stockholders and directors of the
corporation. It contains the following:
 Internal rules, rules that would govern the relationship
o Among stockholders,
o Among officers and board of directors.
o It is not supposed to cover the relationship to third parties. However,
even if the public or third parties are not bound, there could be
instances when third parties could insist on the compliance of the by-
laws.
 List of officers of the corporation
o Manner of selection or election (includes directors)
o How often should the stockholders meet, as well as for the directors
and the officers
 Management is defined.
o Stockholders
o Board of directors
o Board of officers
o Executive committee
Their functions and powers are defined. While we said in partnership that the
partners are the managers, in a corporation, management is vested in the
board of directors. The stockholders have nothing to do on how the
corporation will be run, operated or managed. The members of the board are
elected by the stockholders themselves, so it’s an indirect way of managing
the corporation. The shareholders still control the board of directors, such that
the latter gets the authority from the election. However, while there is indirect
management, the stockholders cannot interfere on how the corporation shall
be managed. Once they elect the board of directors, the directors are on
their own and the shareholders have no authority to interfere and dictate the
board on how the corporation will be managed. The only way that the
shareholders will have authority and control over the directors is only through
the elections.
The power given to the board of directors does not come from the
shareholders. The power and authority granted to the board comes from the
State itself because it is the State that created the corporation The State grants
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the power to the corporation and to the board. The business judgment of the
board, such shall prevail, which is called the business-judgment rule.
Can the stockholders question the decision of the board?
 No. They have no authority to question the decision of the board. Not even the
court can dictate the board to manage the business. The board has the sole
authority on the management of the business.
 Imagine if the shareholders can interfere in the management of the business
and there are thousands of shareholders, it would be very messy if they still
have to consult all shareholders on by one just to buy a company car.
We do not however mean that the board can do whatever they want; we are only
referring to the management decision of the board. We are not saying that the board
could commit, violate, or even enforce its objective or intention to commit a crime. We
cannot enforce the decision of the board if that decision violates taxation laws. The
board cannot say that it is a business decision of the board to pay only 10% of its taxes.
When taxes are due, taxes will have to be paid in accordance with the Internal
Revenue Code. Business-judgment rule refers to business decisions.
 How meetings are conducted
 Quorum needed
 Votes required to carry out a decision
Stockholders’ Meeting
Once the corporation is organized, when the SEC has issued the certificate, there should
first be a stockholders’ meeting.
Not all the stockholders manage. During the meeting, they shall elect the members of
the board based on the by-laws. Once elected, they could not adjourn. Once the
board is elected, it is now the board which shall be organized, e.g. election of president
or chairman, as defined in the by-laws.
Once elected, the president will now assume the presiding officers and elect the other
officers, indicated in the by-laws, such as the VP if any, secretary, treasury, the core
basic positions, and other officers indicated in the by-laws.
Powers of the corporation are different from that of the board, different of that of the
officers. All these powers are defined in the by-laws.
Shareholding
If you are a shareholder, you must be issued the certificate of stocks which is the proof
that you are the owner of the stocks, which are personal properties. Since they are
personal, the rights of the owner apply, you could sell them.
In partnership, if you are a general partner, you could assign your interest to a new
partner, but you need consent from the other partners. In corporation, no fiduciary
relationship exists. The shareholders, even the incorporators need not know each other,
theoretically.
Additional Capital
There could be a possibility that the capital might not be enough to pursue further the
business that was intended originally. There might be a need for additional capital. This is
done by
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 An increase of the subscribed capital stock. More subscriptions are offered
until the 100M authorized stock is consumed. Since 25M was subscribed, there
is still 75M remaining to be offered to whosoever will be interested to subscribe
or invest.
 If other existing stockholders are no longer interested, therefore, they may
transfer their shares.
If we need capital, we may welcome additional investors; existing stockholders may
subscribe more or the third parties or the public may subscribe for shares.
Corporate Combinations
If the existing stockholders are no longer interested to invest some more and none from
public is interested to invest, we could resort to various corporate combinations. There
might be corporations who are interested to join or to buy certain shares from another
existing corporation. In other words, another corporation may be a stockholder of
another corporation.
A shareholder may be a natural or juridical person but an incorporator is always a
natural person, because an incorporator signs the articles of incorporation in his own
name, so he has to be a natural person.
Merger - two corporations decided to marry each other and become one.
There are various reasons why one corporation wants to merge with another.
 Another business might be supplementary or complementary to an existing
business.
Bus Company-Machine Shop Merger Illustration
If I have a transportation company and I need some technical people to
maintain my buses, because I have 200 buses and it is not easy to maintain
them, I need the services of a machine shop. Organizing a machine shop
solely for my 200 buses might be too expensive. What I could do is find an
existing corporation engaged in the business of maintaining buses. I could buy
that corporation, and offer my services to other bus companies. I serve my 200
buses, and at the same time, I could serve other bus companies and earn from
them. So I buy that company or we could merge. I could ask the bus repair
company, if they’re interested, for a merger. They will become the owner of
my company and I will also become the owner of their company.
 Expansion
Bank Merger Illustration
I have a bank with branches in Manila only, and I want to go to Mindanao and
Visayas. Instead of organizing a new bank in Mindanao and Visayas, I could
just buy existing banks. With this, I am automatically in Mindanao and Visayas
without the problem of organizing a new bank. Or they can be stockholders of
my existing bank; they could just buy shares from my bank and they will pay it,
not with cash, but with the assets of their own bank. So it’s share and assets
combination.
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Dissolution of Corporation
A corporation is dissolved by actual dissolution or by shortening the period of existence.
Instead of 50 years, the articles may be amended to just 20 years, as the case may be.
On the 20th year, the corporation will then be terminated.
Section 15. Form of Articles of Incorporation (to be substantially complied with)
Section 16. Amendment of Articles of Incorporation. - Unless otherwise prescribed by this
Code or by special law, and for legitimate purposes, any provision or matter stated in
the articles of incorporation may be amended by a majority vote of the board of
directors or trustees and the vote or written assent of the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock, without prejudice to the appraisal
right of dissenting stockholders in accordance with the provisions of this Code, or the
vote or written assent of at least two-thirds (2/3) of the members if it be a non-stock
corporation.
The original and amended articles together shall contain all provisions required by law
to be set out in the articles of incorporation. Such articles, as amended shall be
indicated by underscoring the change or changes made, and a copy thereof duly
certified under oath by the corporate secretary and a majority of the directors or
trustees stating the fact that said amendment or amendments have been duly
approved by the required vote of the stockholders or members, shall be submitted to
the Securities and Exchange Commission.
The amendments shall take effect upon their approval by the Securities and Exchange
Commission or from the date of filing with the said Commission if not acted upon within
six (6) months from the date of filing for a cause not attributable to the corporation.
Relationships in the Corporation – 3-Fold Nature
1) State and the Corporation – the creator and the creature
 Corporation is a mere creation of the State
 The corporation must comply with the requirements and limitations
set forth by the code, otherwise, the State has the power to revoke
the privilege to exist as a juridical entity.
o Compliance with the capital structure
o Treasurer's affidavit showing at least 25% of the entire
authorized shares has been subscribed and at least 25% of
the subscription has been paid in cash and/or property to
the corporation
o Minimum of 5, maximum of 15 incorporators
o Issuance of certificate of incorporation before the
corporation can formally organize and commence its
transactions
o Purpose of the corporation must be lawful
(Among others)
2) Corporation and the Stockholders – the juridical person and the persons who
constitute the juridical person
 Terms and conditions with respect to the shares issued by the
corporation shall remain binding between the corporation and the
stockholder
o Redeemable shares – the corporation should redeem the
shares on the date agreed upon
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 Holders of voting shares have the right to vote
 General rule, holders of non-voting shares are not allowed to vote
except:
o Amendment of the Articles of Incorporation
o Adoption or Amendment of the By-laws
o Sale or other dispositions of all or substantially all of the
corporate assets
o Merger or Consolidation
o Incurring or Increasing the Bonded Indebtedness of the
Corp
o Increase or Decrease of Capital stock
 Subscribed Capital Stock- Once the shareholders committed to
subscribe a number of shares to the corporation they cannot
withdraw such commitment
 Distribution of dividends and distribution of corporate assets upon
dissolution depending on the kind of shares
 The basic agreement between the corporation and the stockholders
are contained not only in the articles but on the subscription
agreements; certificate of stocks may be issued, and the certificate
of stocks are the contract between the corporation and the
stockholder.
3) Stockholders among themselves - the persons who constitute the juridical
person itself
 There are instances when the stockholder’s conformity must first be
secured before changes could be done.
o If there is a deviation from the original agreement, the Board of
Directors cannot amend the Articles of Incorporation without the
agreement or consent of the other shareholders.
These changes could be introduced in what way?
 Through amendment of the Articles of Incorporation
How is amendment initiated?
1) It is initiated by conducting a meeting between the Board of Directors and the
Articles of Incorporation may be amended by a majority vote of the BOD or
trustees (if non-stock corporation)
2) It will be submitted to the stockholders. It needs the concurrence of at least 2/3
of the stockholders representing the outstanding capital stocks. (2/3 of the
members if non-stock corporation)
For those who dissent to the proposed agreement, what could be their option?
 Exercise right of appraisal - Such a right can be exercised by a stockholder
who disagrees with the decision of the BOD to amend the Articles of
Incorporation. The dissenting stockholder can demand the corporation to buy
back his shares at their fair market value. Such stockholder may be holding any
class of shares. While the Board has the sole management of the corporation,
this is one of the instances when it cannot act unilaterally—amendment of the
Articles of Incorporation. And because this is still a democracy, the dissenting
stockholder can exercise his right of appraisal
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Procedure in Exercising the Appraisal Right
1) The board will discuss the proposed amendments and voting will be done via
simple majority.
2) Once approved by the board, it will be presented to the stockholders in a
Stockholders’ Meeting. 2/3 of the shareholders must approved. Otherwise, the
amendments cannot be carried out.
3) The dissenting stockholder shall make a written demand on the corporation
within thirty (30) days after the date on which the vote was taken for payment
of the fair market value of his shares. The failure of the stockholder to make the
demand within the 30-day period shall be deemed a waiver of his appraisal
right.
4) If the proposed corporate action is implemented or effected, the corporation
shall pay to such stockholder, upon surrender of the corresponding certificate
of stock within ten days after demanding payment for the fair market value of
his shares.
5) Upon payment of the agreed or awarded price, the stockholder shall transfer
his shares to the corporation.
(See textbook discussion under Section 82)
Where will the company get the money to pay for the fair market value of the shares?
 From the unrestricted retained earnings - Assets less liabilities, they result in
unrestricted retained earnings which are reserved for the creditors of the
corporation
If you did not agree with the decision, your normal reaction would be “I’m out of this
since my opposition is not heard, what’s the point that I should remain here.” That’s why
the law gives him the appraisal right.
This right protects the dissenting stockholders and at the same time protecting the rights
of the 2/3 of the stockholders. The right means that dissenting stockholders can sell their
shares to the company on the condition that the corporation can only buy it back
provided there are unrestricted retained earnings.
In passing it as a condition precedent to the payment of the dissenting shareholders,
whom is it trying to protect?
 Other stockholders and the creditors.
The money of the corporation might be eaten up by the dissenting stockholders which
would make everything useless. Why pursue a business if we will be compelled to pay
the dissenting stockholders? IOW, it will paralyze the operations. The law is trying to
protect the business. The law is also trying to protect the creditors. Unless there are
unrestricted earnings, the corporation do not pay. This is pursuant to the Trust Fund
Doctrine.
Trust Fund Doctrine
 This means all the assets of the corporation are being held by it in trust for the
creditors. That regardless of what happens to the business, at least the assets of
the corporation are still there. So that when the creditors demand for payment,
the corporation has something to pay the creditors. The law entrusts to the
corporation the funds in behalf of the creditors.
 Whenever payments are to be done to the stockholders through their
appraisal right, the corporation can pay the dissenting stockholders only if
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there are unrestricted retained earnings. There is an extra surplus other than the
assets and some profits, the law makes sure that the creditors are protected.
Otherwise, it may end up that the corporation is using the capital to pay the
stockholders and the creditors discover that the funds have been returned to
the stockholders. We are giving undue advantage to stockholders at the
expense of creditors. This is what the law does not want.
 The general rule is that the corporation must not return investment to the
stockholders until all the creditors are duly paid.
Section 17. Grounds when articles of incorporation or amendment may be rejected or
disapproved. - The Securities and Exchange Commission may reject the articles of
incorporation or disapprove any amendment thereto if the same is not in compliance
with the requirements of this Code: Provided, That the Commission shall give the
incorporators a reasonable time within which to correct or modify the objectionable
portions of the articles or amendment. The following are grounds for such rejection or
disapproval:
1. That the articles of incorporation or any amendment thereto is not substantially
in accordance with the form prescribed herein;
2. That the purpose or purposes of the corporation are patently unconstitutional,
illegal, immoral, or contrary to government rules and regulations;
3. That the Treasurer's Affidavit concerning the amount of capital stock
subscribed and/or paid if false;
4. That the percentage of ownership of the capital stock to be owned by citizens
of the Philippines has not been complied with as required by existing laws or
the Constitution.
No articles of incorporation or amendment to articles of incorporation of banks, banking
and quasi-banking institutions, building and loan associations, trust companies and
other financial intermediaries, insurance companies, public utilities, educational
institutions, and other corporations governed by special laws shall be accepted or
approved by the Commission unless accompanied by a favorable recommendation of
the appropriate government agency to the effect that such articles or amendment is in
accordance with law.
Grounds for Rejection or Amendment of the Articles of Incorporation
1. That the AOI or any amendment thereto is not substantially in accordance with
the form prescribed (Sec. 17)
2. That the purpose or purposes of the corporation are patently unconstitutional,
illegal, immoral, or contrary to government rules and regulations (Sec. 17)
3. That the Treasurer's Affidavit concerning the amount of capital stock
subscribed and/or paid is false (Sec. 17)
4. That the required percentage of ownership of the capital stock to be owned by
citizens of the Philippines has not been complied with (Sec. 17)
5. In case of banks and other corporations governed by special law, if
unaccompanied by a favorable recommendation of the appropriate
government agency to the effect that such articles or amendment is in
accordance with law (Sec. 17)
6. There is fraud in procuring the AOI (as when there is misrepresentation)
The SEC will issue a ruling on whether or not they will accept the amendment. If you do
not agree with the ruling, your remedies are:
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 You can go to the SEC Commissioner
 You can go to the regular court (Court of Appeals)
Section 18. Corporate name. - No corporate name may be allowed by the Securities
and Exchange Commission if the proposed name is identical or deceptively or
confusingly similar to that of any existing corporation or to any other name already
protected by law or is patently deceptive, confusing or contrary to existing laws. When
a change in the corporate name is approved, the Commission shall issue an amended
certificate of incorporation under the amended name.
Corporate Name, importance
 The name is important because it is carries the identity of the corporation.
 Through its name, the corporation has the following privileges:
o Given certain rights and obligation
o Can sue and be sued (SEC can send summons and notices to the
corporation)
o Distinguishes the corporation from another corporation
 The name carries with it goodwill. Therefore, any goodwill credited to your
name will be enjoyed by the corporation. In fact, goodwill is an asset whi ch
can be sold.
Section 19. Commencement of corporate existence. - A private corporation formed or
organized under this Code commences to have corporate existence and juridical
personality and is deemed incorporated from the date the Securities and Exchange
Commission issues a certificate of incorporation under its official seal; and thereupon the
incorporators, stockholders/members and their successors shall constitute a body politic
and corporate under the name stated in the articles of incorporation for the period of
time mentioned therein, unless said period is extended or the corporation is sooner
dissolved in accordance with law.
Section 20. De facto corporations. - The due incorporation of any corporation claiming
in good faith to be a corporation under this Code, and its right to exercise corporate
powers, shall not be inquired into collaterally in any private suit to which such
corporation may be a party. Such inquiry may be made by the Solicitor General in a
quo warranto proceeding.
Compliance with the procedures and requirements of the incorporation is important;
otherwise, what would happen to the corporation?
 It cannot be issued the Certificate of Incorporation.
Use of Certificate of Incorporation
 Existence of a corporation starts when the COI is issued (―Birth Certificate‖ of a
corporation)
 Best evidence of the existence of the corporation. Without it, the corporation
cannot claim the rights and privileges as a juridical entity.
Instances where requirements are not strictly complied, as in the case of:
1. De Facto Corporation
2. Corporation by Estoppel
De Facto Corporation
- Corporation existing in fact but not in law
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Requisites of a De Facto Corporation
a. A valid law under which a corporation with powers assumed might be
incorporated
b. A bona fide attempt to organize a corporation under such law
c. Actual user or exercise in good faith of corporate powers conferred upon it by
law
Effect of a De Facto Corporation
- Acquires the same rights and benefits as that of a de jure corporation
Illustration 1: De facto Corporation
Corporation X is a de facto corporation and entered into a transaction with Corporation
Y, a de jure corporation. Y ordered goods from X. Y defaulted and X sued Y. Y
contended that X does not have the personality to sue because it has no COI, which is
the best evidence of its existence as a corporation. What could happen to the case?
 The case will not prosper. The existence of X as a corporation cannot be
collaterally attacked.
 The State must bring a direct proceeding (quo warranto) against the
corporation.
Can the de jure corporation file a quo warranto proceeding?
 No. Only the state can file a quo warranto proceeding because the existence
of a de facto corporation is valid as to third parties. The de facto corporation
has substantially complied with the requirement to be deemed sufficient and
there is good faith on their part. As to the third parties, the de facto
corporation is already established. Its lapses in the requirement are only
questionable by the State.
In other words, who can say that a de facto corporation has no right to exist?
 Only the State, because it the only one who can issue a COI. If it does not
issue, only the State can say you do not exist. For all intents and purposes, the
de facto corporation can be considered as existing insofar as the public is
concerned, except the State. Therefore, only the State can question.
Section 21. Corporation by estoppel. - All persons who assume to act as a corporation
knowing it to be without authority to do so shall be liable as general partners for all
debts, liabilities and damages incurred or arising as 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.
Corporation by Estoppel
- Group of persons who assume to act as a corporation knowing it to be without
authority to do so
Requisites of a Corporation by Estoppel
a. Representation by a group to the public
b. Knowing that they do not have the authority to act as a corporation
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c. Third parties contracting with them are induced to believe that they have the
authority to act as a corporation
De Facto Corporation v. Corporation by Estoppel
DE FACTO CORPORATION CORPORATION BY ESTOPPEL
Valid law that deems to establish a Bad faith on the part of the persons
corporation claiming to be a corporation
Good faith on the part of the
Intent to defraud
corporation
Third party is induced to believe that
Substantial compliance with the
such corporation has the authority to
requirements
act as such
Illustration 2: Corporation by Estoppel
Corporation X dealt with Corporation Y, a de jure corporation. X is composed of 5
stockholders who were engaged in business. Y ordered goods from X because X told Y
that they were a corporation, that they were duly organized and were offering goods
for sale. Y purchased goods from X. Y defaulted in the payment thereof. X now sues Y
for collection. Y seeks for the dismissal of the case because X cannot present a COI.
 Y cannot refuse to pay X. As to Y, X is a corporation. Even if it is a corporation
by estoppel, it can file a case as a corporation based on estoppel.
 This is not to say that registering with the SEC is useless. A corporation by
estoppel can also file a case and claim for any liability incurred by another
party.
Why is this privilege given even though it is not a corporation?
 It is fair that Y should be required to pay its liabilities regardless of whether or
not X has gone through the process of incorporation because Y relied on the
representations made by X and based on that reliance, it has entered into a
transaction. It has incurred liability from that corporation. It will no longer be fair
if X will not be allowed to collect from Y since Y has already enjoyed the
benefits extended by X. To allow Y to question the existence of X after enjoying
the benefits will be unfair. It will no longer be in accordance with the principles
of equity.
Limitation of a Corporation by Estoppel
 A corporation by estoppel is limited between the transacting parties.
Illustration 3: Corporation by Estoppel
If it was X who misrepresented themselves as a corporation and they incurred liability
from Y and now demands payment from X, can X now refuse to pay because it is not a
corporation?
 No. They are already estopped. Principle of equity applies.
 It cannot deny liability just because you are not a corporation.
Existence of a Corporation by Estoppel
a. Between transacting parties
b. The moment damage is incurred (No damage, no issue on estoppel)
Applicability of Limited Liability on Corporation by Estoppel
 Not applicable. Not a corporation in reality.
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 But it is estopped from denying its existence as corporation not for purposes of  At all elections of directors or trustees,
giving them the privilege under the Corporation Code but only for establishing there must be present,
their liability - the owners of a majority of the
outstanding capital stock, or
Liability of Person Composing a Corporation by Estoppel - if there be no capital stock, a
 Liable as general partners majority of the members entitled to
 Not only liable up to their investment but also up to their separate properties vote.

Section 22. Effects on non-use of corporate charter and continuous in operation of a  The election must be by ballot if
corporation.- If a corporation does not formally organize and commence the requested by any voting stockholder or
transaction of its business or the construction of its works within two (2) years from the member.
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  In stock corporations, every
business but subsequently becomes continuously inoperative for a period of at least five stockholder entitled to vote shall have
(5) years, the same shall be a ground for the suspension or revocation of its corporate the right to vote the number of shares
franchise or certificate of incorporation. ELECTION of stock standing.
- that the total number of votes cast
This provision shall not apply if the failure to organize, commence the transaction of its by him shall not exceed the
businesses or the construction of its works, or to continuously operate is due to causes number of shares owned by him
beyond the control of the corporation as may be determined by the Securities and - no delinquent stock shall be voted
Exchange Commission.
 In non-stock corporations, members of
Section 23. The board of directors or trustees. - Unless otherwise provided in this Code, corporations which have no capital
the corporate powers of all corporations formed under this Code shall be exercised, all stock may cast as many votes as there
business conducted and all property of such corporations controlled and held by the are trustees to be elected but may not
board of directors or trustees to be elected from among the holders of stocks, or where cast more than one vote for one
there is no stock, from among the members of the corporation, who shall hold office for candidate.
one (1) year until their successors are elected and qualified.
 Candidates receiving the highest
Every director must own at least one (1) share of the capital stock of the corporation of number of votes shall be declared
which he is a director, which share shall stand in his name on the books of the elected.
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
 No person convicted by final judgment
directors or trustees of all corporations organized under this Code must be residents of
of an offense punishable by
the Philippines.
imprisonment for a period exceeding 6
years
Management of the Corporation DISQUALIFICATION
- Vested in the board of directors or trustees. In other words, the board acts in
 Violation of this Code committed within
behalf of the corporation
5 years prior to the date of his election
or appointment
How do you classify the powers of the BOD?
 As managers, it exercises the powers of the corporation. The corporation can
act only through the board. The board acts in behalf of the corporation. All the
 Any director who ceases to be the
powers of the corporation can be done only by the board, not even the
owner of at least 1 share of the capital
individual members of the board. The board itself must act as a board. It
stock ceases to be director
exercises what we call as the corporate powers. REMOVAL
 It conducts the business. Business of the corporation is conducted by the
 Any director or trustee of a corporation
board and not by anyone else.
may be removed from office by a vote
 It administers the properties and assets of the corporation. The board assumes
of the stockholders holding or
custody of the assets and properties of the corporation.
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representing at least two-thirds (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
 Removal may be with or without cause
- that removal without cause may
not be used to deprive minority
stockholders or members of the
right of representation to which
they may be entitled
 Any vacancy occurring in the board of
directors or trustees other than by
removal by the stockholders or
members or by expiration of term, may
be filled by the vote of at least a
majority of the remaining directors or
trustees, if still constituting a quorum
VACANCY - Otherwise, said vacancies must be
filled by the stockholders in a
regular or special meeting called
for that purpose.
- A director or trustee so elected to
fill a vacancy shall be elected only
or the unexpired term of his
predecessor in office.
Old BOD v. New BOD Illustration
Six months after the election of a BOD, the president called a stockholders’ meeting,
and in that meeting, the president announced that they will elect a new set of BOD. The
stockholders elected a new board, composed of new members. They took their oath of
office and acted as the board. What happens to the old board? Remember the old
board was still there but the stockholders in a meeting elected a new set of officers and
almost 90% voted for the new board. Which board will manage the corporation?
 The fact that the stockholders elected a new set of board of directors does not
mean that the old directors who were duly elected were considered removed.
There’s no such thing as presumed removal, rather, there is a procedure
provided under the law on how to remove the board and it must be followed.
If it will not be followed, it would be an avenue for the stockholders to just
remove board of directors at their will. This will prejudice the corporation
because this will result to instability and detriment to the corporation.
Is it easier to remove or elect members of the board?
 Removal is difficult, because any director or trustee of a corporation may be
removed from office by a vote of the stockholders holding or representing at
least two-thirds (2/3) of the outstanding capital stock, or if the corporation be a
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non-stock corporation, by a vote of at least two-thirds (2/3) of the members
entitled to vote. Whereas, in electing a member of the board, only plain
majority is required.
 That is why, if there is no such requirement, it would have been very easy for
the stockholders to change the board and this will affect the independence of
the board.
 IOW, the existence of the board should not be subjected to the whims and
caprices of the stockholders. They should be independent. As a matter of fact,
we said that the decision of the board cannot be revised, reviewed,
corrected, or amended by the stockholders.
What is the nature of the powers of the board?
 Undelegated and exclusive
Business Judgment Rule
The decision cannot be reviewed by the stockholders themselves. This is because the
power of the board came from the law itself. All that the stockholders can do is elect
the board and once they are elected, the stockholders would have nothing to do with
their (BOD) decision. The fact that they (stockholders) were the once who elected does
not give the stockholders any authority to review their decisions because the power to
elect is vested in the stockholders. However, the power of the board is granted by the
law, and therefore, cannot be reviewed, except those instances expressly provided for
by the Code including among others: amendment of the articles of incorporation;
merger or consolidation; increase or incurring of bonded indebtedness, etc.
Qualifications of the Board of Directors
1) A director of the board should own at least one (1) share of stock.
2) Majority of the board should be residents of the Philippines.
Business Judgment Rule
The stockholders may not review the judgment of the board of directors. Although the
stockholders elect the directors, it is the law that confers the board with authority to act
for the corporation. Not even the courts can question the decisions of the board
because the board is presumed to know the business better than anyone and they are
in the best position to make decisions for the corporation. That’s how broad the powers
of the board are. But, however broad they may be, it is still subject to limitations.
Limitations of the Powers of the Board
a) The power of the board is subject to limitations imposed by (1) law, the
Constitution, statutes (such as the Corporation Code); (2) Articles of
Incorporation; and (3) by-laws.
(not discussed, but enumerated in the book)
b) The board cannot perform constituent acts, that is, acts involving fundamental
changes in the corporation.
c) It cannot exercise powers not possessed by the corporation.
Limitation of Powers Illustration
If the board performs an act which is not consistent with or contrary to the articles, can
you now question the decision of the board?
 Yes, it may be questioned, because it is in excess of its power. The stockholders
may question. However, pursuant to the business judgment rule, they cannot
directly reject or abrogate the decision of the board.
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 They must first go to court.
Can the court now review or change that decision?
 Yes. The court may review such decision because an act that is contrary to the
articles of incorporation is an ultra vires act which means that it is beyond the
power granted by the state to the corporation. To know the authority granted
to the corporation, we have to look at the articles of incorporation. So that if it
is beyond the authority, the court can nullify the decision.
 Yes. Although we said that the court cannot question the wisdom of the
board, in reversing that decision of the board, it does not intend to substitute its
own wisdom from that of the board. It simply declares that the board has
exceeded its authority and is no longer allowed to do such act.
This is precisely why we said that even if there is a business judgment rule, that does not
mean that the board can do anything, there are limitations.
The rule, insofar as the business judgment rule is concerned is that the court cannot
review the decisions of the board, however, it is subject to limitations, such as those
imposed under the Constitution, the law, e.g. Corporation Code, the Articles of
Incorporation, and the by-laws.
Why does the law vest in the BOD the power to manage the corporation?
 The reason behind empowering a limited number of people to control the
corporation is for the efficiency of the operations of corporation. If the powers
of the corporation are granted to the stockholders, there will be instability in
the corporation, specifically in making decisions. If it is limited to a number of
persons, such persons may be able to discuss matters in making decisions
regarding the corporation, and especially if such persons have special sets of
skills in the management of the corporation.
Stockholders’ Meeting
Before the voting for directors, there should be a meeting. How is the meeting called?
 Stockholders’ Meeting (in a regular or special meeting called for the purpose)
Frequency of Meetings
1. Stockholders’ Meeting
 As often as the by-laws require
 At least once a year (regular)
Normally, the election of directors is done because the board has a
term of one year. Every year, the stockholders need to meet for that
purpose.
 As often as necessary (special)
2. Board Meeting
 As often as the by-laws require
 At least once a month (regular)
 As often as necessary (special)
Board Meetings
The board, acting as such, must come up with decisions by conducting deliberations or
meetings. It must act together as a body in order to bind the corporation by their acts.
24
Shower Resolution Illustration
You were one of the directors in a corporation. One morning, while you were taking a
shower, your helper knocked on the door and asked if you could sign some papers, said
to be a resolution of the board. You just approved said resolution. Hence, it was passed
even if you were not there in the meeting. When you read the resolution, you found out
that it was not what you wanted. Can you still object?
 Yes, because the resolution is not valid. The resolution should be resolved or
decided by the board. There must have been a deliberation, which means
that there must have been a meeting. If there was no deliberation, it should
not be considered as a binding resolution.
During the deliberations, the directors exchange their ideas and they are allowed to
object or to vote in favor of a resolution. IOW, the board meeting is expected to be a
market of ideas, there is an exchange of ideas so that the final resolution will be the
result of an intelligent deliberation; otherwise, if there is no such deliberation, then the
decision-making process might not be for the best interest of the corporation.
Exceptions to the Rule (that the directors or trustees can bind the corporation only by
action taken at a board meeting)
1) Where the directors happened to be the sole stockholders
2) Where a contract entered into by a corporate officer authorized by the board
of directors, expressly or impliedly as a matter of general practice, custom, and
policy
3) Where the transaction is ratified in a subsequent board meeting
 Ratification cures the defect
4) Where the acts of one of the directors or agents held out by the corporation to
the public as possessing power to do those acts
5) Where the stockholders, by acquiescence, invest the executive officers with
powers of the directors as the usual method of doing business, the board being
inactive
6) Where the stockholders waive the necessity for a meeting of the board of
directors
7) Under exceptional circumstances as when no creditors, minority stockholders
or other persons of the public are affected
8) Creation of an executive committee
9) Where the corporation entered into a management contract, where
management is delegated to another corporation
(Only items 1, 3, and 6 were discussed)
Maceda’s Excess Loan Illustration
Maceda was one of the members of the board. The board decided to borrow money
from the bank worth 5 million. The resolution read as follows, ―Authorizing Maceda, in her
capacity as president, to borrow from the bank an amount not exceeding 5 million.‖
When she went to the bank, she convinced them to extend her 10 million as loan. When
the bank demanded payment of the loan, the corporation was willing to pay only 5
million. Can the bank compel the corporation to pay the entire 10 million?
 No. The corporation will only be liable up to 5 million because the Maceda
exceeded the authority given to her by the resolution.
Was the borrowing of the 5 million excess an ultra vires act?
 No, it was not an ultra vires act because the corporation had the authority to
borrow money.
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In a stock corporation, the majority of the owners of capital stock must be present
 An ultra vires act is an act which a corporation is not supposed to perform, or during the election. In a non-stock corporation, the majority of the members entitled to
something that is contrary or beyond the purpose of the corporation. It was vote must be present. Without the presence of the majority of stockholders or members,
merely an excess of authority. It was, therefore, an unauthorized act. the meeting cannot proceed, since there is no quorum.

Ultra Vires Act v. Unauthorized Act Election can be done by a raise of hands or if someone requests, by ballot. The
An ultra vires act is when a corporation acts in excess of the powers granted to it in candidates attaining the most of the number of the votes will be the elected as the
accordance with its purpose. An unauthorized act is committed by an agent of the board of directors.
corporation in excess of the authority given to him.
Quorum – the number of persons required to be present in a meeting in order for that
Maceda’s Discretion Illustration body proceed with any transaction or any corporation act. The number required for a
Maceda is authorized to borrow from the bank. The resolution reads, ―This hereby quorum is usually a majority.
empowers Ms. Maceda to borrow money in the amount that she may find necessary.‖  Simple majority – 50% + 1
She went to the bank and borrowed 10 million, can she do so? And if she does, can the  Qualified majority – higher than the simple majority as provided for in the
corporation be liable for the loan? articles or in the by-laws (e.g. 50% + 2, three-fourths, two-thirds)
 No. The acts is not binding on the corporation. The resolution itself is not valid.
 Discretionary powers may not be delegated. Majority is not plurality. Plurality is simply the most number or the highest number of votes
 The resolution is not a proper delegation since it involves discretionary power. in a given group, even if the majority has not been reached. In a group of 10, 3 could
o It amounts to the abandonment of the board of its power. be the plurality even if it does not reach the majority which should be 6. If only 4 voted
 Should the bank give money to Ms. Maceda, the corporation will not be liable and the others abstain, a vote of 3 could make one win since he has the highest
since such act is not binding on the corporation. In this case, it is the board number of votes in the given election.
who will be liable to the bank
Majority – presence of stockholders or members to constitute a quorum
Section 24. Election of directors or trustees. - At all elections of directors or trustees, there Plurality – votes needed to elect a member of the board
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, How Election Is Done
a majority of the members entitled to vote. The election must be by ballot if requested  Straight Voting
by any voting stockholder or member. In stock corporations, every stockholder entitled Every stockholder may vote such number of shares for as many persons as there are
to vote shall have the right to vote in person or by proxy the number of shares of stock directors to be elected.
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  Cumulative Voting
stockholder may vote such number of shares for as many persons as there are directors It means you can attribute your votes even to one candidate or any number of
to be elected or he may cumulate said shares and give one candidate as many votes candidates as one may see fit. The vote that may be cast for is equal to the number of
as the number of directors to be elected multiplied by the number of his shares shall shares outstanding of a stockholder multiplied by the number of directors to be elected.
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 Cumulative Voting Illustration
number of shares owned by him as shown in the books of the corporation multiplied by Directors to be elected – 5
the whole number of directors to be elected: Provided, however, That no delinquent VOTES THAT MAY BE CAST (no.
stock shall be voted. Unless otherwise provided in the articles of incorporation or in the STOCKHOLDERS NO. OF SHARES
of shares x no. of directors)
by-laws, members of corporations which have no capital stock may cast as many votes A 20 100
as there are trustees to be elected but may not cast more than one vote for one B 10 50
candidate. Candidates receiving the highest number of votes shall be declared
C 15 75
elected. Any meeting of the stockholders or members called for an election may
D 15 75
adjourn from day to day or from time to time but not sine die or indefinitely if, for any
E 15 75
reason, no election is held, or if there not present or represented by proxy, at the
F 5 25
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. G 20 100
TOTAL 100 500
Election of the Board
The board is elected during a stockholders’ meeting. B, C, D, E, F and G had a meeting and they wanted to exclude A from the board so
 Stock corporation: board of directors they could control it. It was their agreement that A should not be in the board. However,
 Non- stock corporation: board of trustees there is still a chance for A to be in the board if he will cast all of his votes for himself.
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Even if 6 is against 1, it does not necessarily mean anything as long as A casts all his
votes for himself. He is guaranteed a position in the board.
That is the intention of cumulative voting; it is to protect the minority. It is to give the
minority a chance to be represented in the board.
Number of Directors
 Stock corporation – not less than 5 nor more than 15
 Non-stock corporation – may be more than 15
Pledge and Trust Agreement Illustration
Pledge is an accessory contract intended to secure the fulfilment of a principal contract
of loan.
Shares of stock are considered property and ownership thereof is evidenced by a
certificate of stock. If you offer a certificate of stock as security for a loan obtained with
a bank, that contract is considered a pledge, and not mortgage. Posession thereof is
given to the pledgee, the bank.
In mortgage, possession of the thing offered as security is retained by the mortgagor,
while in pledge, possession is transferred to the pledgee.
If you were nominated as director in a corporation during election, are you still qualified
to become a director given that your certificate of stock is possessed by the bank?
 Yes. Although not in possession thereof, a pledgor is still considered the owner
of the certificate of stock because only the possession is transferred.
In a trust agreement, the thing itself is transferred, not only the possession thereof, but
also the ownership, the rights as an owner.
If you executed a trust in favour of another, and you were nominated to be a director.
Can you be qualified to be nominated?
 No. He is no longer qualified. In case of trust, legal ownership is transferred to
the trustee while the beneficial ownership is retained by the trustor. In that
context, the trustor is not the legal owner, therefore, he cannot be elected.
 Although under a trust agreement, if indicated, one could always get back
the legal ownership of the property.
To be elected as a director is a right. It goes with the ownership of a share – together
with that share is the right to be nominated and elected as director. To be a director the
law requires one to be a holder of at least one share.
Illustration 4: Bank Representative in the BOD
When a corporation secures a loan from a bank and the loan is so huge, the bank now
has to find ways to protect the money that it lent to the corporation. There are
occasions when the bank requires the borrowing corporation to allow a representative
of the bank to be in the board, temporarily, during the existence of the loan. The bank
will require the borrower corporation to at least assign a share to a representative of the
bank so that the bank could be represented in the board. Having a representation in
the board, the bank will be guided on how the money is being spent. This is so because
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there are occasions the borrower would just squander the money without this method of
counterchecking. The bank has an interest in making sure that the money that they lent
will be applied for good use. Hence, the bank will require a qualifying share to be on the
board.
The point is that the moment you own a share, together with that ownership is the right
to be nominated and be voted for. Nobody can question that, unless of course, it is
provided in the by-laws. Later, we will learn that the by-laws of the corporation is an
agreement among the stockholders and officers. It is the house rules or internal rules
among the stockholders.
Director in Rival Corporation Illustration
If you were a shareholder in a corporation engaged in the manufacturing of beer, Beer
na Beer. At the same time, you were a stockholder of a bigger beer manufacturing
company, San Miguel Beer. You wanted to be in the board of San Miguel, although you
were already a director in Beer na Beer because you owned the latter. Would the
owner of San Miguel be happy?
 No, because they are competitors. There is now a problem when a director of
Beer na Beer is also a director of San Miguel. As a director of San Miguel
Corporation, you will be privy to all the operations or the conduct of business
of San Miguel and you might use the information for the benefit or advantage
of your corporation, Beer na Beer.
Can San Miguel prevent him to be a director thereof? How? We said that ownership
entitles you to be elected to the board.
 Yes. San Miguel may add provisions in its by-laws preventing a stockholder
from being elected to the board, if he is also a director of another corporation.
That’s what SMC did, ―No stockholder shall qualify to be elected if he is an owner of 10%
of shares of a company directly competing with SMC.‖ Can Beer na Beer oppose on this
provision by perhaps invoking discrimination?
 No. The SC ruled in favor of San Miguel because it is based on a valid and
reasonable ground.
IOW, the survival of the corporation is at stake. And in saying that he was singled out, it’s
not, it just happens that it applies to him, but his name was not indicated in the by-laws.
Section 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.
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Directors or trustees cannot attend or vote by proxy at board meetings.
Corporate Officers
These officers are elected by the board of directors or trustees.
 President
- Cannot be the secretary nor the treasurer at the same time
- Although the law does not require for the president to own a share of
stock, it is required that he must be a director of the board. In order
for him to be a director, he must be a shareholder
- He is the only officer who must own at least one (1) share of stock
Should the president die, can the vice-president, who has no share, assume the
position?
 No, the vice-president cannot assume the position of the president; rather,
he must own at least one share of stock and must be a member of the
board in order for him to succeed the president.
 Treasurer
- Can be the secretary at the same time
- Can be elected even if not a stockholder
 Secretary
- Must be a resident and citizen of the Philippines
- Can be elected even if not a stockholder
 Vice-President
- The law does not require the board to elect a vice-president
- Ensures succession for the presidency. There might be a situation
where there is a need to immediately fill the possession of the
president. At least we are now sure that somebody will succeed the
president in any eventuality.
- It is not provided in the law that a vice-president should own at least
one share of stock. However, in order for the vice-president to
succeed the president, he must have at least 1 share of stock and he
should also be a member of the board.
Vacancies in the Position of Officers
They are filled by a vote of the majority of the board of directors. The board decides
because it is the one who appointed or elected the officers in the first place. There is no
need to call the stockholders to fill such positions, e.g. president, treasurer, secretary.
Although the law does not require for the President to own a share of stock, the law
requires that the President must be a director of the Board. In order for him to be a
director, he must be a shareholder.
Section 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
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corporation, or the director, trustee or officer himself, shall immediately report such fact
to the Securities and Exchange Commission.
Report of Election
Once the election of the directors, trustees and officers are done, the secretary of the
corporation must submit a report to the Securities and Exchange Commission within 30
days thereafter the names, nationalities and residences of the directors, trustees and
officers elected.
Section 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.
Disqualification of Directors, Trustees or Officers
1) If the person is guilty or convicted of an offense punishable by imprisonment for
a period exceeding 6 years, or
2) If he is guilty of any of the violations of the Corporation Code committed 5
years prior to the date of election or appointment.
De Facto Officer
He is an officer elected to the board without him having all the qualifications. His
decisions are still valid and binding to the corporation.
Even if he was not properly elected or even if there were some disqualifications, but
nobody noticed or nobody questioned his qualifications, he was elected and assumed
as an officer, then the law finds it necessary to honor his decision as an officer and
make it binding upon the corporation. Imagine if two years after acting as president, it
was discovered that he was disqualified, if we do not honor his decisions, it will result to a
catastrophe in the corporation.
You would have to review all acts of the corporation all over again and declare all the
transactions as not binding because it was just discovered that the officer is not
qualified. The law looks at stability issues. The law looks more on the issue on order and
stability in the business world. However, it does not mean that since it was discovered
that he is no longer qualified, he should remain there until his term expires. There should
be a quo warranto proceeding regarding the validity of the election of the de facto
officer.
Section 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 two-thirds (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
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by the stockholders in a regular or special meeting called for that purpose. A director or
trustee so elected to fill a vacancy shall be elected only or the unexpired term of his
secretary, the call for the meeting may be addressed directly to the stockholders or predecessor in office.
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 A directorship or trusteeship to be filled by reason of an increase in the number of
removal, must be given by publication or by written notice prescribed in this Code. directors or trustees shall be filled only by an election at a regular or at a special
Removal may be with or without cause: Provided, That removal without cause may not meeting of stockholders or members duly called for the purpose, or in the same meeting
be used to deprive minority stockholders or members of the right of representa tion to authorizing the increase of directors or trustees if so stated in the notice of the meeting.
which they may be entitled under Section 24 of this Code.
How Vacancies Are Created (DARI-DREI)
Election and Removal of Directors and Trustees 1. Death
2. Abandonment
ELECTION REMOVAL 3. Resignation
Vote of at least 2/3 of the 4. Incapacity
Majority of stockholders
stockholders representing 5. Disqualification
STOCK CORPORATION representing the
the outstanding capital 6. Removal by SH or members
outstanding capital stock
stock 7. Expiration of term
NON-STOCK Majority of the members Vote of at least 2/3 of the 8. Increase in the number of directors/ trustees
CORPORATIONS entitled to vote members entitled to vote
Ways To Fill A Vacancy
It should be easier to elect because when we remove, we are depriving the 1. It is filled by the stockholders in a regular or special meeting called for that
director/trustee of his personal rights and to act as director. It will probably affect the purpose if vacancy occurred through (E-R-I)
conduct of business. a. Expiration of term
b. Removal by shareholders or members
In other words, when we elected him, the stockholders had faith and now we are c. Increase in the number directors/ trustees
removing all of a sudden, for all we know, the move to remove him might be political in
nature or to harass him, so the law requires a higher number of votes. 2. It is filled by the vote of at least majority of the remaining directors or trustees, if
still constituting a quorum if vacancy occurred through(D-A-R-I-D)
Requisites for Removal of Directors or Trustees a. Death
1) The removal must take place either at a regular meeting of the corporation or b. Abandonment
at a special meeting called for the purpose c. Resignation
2) There must be previous notice to the stockholders or members of the d. Incapacity
corporation of the intention to propose such removal at the meeting e. Disqualification
3) The removal must be by a vote of the stockholders holding or representing 2/3
of the outstanding capital stock or if the corporation be a non-stock Old BOD v. New BOD Illustration
corporation, by a vote of 2/3 of the members entitled to vote A, B, C, D, and E are majority stockholders and at the same time, directors. However,
they sold the corporation to W, X, Y, and Z. W, X, Y, and Z paid the shares of sto cks of A,
Removal of the President or Secretary B, C, D, and E.
The president will never call for that meeting, that’s why the law provides for an
alternative. The following shall be carried out: When W, X, Y, and Z wanted to convene, do you think they could now act as a board?
1) Notice from the stockholders for a meeting  No, because in order to act as board you need to be elected.
2) A meeting must be attended by at least majority of the stockholders
Who is the board now?
If the stockholders do not decide to call for that meeting, one brave soul can call for  There is no board because the law requires the directors to own at least 1
that meeting. All that the stockholder shall do is to send written notices to the other share of stock. Any director who ceases to be the owner of at least 1 share of
stockholders informing them that they shall hold a meeting for that special purpose. In the capital stock ceases to be a director.
the meeting, there must be presence of majority of the stockholders. If no written notices
are sent, the notification may be done through publication. Here is a corporation now without a board. What do we do? Who will now manage the
corporation?
Section 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the  Conduct a shareholders’ meeting to elect a BOD
board of directors or trustees other than by removal by the stockholders or members or
by expiration of term, may be filled by the vote of at least a majority of the remaining But when W, X, Y, and Z went to the boardroom, A, B, C, D, and E were still having a
directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled meeting. A, B, C, D, and E argued that they still have a 1-year term.
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 They are already disqualified since they ceased to be the owner of at least 1
share of the capital stock.
Because of poor management, their counsel did not prepare and did not anticipate the
problem. If you are the lawyer, what would you have done when you bought the shares
to avoid confusion?
 When ownership is sold, the orderly transition of the management of the
company must be taken into consideration. You should not only think about
the sale, but you should be able to anticipate potential problems in the
transition of the company. The best way is to have them resign. They will
understand because you could say that if they do not sign the resignation, the
buyers will not pay. Part of the deal of selling your shares is your resignation as
officer or director of the corporation.
While directors enjoy the business judgment rule we said that they can’t just do what
they want because there are limitations imposed by the law, the Constitution, statutes,
the Articles of Incorporation, and the by-laws. Otherwise, if they go beyond this, they
could be held liable.
Section 30. Compensation of directors. - In the absence of any provision in the by-laws
fixing their compensation, the directors shall not receive any compensation, as such
directors, except for reasonable pre diems: Provided, however, That any such
compensation other than per diems may be granted to directors by the vote of the
stockholders representing at least a majority of the outstanding capital stock at a
regular or special stockholders' meeting. In no case shall the total yearly compensation
of directors, as such directors, exceed ten (10%) percent of the net income before
income tax of the corporation during the preceding year.
Section 31. Liability of directors, trustees or officers. - Directors or trustees who wilfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict with their duty as such directors or
trustees shall be liable jointly and severally for all damages resulting therefrom suffered
by the corporation, its stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in violation of his
duty, any interest adverse to the corporation in respect of any matter which has been
reposed in him in confidence, as to which equity imposes a disability upon him to deal in
his own behalf, he shall be liable as a trustee for the corporation and must account for
the profits which otherwise would have accrued to the corporation.
Liabilities of Directors
The directors or trustees in a corporation are liable to the corporation for the commission
of the following:
1. Wilfully and knowingly vote for or assent to patently unlawful acts of the
corporation
2. Who are guilty of gross negligence or bad faith in directing the affairs of the
corporation
3. Acquire any personal or pecuniary interest in conflict with their duty as such
directors or trustees (Sec. 31, Corporation Code)
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Illustration:
 If you are a director of a corporation engaged in selling fishes. As a
director, you necessarily have the obligation to promote the business
and to ensure the growth of the business. However, outside the
corporation, you built a business of your own, engaged also in selling
fish, and in the process, you approached the customers of the
corporation and earned in your personal capacity as a businessman.
Section 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.
Dealings of Directors
A director can engage in a contractual relationship with the corporation. However,
such contract is voidable, except if the following conditions are present:
1) That the presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such
meeting
2) That the vote of such director or trustee was not necessary for the approval of
the contract
3) That the contract is fair and reasonable under the circumstances
4) That in case of an officer, the contract has been previously authorized by the
board of directors (Sec. 32, Corporation Code)
Conflict of Interest Illustration
You were the director of a corporation which was planning to celebrate its 100 th
anniversary, expected to host 5,000 guests. You happened to be engaged in the
catering business. As a director, you were there during the discussion of the board while
it was looking for a catering company who could serve 5,000 guests. You went to the
Marketing Division and offered your catering services and you were allowed to do so.
Your catering business earned substantial amount of money, 5,000 x P1,000 per head
equals P5M. The other directors became jealous and questioned the contract, alleging
that you should be held liable for damages because of conflict of interest. You knew
about the opportunity because you were on the board. Can that contract be
questioned? Is there conflict of interest?
 No, as long as the four requisites for the validity of a contract between the
corporation and the self-dealing director are present. The director’s presence
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should not be required to attain a quorum in the meeting of the board and the
director’s vote should not be necessary for the approval of the contract
between the catering business and the corporation.
Section 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.
Interlocking Director
- A person who is a director of two or more corporations. Contracts between
corporations with interlocking directors cannot be invalidated on that ground
alone, provided that there is no fraud and the contract is fair and reasonable
under the circumstances.
Illustration: When will a contract between corporation with an interlocking director be
valid?
Director A owning a substantial interest (25%) of Corporation X (engaged in selling
products) and nominal interest of 5% of Corporation Y (engaged in advertising
products). Because A is a director of both corporations, if they enter into a contract,
where Corporation Y will advertise the products of Corporation X, the contract will be
voidable, except if the following conditions are present. (Sec. 32, Corporation Code)
Interlocking Director Illustration
Corporation X is engaged in manufacturing cell phones and Caballero is a director.
Caballero is also a director of a large food chain. The services of the food chain were
engaged by the cell phone company to celebrate an occasion. Since Caballero was a
director of both companies, she is what we call an interlocking director. Nothing is
wrong in engaging the services of that catering company. However, Caballero was
able to get that contract by telling the purchasing department that the latter shall get
10% of her profit should her catering company be contracted. Because of that
agreement between Caballero and the purchasing manager, her catering business
was engaged. Is there something wrong?
 Yes. There is now something wrong because Caballero is giving secret profits to
the purchasing officer. That is disloyalty to the manufacturing corporation.
Since there is disloyalty, Caballero will be accountable to the corporation for
any profit obtained from that transaction.
What is the ground for questioning that contract?
 The ground is disloyalty on the part of Caballero for preventing the corporation
the business opportunity that she took in that transaction.
Did the manufacturing company suffer any damage?
 Yes. The company was prevented from being able to pursue another catering
service by giving the purchasing officer a commission.
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Clearly, there was a conflict. Other than the presence of conflict, what else would have
happened to Caballero?
 She earned more from that transaction because that is her motive in telling the
purchasing officer to engage her catering services.
Is there anything wrong being an interlocking director?
 There is something wrong in this situation because as a director, she has a
fiduciary relationship with the corporation. There is a violation of her duty to the
corporation. Interlocking directorship may be questioned because she was
giving advantage to her catering company.
Interlocking Directorship may be questioned when it does not comply with the following
requisites:
1) That the presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such
meeting
2) That the vote of such director or trustee was not necessary for the approval of
the contract
3) That the contract is fair and reasonable under the circumstances
4) That in the case of an officer, the contract has been previously authorized by
the board of directors.
If such contract is not fair, not reasonable or fraudulent, the interlocking director could
even be liable for damages.
Section 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. (n)
Section 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.
Executive Committee
It is a smaller committee given delegated powers by the board. It is composed of not
less than three (3) members of the board to be appointed by the board
IOW, the board can delegate, except matters which are discretionary. However, the
intention of creating the committee is for purposes of expediency so that they don’t
have to meet at all times because it can be difficult to convene the board sometimes.
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What can the committee not decide on?
 Amendments to the by-laws or board resolutions which provide specifically
that they may not be amended by such committee
 Filling-in the vacancies in the board
 Distribution of dividends to the stockholders
These matters are usually reserved to the board itself or subject to ratification by the
other stockholders.
Section 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. (13a)
Classification of Corporate Powers
1. Express - those powers expressly provided by law or in the AOI
2. Implied powers - the powers that are exercised as a means to achieve the
purpose of the AO(
3. Inherent powers - those powers that are exercised by a corporation by the
nature of its business
4. Incidental powers - are those powers necessary for the operation of the
business
If the corporation were to be a shipping company (with primary purpose of “to manage,
operate and run vessels”), does it have the power to buy vessels?
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 Yes. It is not an express power because the ―buying‖ is not expressly mentioned
in the primary purpose of the AOI.
 The power to lease or buy are incidental to the power to ―operate‖ since these
are necessary to exercise the express powers.
Inherent Power Illustration
If it were a railroad company, for example, to operate, manage, and maintain a
railroad company, what powers do you think that is part of the nature of the business?
 The power to construct railroads, and to construct railroads you will have to
obtain several properties and these properties are not public these could be
privately owned you will have to buy these properties. You cannot just pass by
without buying these properties.
 You will have to buy from the owner but you will notice that not every owner
will willingly agree to sell these properties.
What could be the remedy?
 You are engaged in a public utility, for example, the law gives you the power
to exercise the power of eminent domain. If you are not given that right you
might not be able to carry out your business as a railroad company. As a
railroad company you should have the right to exercise the power of eminent
domain. It goes with the nature of the business.
Succession
Even if all the BODs will die, the existence of the corporation will not cease, so the
shareholders will be there to elect another set of board of directors to continue to
exercise these powers.
It does not only apply to the board of directors, even if all the stockholders will die, there
will still be succession. How’s that?
 In cases of stockholders, if a stockholder will die, his heirs will inherit the stocks.
Merger
- When one corporation is dissolved and the other corporation survives.
Consolidation
- When there is a creation of a new entity or a corporation and there is
dissolution of the old corporations.
Increase or decrease capital stock
- Approval by the majority vote of the BODs
- Ratified by the stockholders representing 2/3 of the outstanding capital stock
- Provided that there must be a prior notice to the stockholders of their intention
to increase or decrease the capital stock.
Extend of shorten corporate term
- Approval by the majority vote of the BODs/ BOTs
- Ratified by the stockholders representing 2/3 of the outstanding capital stock
or 2/3 of the members in case of non-stock corporations.
Section 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
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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.
(n)
Section 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 ap proved 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 stock-holder 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
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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)
Section 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.
Pre-emptive Right
When the corporation decides to issue new capital stocks, the stockholders are given
the right to subscribe these shares before offering it to the public. The purpose is to
eliminate the diminution of the interest of the stockholders
Pre-emptive right vis-a-vis diminution of the interest Illustration
There are five stockholders, A, B, C, D and E wherein they have an interest of the
corporation of 20%. The capital stock is 1,000,000 shares with 1 peso per share so each of
them have 200,000 shares worth P200, 000.00.
Three stockholders, A, B and have a voting trust agreement that they will always vote
together. They are assured of a 60% vote. So no matter what happens, they will always
dominated the decision.
D and E noticed so they decided to increase their capital stock to 2,000,000. If they
increase their capital stock, there is an additional capital stock of 1,000,000. D and E
agreed that it will only be the two of them to get the additional capital stock. 500,000
for C and 500,000 for D.
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Shareholdings Requiring Minimum Ownership By The Public
When the corporation decides to go public. When we say go public, this is when a
How much will be there percentages? corporation decides to offer its shares to the public. In other words, you will be listed in
Original Interest New Interest the stock exchange and you will now be allowed to sell your shares of stocks in the stock
Number of Number of market. But before you are allowed to do so, you are required to go through a process
Percentage Percentage
shares shares of being registered as a publicly listed corporation. There is a process and it is not an
A 200,000 20% 200,000 10% easy process.
B 200,000 20% 200,000 10%
C 200,000 20% 200,000 10% I had once the opportunity to go through the process and it was not easy. You have to
200,000 + prepare everything. Because when you go public, everything must be fully disclosed
10% + 25% = from management, to operations, to liabilities.
D 200,000 20% 500,000 =
35%
700,000
So, maybe you have to disclose the management first. You will give the list of all officers
200,000 +
10% + 25% = and the board members. You have to submit bio data of these officers and board
E 200,000 20% 500,000 =
35% members. Because if your board members are former janitors, who do you think will buy
700,000
shares of stocks of your company? If your department heads were just a former utility
Total 1,000,000 100% 2,000,0000 100%
men, who will buy? So your management must impressive. Your president, come out
with a very impressive bio data. Whether the president is a graduate of this
So in case of a voting, D and E will now have? How much the total percentage? management school, he has master’s degree in management, these are the things that
 70% will impress the public and will therefore induce the public to be part of that corporation
and therefore will induce the public to buy shares because sooner or later the prices of
While A, B, and C even if they vote together? this shares could go up and make money.
 It is now down to 30%
The legal department will be scrutinized. How many cases the legal department is
It is now down to 30%, whereas before they control 60%. While D and E now control 70%. handling, are these cases being attended to by the legal department? Dumadaog or
Is this what the law wants? What does the law says? kapildihon? If all those cases is kapildihon, nobody will buy because sooner or later all
 That is why the law says that they are given equal opportunity to subscribe to this cases will be decided against the corporation and will drain the assets of the
the new issuance of stocks. corporation. Make sure that your records are good.

Is the requirement to give each stockholder the pre-emptive right an absolute one?
 No. 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
 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.
 Expressly stated in the articles of incorporation
Payment of Pre-Existing Debt Illustration
A corporation owes somebody 10M. The corporation cannot pay or it does not have
cash. What may the corporation do?
 It can issue shares. Instead of paying its creditor with cash, the corporation
may issue shares in favor of the former, subject to its agreement or consent. If it
sees that your potentials are good (referring to the corporation) and
anticipates that it will have a profitable year, it might be willing to accept
shares of stock as payment of what the corporation owes.
 In this case, the stockholders cannot demand that the shares be first offered to
them. It was a legitimate decision which can be done. They cannot say that it
will affect their pre-emptive rights or that it might dilute their ownership. This is
an exception.
You make and present an inventory of cases against the corporation. Come out a brief
summary of the case. The value involve, the amount being questioned, the potential
losses, chances of winning or losing. The PSE will sit down with you, what made you say
the chances when you do not have the evidence and witnesses. There must be full
disclosure. The background of the lawyers, present the marketing plan, who are the Top
10 Customers, bankers. Once you are ready you file your application at the Philippine
Stock Exchange with the recommendation of SEC. Put up a video presentation about
your corporation.
One requirement before a corporation may be allowed to go public is that it must
earmark a certain percentage of the shares of stocks to its employees.
- The law believes that an employee who is also a stockowner of the company is
encouraged some more. The more he works, the more it will be profitable and
as a stockholder he will be able to share the benefits by way of dividends.
- Payment can be done by way of salary deduction.
Pre-emptive rights cannot be exercised when you go IPO, when such portion goes to
the employees.
Section 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,
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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.
Sale or Other Disposition of Assets
 Directors or trustees may choose to dispose all or substantially all of its assets by
a majority vote when authorized by the vote of the stockholders representing
at least 2/3 of the outstanding capital stock or in case of non-stock
corporation, by the vote of at least 2/3 of the members.
 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.
Section 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
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3. To pay dissenting or withdrawing stockholders entitled to payment for their
shares under the provisions of this Code. (a)
Section 9. Treasury shares. – Treasury shares are shares of stock which have been issued
and fully paid for, but subsequently reacquired by the issuing corporation by purchase,
redemption, donation or through some other lawful means. Such shares may again be
disposed of for a reasonable price fixed by the board of directors.
As a general rule can any share be reacquired?
 No, except redeemable shares.
Under what circumstances may the corporation reacquire shares?
 The corporation can reacquire shares when a stockholder would exercise their
right of appraisal.
 Requisites:
o The corporation has unrestricted retained earnings.
o It should not violate the Trust Fund Doctrine
Generally, a corporation cannot reacquire its own shares because of the trust fund
doctrine, which means that they cannot reacquire their own shares, it would prejudi ce
their creditors since in buying back the shares, they would be using the funds of the
corporation.
Can the corporation re-acquire its own shares?
 As a general rule, no, because it will violate the Trust Fund Doctrine, in a way. In
acquiring its own shares, the corporation would be using its own capital which
ought to be reserved for the corporate creditors and other expenses necessary
for the operation of the corporation. In effect, it’s already liquidating its assets,
the returning of capital to the investors. If this was allowed, one day the
creditors will wake up only to know that there are no more assets that could
pay for the corporation’s obligations.
 There are, however, exceptions:
a) To eliminate fractional shares
b) To pay dissenting stockholders who are exercising their right of
appraisal
c) To repurchase delinquent shares
d) Redemption of redeemable shares
Right of Appraisal
- It is the right vested to dissenting stockholders to a certain decision of the
board, the said dissenting stockholders shall be given the fair value of their
shares provided that there are unrestricted retained earnings.
If the corporation is allowed to reacquire the outstanding shares, will the creditors
complain? Will the other stockholders complain? Especially if out of 5, the shares of 2 are
reacquired?
 No, because there are advantages to such re-acquisition; the percentage of
ownership of a stockholder may increase and he might receive a bigger
percentage compared to no re-acquisition.
Five shareholders, having 20% each, and two stockholders’ shares were reacquired.
What happens?
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 When two of them surrendered their share, from originally only 20% each
dividends, the remaining shareholders may acquire the surrendered shares.
 A B C D E --- A and B surrendered their shares or the shares were reacquired by
corporation. C, D, and E may acquire the share of A and B and instead of
having a share of 20 % in the dividends, they could have higher.
Where will the shares go if reacquired?
 Treasury shares, they will stay at the treasury of the corporation.
In your illustration, the remaining 3 shareholders will remain to be holder of 20% each, is
there any reason for them to complain, if they are not interested to buy. In that case,
they might as well just reacquire our share as well, Tabla ta, alkansi palang mi, if the
corporation will suffer a loss. No dividends, only the remaining one will suffer the loss. The
other 2 got their investments back, so they might complain
If profits are used to buy back the shares of A and B, would C D E complain?
 Yes, because instead of having dividends, the profits will be used to purchase
the shares of A and B. It could have been dividend for everyone.
Section 42. Power to invest corporate funds in another corporation or business or for any
other purpose. - Subject to the provisions of this Code, a private corporation may invest
its funds in any other corporation or business or for any purpose other than the primary
purpose for which it was organized when approved by a majority of the board of
directors or trustees and ratified by the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock, or by at least two thirds (2/3) of the members in the
case of non-stock corporations, at a stockholder's or member's meeting duly called for
the purpose. Written notice of the proposed investment and the time and place of the
meeting shall be addressed to each stockholder or member at his place of residence as
shown on the books of the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally: Provided, That any dissenting
stockholder shall have appraisal right as provided in this Code: Provided, however, That
where the investment by the corporation is reasonably necessary to accomplish its
primary purpose as stated in the articles of incorporation, the approval of the
stockholders or members shall not be necessary. (17 1/2a)
Section 43. Power to declare dividends. - The board of directors of a stock corporation
may declare dividends out of the unrestricted retained earnings which shall be payable
in cash, in property, or in stock to all stockholders on the basis of outstanding stock held
by them: Provided, That any cash dividends due on delinquent stock shall first be
applied to the unpaid balance on the subscription plus costs and expenses, while stock
dividends shall be withheld from the delinquent stockholder until his unpaid subscription
is fully paid: Provided, further, That no stock dividend shall be issued without the
approval of stockholders representing not less than two-thirds (2/3) of the outstanding
capital stock at a regular or special meeting duly called for the purpose. (16a)
Stock corporations are prohibited from retaining surplus profits in excess of one hundred
(100%) percent of their paid-in capital stock, except: (1) when justified by definite
corporate expansion projects or programs approved by the board of directors; or (2)
when the corporation is prohibited under any loan agreement with any financial
institution or creditor, whether local or foreign, from declaring dividends without its/his
consent, and such consent has not yet been secured; or (3) when it can be clearly
35
shown that such retention is necessary under special circumstances obtaining in the
corporation, such as when there is need for special reserve for probable contingencies.
What are the requirements for a corporation to exercise its power to declare dividends?
 BODs have such power to declare provided there are unrestricted retained
earnings with board resolution.
Can the stockholders, on their own, declare dividends, without the board?
 General rule: Stockholders cannot compel the BOD to declare dividends
 Exception: If the retained profits exceed 100% of the paid-up capital
Under the Corporation Code, the corporations are prohibited from retaining profits
exceeding 100% of the paid-up capital, otherwise, it will be penalized by the BIR for
improper accumulation of retained earnings.
Corporations do not want to declare cash dividends because their income will be
subject to double taxation (corporate income tax and income tax to stockholders). So
instead of declaring cash dividends they just make it appear that there is a study tour of
all the stockholders and declare it as an expense not income; or just declare stock
dividends because stock dividends are not subject to income tax. Stock dividends are
not subject to income tax because it’s not income yet, the value of the stocks may go
down or may go up.
Forms of Dividends
1. Cash Dividends
o Requirements:
a) Unrestricted retained earnings
b) Approved by the BODs
o When dividends are declared, the corporation must pay the
stockholders.
Exception: If the stocks are delinquent. In which case, the dividends
will be first applied to the unpaid stockholdings.
2. Property Dividend
3. Stocks Dividend
What happens when the dividends will be more than 100% of the capital?
 Stock corporations are prohibited from retaining surplus profits in excess of
100% of their paid-in capital stock
Exceptions:
1) When justified by definite corporate expansion projects or programs
approved by the board of directors
2) When the corporation is prohibited under any loan agreement with
any financial institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and such consent has
not yet been secured
3) When it can be clearly shown that such retention is necessary under
special circumstances obtaining in the corporation, such as when
there is need for special reserve for probable contingencies