Hizon Notes - Corporation Code (Divina) PDF

NOTES ON CORPORATION LAW
Kenneth and King C. Hizon _________________________________________________________________________________________________________________
UNIVERSITY OF SANTO TOMAS

Faculty of Civil Law
A.Y. 2012-2013
Second Semester
CORPORATION LAW
Trust the hands of trustees who act for a large

THE CORPORATION CODE OF THE PHILIPPINES group of beneficiaries.
INTRODUCTION Kinds:
Different forms of business organization
1. Express
Q: Discuss the various forms of business organizations. 2. Implied (Aquino, 2011).
Corporation Creature of law and all its rights, powers and
A: duties are derived from legislation.
Form of Business Description Joint accounts Present when there is an arrangement

Organization (Sociedad de whereby merchants may interest themselves
Individual Primitive form of business organization; Cuentas en in the transaction of other merchants,
Proprietorship Responsible alone for its success or failure. Participacion) contributing thereto the amount of capital
they may agree upon and participating in the
There are certain activities that are not open favorable and unfavorable results thereof in
to corporate form. For instance, generally, the the proportion they may determine. This is
practice of profession cannot be undertaken commonly known as accidental partnership
using the corporate vehicle (Aquino, 2011). (Aquino, 2011).
It is neither a creature of statute nor of Characteristics:

contract; hence, it involves none of the a. Has no juridical personality
complexity or expense required of business b. No commercial name
associations such as corporations and c. General partners are all managers in
partnerships (Aquino, 2011). this partnership
d. Only the ostensible partner—the
It has no personality separate from its person carrying on the joint
proprietor. business-can be sued by and is liable
Partnership Two men in the same business unite their to all persons transacting with the
capital in order to secure as equate capital for former (Aquino, 2011).
the conduct of their business
Joint stock A combination of the partnership in that it is Joint venture An association of persons or companies jointly
company formed under a contract and requires no undertaking some commercial enterprise;
special sanction from the state. generally, all contribute assets and share risks.
It requires a community interest in the
Members are jointly and severally liable for all performance of the subject, a right to direct
company’s debts. and govern the policy connected therewith,
and duty, which may be altered by agreement
Members do not control the company but to share both in profit and losses (Aquino,
choose a board of directors who were the 2011).
authorized agents and managers.
Cooperative An autonomous and duly registered It is an organization for some temporary
association association of persons, with common bond of purpose. It is a form of partnership and should
interest, who have voluntarily joined together thus be governed by the law of partnerships
to achieve their social, economic, and cultural (Aquino, 2011).
needs and aspirations by making equitable
contributions to the capital required (Aquino, Corporations can enter into joint venture
2011). agreements if the nature of the venture is in
line with the business authorized by their
The governing law is R.A. 9520. charters. The contract need not be registered
Business trust or It is formed by a contract and that the title to with the SEC provided that the joint venture
Massachusetts the property and the conduct of business is in will not result in the formation of a
Facultad de Derecho Civil 1

partnership or corporation (Aquino, 2011). Realist or The corporation is the legal recognition of group
Other business Arise where different enterprises unite for a Inherence interests which as practical matter already exists.
forms common purpose. theory It views the corporation as a group whose group
activities are such as to require separate legal
Purpose may be temporary in character recognition, with many of the attributes of a
(syndicate) or it may contemplate more natural person, and by its focus on the voluntary
permanent associations (the trust, holding associational activities of individuals provides the
company). usual constitutional and other legal protection for
Syndicate A temporary alliance of individuals, firms or individuals (Aquino, 2011).
corporations, usually for the purpose of Enterprise It stresses the underlying commercial enterprise
financing an enterprise. After the purpose is theory without emphasis on entity-aggregate distinctions
accomplished, the syndicate is dissolved. of the components (Aquino, 2011).
Symbol theory A corporation is a symbol for the aggregate of the
This is often encountered among insurance associates in their group personalities. A
companies who may be underwriting a large corporation is regarded as the symbol for the
risk or banks who are lending a huge amount. aggregate of jural relations of the persons
Syndication is therefore the practice of composing it (Aquino, 2011).
dividing investment risk between several
persons in order to minimize individual risk Rise and development of Corporations
(Aquino, 2011).
Homeowner’s Homeowner’s associations may acquire Roman a. Collegium or College of priests;
association juridical personality and corporate powers. It Times b. Municipalities;
refers to the association which is a non-stock, c. Official societies
non-profit corporation registered with the d. Military groups;
HLURB, or one previously registered with the e. Trade societies
Home Guaranty Corporation or the SEC Medieval a. Municipal and guild organizations
organized by the owners or purchasers of lots times
in a subdivision or village or other real England a. British Trade
property located within the jurisdiction of the - Hudson Bay Company
association (Aquino, 2011). - East India Company
Combinations Purpose is to secure the savings and other
advantages which results from consolidation United a. Educational, religious or military;
and large-scale operation. Initially, they are States b. Principle of limited liability
trusts except that corporations formed the
constituent elements and beneficiaries of the Philippines a. Sociedad en comandita (limited
trust. partnership);
Holding company To organize a new corporation which buys the b. Sociedad regular collectiva (general
individual plants it wishes to bring into the partnership);
combination and which thus becomes a single c. Code of Commerce (December 1, 1888);
owner of all the establishments. d. Sociedad anonima (Article 151 to 159 of
the Code of Commerce);
The stock of the constituent companies is all e. Joint account participation (Articles 239 to
brought by a unifying company called holding 243 of Code of Commerce);
company. f. Corporation Law (March 1, 1906)-
Partnership;
Theories as to origin of corporations g. Philippine Bill of 1902 (July 1, 1902)-
matter of granting franchises, privileges
Q: Discuss the various theories as to the origin of corporations. and concessions;
h. Act No. 1459-provided for the
A: organization of Corporations in the
Philippines;
Theory Discussion i. Corporation Code of 1980:
Ethnological Groups of men united by the reality or fiction of - Government corporations;
theory blood relationship into families, clans or tribes - Special types of corporations
were recognized units of primitive society even (General Banking Act, Rural Banks,
before the individual was so regarded. Investment Company Act, Savings
and Loans Association Act, Private
The law has done no more than to recognize the Development Banks Act, Financing
existence of this phase of human activity, guide Company Act, Investment Houses
its development and define its functions and Law, Pawnshop Regulation Act and
relations. Insurance Code.
Initiative Originated from Greece of Solon; Modern a. Flexible
theory business b. Assembles huge quantities of capital—large

scale production
c. Degree of permanence-it usually outlives A:
men who make and manage it.
1. Artificial being
2. Created by operation of law
3. Has the right to succession
Title I 4. Has only the powers, attributes and properties expressly
GENERAL PROVISIONS authorized by law or incident to its existence
DEFINITIONS AND CLASSIFICATIONS
Concession Theory
Historical Background of our Corporation Code
Q: What is the concession theory?
Business a. Sociedad anonimas
associations A: Section 2 expresses the basic postulate in corporation law that a
under Code of corporation is an artificial being created by operation of law. it owes
Commerce its life to the state and its birth is purely dependent on the State’s
Business a. Section 75; will (Aquino, 2011).
associations b. Section 191;
under the c. To introduce into the Philippines the This is also known as:
1. Fiat Theory
former American corporation as the standard
Corporation Law commercial entity and to hasten the 2. Government Paternity Theory
3. Franchise Theory (Aquino, 2011).
day when the sociedad anonimas of
the Spanish Law would become
NOTE: A corporation is not in fact and in reality a person but the law
obsolete.
treats it as though it were a person, but the law treats it as though it
Business a. New concept of business corporations
were a person by process of fiction, or by regarding it as an artificial
Corporations that they are not merely entities
person distinct and separate from the individual stockholders
under the established for private gain but effective
(Aquino, 2011).
Corporation partners of the National government in
Code spreading the benefits of capitalism for
Q: What is the Genossenchaft theory?
the social and economic development of
the nation.
A: It is the reality of the group as a social and legal entity,
b. Ample powers of SEC to enable it to
independent of state recognition and concession (Aquino, 2011).
exercise adequate supervision over the
operations and activities of private
Q: Does the Philippines subscribe to this theory?
corporations.
A: No. A corporation is a creature without any existence until it has
NOTE: B.P. 68, otherwise known as “The Corporation Code of the
received the imprimatur of the State acting according to law
Philippines” took effect on May 1, 1980.
(Aquino, 2011).
Scope of the Code
Franchise
Q: State the Scope of the Corporation Code.
Q: A corporation is granted a franchise. What is a franchise?
A:
A: It is a special privilege conferred by governmental authority, and
which does not belong to citizens of the country generally as a
a. Provides for the incorporation, organization and regulation
matter of common right.
of private corporations;
b. Defines their powers and provides for their dissolution;
Q: What are the 2 kinds of franchise?
c. Fixes duties and liabilities of directors or trustees and
other officers thereof;
A:
d. Declares rights and liabilities of stockholders and
members;
CORPORATE OR GENERAL SPECIAL OR SECONDARY
e. Prescribes conditions under which corporations including
FRANCHISE FRANCHISE
foreign corporations may transact business;
A franchise to exist as a Certain rights and privileges
f. Penalties for violations; and
corporation conferred upon existing
g. Repeals all laws in conflict or inconsistent
corporations, such as the right
CORPORATION (Sec.2) to use the streets of a
municipality to lay pipes of
C.J. Marshall: An artificial being, invisible, intangible and existing tracks, erect poles, or string
wires (Aquino, 2011).
only in contemplation of law
This is vested in the individuals Vested in the corporation and
Q: What are the attributes of a corporation? who compose the corporation may ordinarily be conveyed or
and not in the corporation itself, mortgaged under a general
and cannot be conveyed in the power granted to a corporation 2. All contracts entered into in its name are contracts of the
absence of legislative authority to dispose of its property corporation and not those of stockholders or members.
to do so. (Aquino, 2011) 3. A corporation cannot be held liable for the personal
indebtedness of a stockholder even if he should be its
president.
4. Stockholder’s debt or credit is not the debt or credit of the
A. ARTIFICIAL BEING corporation, and vice versa.
5. Corporate officers cannot be held personally liable for the
The stockholders or members are merged in the corporate body, consequences of their acts, for as long as they are for and
composed the corporation but they are not the corporation. on behalf of the corporation, within the scope of their
authority and in good faith.
Primary Rules of Attribution 6. The property of the corporation is not the property of the
stockholders or members and may not be sold by the
Q: What is the so-called Primary Rules of Attribution? stockholders or members without the express
authorization of its board of directors or trustees.
A: It is a common law concept which states that the action of the
Board of Directors will be treated as action of the corporation. this is Q: What is the interest of stockholders or members to these
consistent with our Corporation Law which provides that the properties?
corporate powers of the Corporation shall be exercised by the Board
(Aquino, 2011). A: Only indirect, contingent, and inchoate. Thus, it does not entitle
them to intervene in a litigation involving corporate property.
Q: Explain by the “Attribution of Knowledge”?
II. Liability when exceptional circumstances warrant
A: Consistent with the Primary Rules of Attribution, notice to the
Board of Directors should be deemed notice to the corporation Personal liability may be incurred by corporate agents acting in
(Aquino, 2011). behalf of the corporation when the director/trustee or officer:
Q: What are the consequences of this legal concept of corporation a. Acted maliciously or
as an artificial being? b. In bad faith;
c. With gross negligence
A: d. Agreed to hold himself personally and solidarily liable
e. Made by specific provision of law, personally liable for
I. Liability for acts or contracts corporate action;
f. It is proven that he has used the fiction of separate
GR: Obligations incurred by a corporation are its sole liabilities corporate personality to defraud a third party of for
wrongful ends.
It cannot be made to answer for acts or liabilities of its stockholders
or members or those of the legal entities to which it may be III. Right to bring actions
connected and vice versa.
a. Corporation has no personality to bring action for and in behalf
CASE: Palay, Inc. v. Clave of its stockholders or members for the purpose of recovering
property which belongs to the latter in their personal
PCGG v. Sandiganbayan (2000-2001) capabilities;
b. Right to object to the seizure of papers and documents of the
A suit against certain stockholders of a corporation cannot ipso facto corporation belongs to the corporation as a separate entity
be a suit against unpleaded corporation itself without violating the and not to its stockholders as such (Stonehill v. Diokno);
fundamental principle that a corporation has a legal personality c. Claim for moral damages:
distinct and separate from its stockholders. Failure to implead the
corporations as defendants and merely annexing a list of such Right to claim for moral damages
corporations to the compliant is a violation of their right to due
process for it would be in effect disregarding their separate Q: Are corporations entitled to claim moral damages?
personality without a hearing.
A:
1. GR: A corporate officer is not personally and solidarily
liable with the corporation for the money claims of GR: A juridical person is not entitled to moral damages.
discharged or retrenched EEs
Q: What is the reason for the general rule?
XPN: He acted with evident malice or bad faith in
terminating their employment A: RATIO: It cannot experience physical suffering or such sentiments
as wounded feelings, serous anxiety, mental anguish or moral shock.
CASE: Asionics Phil. v. NLRC
Q: What is the exception to the general rule?
A:
as a collective body, it waives no constitutional immunities
XPN: A corporation may have a good reputation which, if debased or appropriate to such body.
besmirched resulting in social humiliation , may be a ground for
recovery of moral damages and attorney’s fees. Q: Is a corporation entitled to right against self-incrimination?
NOTE: A corporation whose credit reputation is not exactly A: No. It cannot refuse to produce the books and papers of such
something to be considered sound and wholesome cannot be corporation if lawfully required by the appropriate government
entitled to a big amount of moral damages. agency. While an individual may lawfully refuse to answer
incriminating questions unless protected by an immunity statute, it
There must be proof of the existence of the factual basis of the does not follow that a corporation, vested with special privileges
damage and its causal relation to the defendant’s acts. and franchises may refuse to show its hand when charged with an
abuse of such privileges (Aquino, 2011).
Filipinas Broadcasting Networks v. Ago Medical and Educational
Center-Bicol NOTE: The corporation is a creature of the state. It is presumed to
be incorporated for the benefit of the public. It received certain
A juridical person is generally not entitled to moral damages special privileges and franchises, and holds them subject to the laws
because, unlike a natural person, it cannot experience physical of the state and the limitations of its charter. Its powers are limited
suffering or such sentiments as wounded feelings, serious anxiety, by law.
mental anguish or moral shock. Nevertheless, AMEC’s claim for
moral damages falls under item 7 of Article 2219 of the NCC. Criminal liability
This provision expressly authorizes the recovery of moral damages in Q: May criminally action lie against a corporation?
cases of libel, slander or any other form of defamation. Article
2219(7) does not qualify whether the plaintiff is a natural or juridical A: No. No criminal action can lie against a corporation under the
person. Therefore, a juridical person such as a corporation can present rules (Aquino, 2011).
validly complain for libel or any other form of defamation and claim
for moral damages (Aquino, 2011). Q: What is the reason for such rule?
Q: In case of grant of moral damages, is it automatically granted? A: A corporation cannot commit felonies described under the RPC
because artificial beings are incapable of intent.
A: No. There must still be proof of the existence of the:
a. factual basis of the damage, and Q: May the officers be held liable?
b. its causal relation to the defendant’s acts (Aquino, 2011).
A: Yes. It is settled that an officer of a corporation can be held
Q: Why is such the rule? criminally liable for acts or omissions done in behalf of the
corporation only where the law directly requires the corporation to
A: Moral damages, though incapable of pecuniary estimation are an do an act in a given manner and the same law makes the person
in the category of an award designed to compensate the claimant who fails to perform the act in the prescribed manner expressly
for the actual injury suffered and not to impose a penalty on the liable criminally(Aquino, 2011).
wrongdoer (Aquino, 2011).
NOTE: This applies whether or not the crime requires the
Constitutional Rights of a corporation consciousness of wrongdoing.
Q: Are corporations entitled to constitutional rights? Q: May shareholders be held liable criminally?
A: Yes. A corporation is a person in proper cases, within the due A: Before a stockholder may be held liable criminally for acts
process and equal protection clause of the Constitution. Just like a committed by the corporation, it must be shown that he had
natural person it cannot be deprived of its life and property within knowledge of the criminal act committed in the name of the
the due process of law. corporation and that he took part in the same or gave his consent to
its commission whether by action or inaction (Aquino, 2011)
However, as a mere artificial being it cannot exercise rights that are
not available because the corporation’s life is just a concession of IV. Right to acquire and possess property
the State.
Lim v. CA
Q: May a corporation claim protection of due process clause for
the protection of liberty? Where real properties included in the inventory of the estate of the
deceased are in the possession of and are registered in the name of
A: No. the corporation, the presumption of conclusiveness of the titles in
favor of the corporation should stand undisturbed.
Q: Is a corporation entitled to right against unreasonable search
and seizure? Traders Royal Bank v. CA
A: Yes. A corporation is after all an association of individuals under

an assumed name and with distinct legal entity. In organizing itself
Stockholders or members are in no legal sense the owners of the resident in which it has its offices and transacts
corporate property or credits which is owned by the corporation as a business
distinct person. b. A foreign corporation licensed to do
business in the Philippines is not a
Silverio v. Filipino Business Consultants, Inc. nonresident within the meaning of Sec. 1
(f) of Rule 57.
While a share of stock represents a proportionate interest in the c. For tax purposes, it may either be a
property of the corporation, it does not vest the owner thereof with resident (engaged in trade or business
any legal right or title to any of the properties of the corporation with the Philippines) or non-resident (not
owned by the latter as a distinct juridical person. engaged and not having any office or
place of business therein);
Cruz v. Dalisay As a citizen a. It is conferred with rights, defining the
jurisdiction of courts;
Mere fact that one is a president of a corporation does not render b. A citizen of the state or country by or
the property he owns or possesses the property of the corporation, under the laws of which it was created
since the president and the corporation are separate entities. and exists without regard to the
citizenship of its stockholders or
NOTE: Because of separate personalities of the corporation, the members;
properties of the corporation are not the properties of the c. Synonymous with domicile or residence
shareholders, members or officers. In the same manner, the for the purpose of jurisdiction only;
properties of the shareholders, members or officers of the d. Principal office must be located in the
corporation are not the properties of the corporation (Aquino, Philippines
2011).
Corporation as a collection of individuals
De Lima v. Gois
Idea of the corporation as a legal entity or person apart from its
Properties belonging to a corporation cannot be attached to satisfy members is a mere fiction of law introduced for convenience in
the debt of a stockholder. The stockholder only has an interest in conducting business.
the assets and business of the former.
DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY OR
V. Acquisition by court of jurisdiction DISREGARDING THE FICTION OF CORPORATE ENTITY OR
DOCTRINE OF ALTER EGO OR
In the absence of summons on the corporation, a judgment against IDENTITY DOCTRINE
it is void for lack of jurisdiction and lack of due process.
TERM DEFINITION
VI. Changes in individual membership Identity Doctrine If the plaintiff can show that there was such
unity of interest and ownership that the
a. A corporation remains unchanged and unaffected in its independence of the corporations had in effect
identity by changes in its individual membership. ceased or had never begun, and adherence to
b. Doctrine of corporate entity- is one of substance and the fiction of separate identity would serve
validity and courts will, in proper cases, ignore the legal only to defeat justice and equity by permitting
fiction of corporate entity. the economic entity to escape liability arising
out of an operation of one corporation for the
Corporation as a person, resident or citizen benefit of the whole enterprise (Aquino, 2011)
Instrumentality Calls for the application of the test consisting of
As a person a. Natural and artificial persons Rule 3 requisites:
b. A person with regard to attachment,
taxation, usury, insolvency, and 1. Control, not mere majority or complete
bankruptcy, limitations, prior notice to control, but complete domination, not only of
bring suits, right to appeal, etc. finances but of policy and business practice in
c. Libel respect to the transaction attacked so that the
d. Sec.1, Art. III—No person shall be corporate entity as to this transaction had at
deprived of life, liberty or property the time no separate mind, will or existence of
without due process of law its own;
e. Not a person with regard to liberty.
Liberty guaranteed is the liberty of 2. Such control must have been used by the
natural nor artificial persons defendant to commit fraud or wrong, to
f. Right against self-incrimination does not perpetuate the violation of a statutory or other
apply positive legal duty, or dishonest and, unjust act
g. Section 3—right to be secured in their in contravention of plaintiff's legal rights; and,
persons against unreasonable searches
and seizures applies to corporations. 3. The aforesaid control and breach of duty
As a resident a. Corporation formed in one state may be must proximately cause the injury or unjust
or non- domiciled or a resident in another State
loss complained of (Aquino, 2011) CASES: Fransisco Motors v. CA; Marubeni Corporation v. Lirag; Lim
Alter ego It must be shown that there is unity of interest v. CA.
doctrine and ownership that the separate personalities
of the corporation and the individual no longer a. The wrongdoing must be clearly and convincingly
exist and that if the acts are treated as those of established; it cannot be presumed.
the corporation alone, an inequitable result will CASES: Matuguina Integrated Wood Products v. CA;
follow (Aquino, 2011). Complex Electronics EEs Association v. NLRC; China
Banking v. Dyne-Sem Electronics Corp.)
Q: Who has the power to pierce the veil of corporate entity? b. The burden of proving otherwise is on the party seeking to
have the court pierce the veil.
A: It belongs to the Court and a sheriff usurps this power when he CASE: Land Bank of the Philippines v. CA
enforces a writ of execution, not against the property of the
corporation, the judgment debtor, but against that of its president Q: What are the 3 main classifications/basic areas where the
on the ground that they are one and the same. doctrine of piercing the veil of corporate fiction may be applied?
a. Tax exemption granted to a corporation cannot be
extended to include the dividends paid to its stockholders. A:
b. Right of first refusal over shares pertains to the
shareholders whereas the capacity to own land pertains to 1. Cases where public convenience may be defeated as when
the corporation (Aquino, 2011). the corporate fiction is used as a vehicle for the evasion of
an existing obligation
Disregarding legal fiction 2. Fraud cases or when the corporate fiction is used to justify
a wrong. Protect fraud or defend a crime
Q: When may the legal fiction be disregarded? 3. Alter ego cases where a corporation is merely a farce since
it is a mere alter ego or business conduit of a person, or
A: where the corporation is so organized and controlled and
its affairs are so conducted as to make it merely an
1. When fiction of corporate entity is being used to cloak or instrumentality, agency, conduit or adjunct of another
cover fraud or illegality corporation (Aquino, 2011)
2. Defeat public convenience
3. Justify a wrong Effect as to liability
4. Protect fraud
5. Defend a crime Umali v. CA
6. For ends subversive of the policy and purpose behind its
creation Q: What is the effect of disregarding the separate corporate legal
identity of a corporation?
NOTE: The law will not recognize separate corporate existence with
reference to the particular transaction involved. A: The Corporation will be treated merely as an association of
persons and the stockholders or members will be considered as the
RATIO: To remove the barrier between the corporation from the corporation- liability will attach personally or directly to the officers.
persons comprising it to thwart the fraudulent and illegal schemes If there are 2 corporations, they will be merged into one, the one
of those who use the corporate personality as a shield for being merely regarded as the instrumentality agency, conduit or
undertaking certain proscribed activities. adjunct of the other.
NOTE: Mere ownership by a single stockholder or by another Even if fraud is established, this fact alone is not sufficient to justify
corporation of all or nearly all of the capital stock of a corporation is the piercing of the corporate fiction where it is not sought to hold
not in itself sufficient ground for disregarding the separate corporate the officers and stockholders personally liable for corporate debt.
personality (Aquino, 2011). Where the petitioners are merely seeking the declaration of nullity
of the foreclosure sale, piercing the corporate veil is not the proper
China Banking Corp. vs. Dyne-Sem Electronics remedy, for such relief may be obtained without having to disregard
the legal corporate entity.
The similarity of business of 2 corporations does not warrant the
disregard of the corporate veil. The mere fact that the businesses of Pantranco Employees Association v. NLRC
2 entities are interrelated is not a justification for disregarding the
separate personalities, absent sufficient showing that the corporate a. Doctrine applies in 3 areas:
entity was purposely used as a shield to defraud creditors and third
persons of their rights. 1. Defeat public convenience as when the corporate
fiction is used as a vehicle for the evasion of an
Jardine Davies v. JRB Realty existing obligation;
2. Fraud cases or when the corporate entity is used to
The existence of interlocking directors, corporate officers and justify a wrong, protect fraud, or defend a crime;
shareholders is not enough justification to pierce the veil of 3. Alter ego cases-where the corporation is merely a
corporate fiction. farce since it is a mere alter ego or business conduit
of a person, or where the corporation is so organized
and controlled and its affairs are so conducted as to
make it merely an instrumentality, agency or conduit he was still in the employ of X. It should not be used as a
or adjunct of another corporation. subterfuge to commit injustice and circumvent labor laws.
f. A corporation is organized by an insolvent debtor to
Instances where doctrine applied defraud his creditors and he transfers his properties to in
furtherance of such fraudulent purpose;
a. Where the corporation functions for the benefit of a single g. A corporation organized to evade an outstanding legal or
person who has complete control of over the funds and equitable obligation.
said person is the sole owner thereof. h. Corporate fiction has also been disregarded in cases:
b. Where the transaction was entered into by the President i. To shield a violation of the prohibition against
who was also the treasurer and general manager of a close forum shopping (First Philippine International
family corporation where the incorporators and directors Bank v. CA);
belong to one single family. ii. Avoid a judgment credit;
CASE: M.R Dulay Enterprises, Inc. v. CA iii. Avoid payment of higher taxes;
iv. Avoid inclusion of corporate assets as part of the
i. Mere majority ownership of the stocks of a estate of a decedent;
corporation is not per se a cause for piercing the v. To promote unfair objectives;
corporate veil vi. Confuse legitimate issues
ii. Mere fact that all or nearly all of the capital stock
of one or more corporations are owned and However:
controlled by the same or single stockholder by
another corporation or have the same president i. Mere fact that the businesses of 2 or more
is not in itself sufficient ground for disregarding corporations are interrelated (China Banking
the separate corporate entities. Corp. v. Dyne-Sem Electronics Corp.); or
CASE: Palay, Inc. v. Clave; EPG Construction ii. Common director sits on the boards of directors
Company, Inc. v. CA; Traders Royal Bank v. CA; of all 3 companies organized as a separate
Asionics Phils., Inc. v. NLRC; Complex entities (Sesbreño v. CA);
Electronics EEs Association v. NLRC iii. Even where some of the EEs of one corporation
iii. Liability of parent corporation as well as the are the same persons manning and providing for
subsidiary will be confined to those arising in auxiliary services to the units of the other
their respective business. corporation and that the physical plants, offices
CASE: PNB v. Retratto Group, Inc. and facilities are situated in the same compound
iv. Substantial identity of the incorporators of 2 (Indo-Phil Textile Mills Workers Union v.
corporations does not necessarily imply fraud. Calica);
For the doctrine to apply, the wrongdoing must iv. Two corporations are sister companies;
be clearly and convincingly established. It cannot v. Mere existence of interlocking directors,
be presumed. corporate officers and shareholders (Jardine
Davies, Inc. v. JRB Realty, Inc.)
c. Where the corporation is a mere instrumentality of the
individual stockholders, latter must individually answer for Is not enough justification for disregarding their separate
corporate obligations. personalities.
d. Where corporation is merely instrumentality, an adjunct,
business conduit or alter ego of another corporation: i. Not because 2 corporations came from the same country
and closely worked together would conclusion arise that
i. Sales of cars made by corporation X to one was the conduit of the other (Marubeni Corp. v.
corporation Y which are sold later to public at Lirag);
higher price and it appears that both j. Legal corporate entity is disregarded only if it is sought to
corporations are owned and controlled by the hold the officers and stockholders directly liable for a
same taxpayer and Y was merely created by X to corporate debt or obligation (Umali v. CA);
reduce the price and sakes tax liability of X; k. Where the parent company assumes complete control of
ii. Where 3 security agencies are managed through the operation of its subsidiary’s business, the separate
X Corporation with all their EEs drawing their corporate existence of the subsidiary must be disregarded.
salaries and wages from the latter entity; l. Subsidiary corporations too are ordinarily independent of
iii. Where 3 business enterprises engaged in the each other.
same line of business and using the same
equipment including manpower services Villa Rey Transit, Inc. v. Ferrer
CASE: Tomas Lao Construction v. NLRC
iv. When the veil of corporation is made as a shield Where a corporation is formed by a seller of a certificate of public
to perpetrate a fraud and or confuse legitimate convenience for the purpose of evading his individual contract that
issues, the same should be pierced; he “shall not for a period of 10 years from the date of this sale, apply
for any TPU service identical or competing with the buyer.”
e. Where P started his employment with X and was later on
transferred to Y, sister company of X, and the separation NOTE: When the veil of corporation fiction is pierced, the corporate
benefits given to P corresponded only to the period in character is not necessarily abrogated. The corporation continues
which he was in the employ of Y, ignoring the period when for legitimate objectives.
6. The parent corporation pays the salaries and expenses or
Instrumentality or alter ego Rule losses or subsidiary
7. The subsidiary has substantially no business except with
Circumstances which may be useful in determination of whether the the parent corporation or no assets except those conveyed
subsidiary is but a mere instrumentality of the parent-corporation: to or by the parent corp.
8. In the papers of the parent corporation, the subsidiary is
a. Parent corporation owns all or most of the capital stock of described as a department or division of the parent corp.
subsidiary; or its business or financial responsibility is referred to as
b. Common directors or officers; the parent corporation’s own.
c. Parent corporation finances the subsidiary; 9. The parent corporation uses the property of the subsidiary
d. Subsidiary has grossly inadequate capital; as its own
e. Parent corporation pays the salaries and other expenses or 10. The directors or executives of the subsidiary do not act
losses of the subsidiary; independently in the interest of the subsidiary but take
orders from the parent corporation
Totality of circumstances test 11. The formal legal requirements of the subsidiary are not
observed (Aquino, 2011)
Q: Explain the “Totality of Circumstances Test.”
Francisco Motors vs. CA
A: It is an approach to focus on a set of circumstances or factors that
serve as an indicia of the applicability of the doctrine of piercing the The SC rejected the counterclaim restating the basic rule that the
veil of corporate fiction (Aquino, 2011). obligations of the stockholders are not the obligations of the
corporation. In this case, instead of holding the individuals
Examples: responsible for an alleged corporate act, the situation has been
reversed.
1. Commingling of funds and assets with those of individual
shareholders Siain Enterprises v. Cupertino Realty Corp.
2. Diversion of the corporate fund’s or assets to non-
corporate The doctrine of corporate fiction was even allowed in favor of a
3. Failure to maintain corporate minutes or adequate corporation who sought to enforce the mortgage obligation. The
corporate records mortgage was sustained even if the obligations secured by such
4. Absence of separately held corporate assets mortgage was incurred before the mortgagee corporation was
5. Use of the same office or business location by the organized. Although the obligations were the transactions with and
corporation and its individual shareholders in favor of the President, the right of the mortgagee was sustained
6. Employment of the same employees or attorney by the because the mortgagee corporation was deemed the alter ego of
corporation and its shareholders (Aquino, 2011) the president.
PNB v. Ritratto Group Inc. Reynoso v. CA
In applying this rule, the courts are concerned with realty and not When the veil of corporate fiction is pierced in proper cases, the
with form, with how the corporation operated and the individual corporate character is not necessarily abrogated. It continues for
defendant’s relationship to that corporation. legitimate objectives.
Subsidiary NOTE: In applying the doctrine of piercing the veil of corporate

fiction, the court will not disregard the corporate personality for
Q: What is a subsidiary? purposes other than the granting of the relief prayed for in the
complaint (Aquino, 2011).
A: It is a corporation more than 50% of the voting stock of which is
owned or controlled directly or indirectly through one or more Group of companies
intermediaries by another corporation, which thereby becomes a
parent company (Aquino, 2011). Q: What are “group companies”?
Q: What are the indicators to prove that a subsidiary is a mere A: It refers to corporations that are financially related to one
instrumentality of the parent corporation? another as parent corporations, subsidiaries and affiliates. It has no
separate personality of its own (Aquino, 2011).
A:
1. The parent corporation owns all or most of the capital

stock of the corporation
2. The parent and subsidiary have common directors or
officers
3. The parent corporation finances the subsidiary
4. The parent subscribes to all the capital stock of the
subsidiary or otherwise causes its incorporation
5. The subsidiary has grossly inadequate capital
B. CORPORATION AS A CREATION OF LAW OR BY OPERATION OF of the shareholders of the corporation.
LAW
The percentage of Filipino equity in the
No corporation can exist without the consent or grant of the corporation is computed by attributing the
sovereign. nationality of the second or even subsequent
tier of the ownership to determine the
a. Special authority or grant by the state required- through nationality of corporate shareholder (Aquino,
the legislature: 2011).
Entity Test or Looks into the nation where the corporation
1. Special incorporation law or charter which directly Place of was incorporated. The sovereignty by which a
creates the corporation; or Incorporation corporation was created, under whose laws it
2. General corporation law Test was organized, determines its national
character, and the fact that some of its
b. In the Philippines, the general law that governs creation of incorporators were residents and citizens of a
private corporations is BP Blg. 87 foreign country does not change this rule
c. Private corporations owned or controlled by the (Aquino, 2011).
government can only be created by special laws often
referred as charters. Residence
Contract Theory A corporation may be considered a resident of a particular country

or place for different purposes.
Q: Explain the contract theory. a. For instance, a foreign corporation can be considered as a
resident of the Philippines for tax purposes.
A: Incorporation is deemed to involve: b. Domestic corporations may be resident of a particular
a. Contract among members region, city, or municipality for purposes of applying the
1. Governed and evidenced by the Articles of procedural rules on venue or in the application of certain
Incorporation doctrines like the doctrine of forum non conveniens
b. Contract between the members and the corporation (Aquino, 2011)
1. Stockholders and members cannot disregard the
provisions of the Articles of Incorporation and By- NOTE: For purposes of venue of cases, the term “residence” is
Laws of the corporation synonymous with “domicile.”
2. The corporation, in turn, cannot disregard the rights
of the rights of shareholders or members provided for C. RIGHT OF SUCCESSION OF A CORPORATION
in the Articles of Incorporation.
c. Contract between the members or the corporation and A corporation has a capacity of continuous existence irrespective of
the State the death, withdrawal, insolvency or incapacity of the individual
1. As a consequence of this contract, the corporation is stockholders or members and regardless of the transfer of their
entitled to the right against impairment of contracts. interest or shares of stock. But it is by no means immortal.
2. The state cannot take the life of the corporation
without due process (Aquino, 2011). The life of corporation is limited to the period of time stated in the
articles of incorporation not exceeding 50 years from the date of
Nationality and citizenship incorporation unless sooner dissolved or unless said period is
extended.
Q: What are the tests in determining the nationality of a
corporation? Q: What is “perpetual succession”?
A: A: It is the continued existence which enables a corporation to

manage its own affairs, and hold property without the necessity of
TEST perpetual conveyances, for purposes of transmitting it. By reason of
Aggregate Test or Requires the looking into the: this quality, this ideal and artificial person remains, in its legal entity
Control Test a. Nationality and personality, the same through frequent changes may be made
b. Domicile of its members (Aquino, 2011).
c. Residence of the individuals who
control the corporation (Aquino, D. POWERS, ATTRIBUTES AND PROPERTIES OF A CORPORATION
2011)
a. A corporation may exercise only such powers as are
Where a domestic or Philippine corporation is granted by law of its creation
controlled by aliens, its nationality shall be b. All powers which may be implied from those expressly
deemed that of the controlling stockholders provided by law and those which are incidental or
thereof during wartime for reasons of national essential to the corporation’s existence may also be
security. exercised.
Grandfather rule A method of determining the nationality of NOTE: Express grant is not necessary
or corporation which in turn is owned by another
Investment Test corporation by breaking down equity structure
i. Corporation organized for the purpose of XPN: Corporation
supplying electricity has no power to buy and sell Sole
agricultural lands; or Commencement Moment of execution of From the date of the
ii. Corporation authorized to operate and of juridical the contract of issuance of the
otherwise deal in automobiles and automobile personality partnership certificate of
accessories and to engage in the transportation incorporation by the
of persons ---no necessary connection with the SEC under its official
corporations’ legitimate business. seal
iii. A corporation engaged primarily in fishing Powers May exercise any power Powers expressly
cannot operate a cold storage plant or an ice authorized by the granted by law or
plant as a public service operator. partners provided it is implied from those
not contrary to law, granted or incident
Tort liability morals, good customs, to its existence
public order, or public
Q: May a corporation be held liable for torts? policy
Management When management is Power to do
A: A corporation is civilly liable in the same manner as natural not agreed upon, every business is vested in
persons for torts, because "generally speaking, the rules governing partner is an agent of the board of
the liability of a principal or master for a tort committed by an the partnership directors or trustees
agent or servant are the same whether the principal or master be a
Effects of A partner can sue a co- The suit against a
natural person or a corporation, and whether the servant or agent
mismanagement partner who member of the
be a natural or artificial person (Aquino, 2011).
mismanages board of directors or
trustees who
NOTE: A corporation is liable, therefore, whenever a tortious act is
mismanages must
committed by an officer or agent under express direction or
be in the name of
authority from the stockholders or members acting as a body, or,
the corporation
generally, from the directors as the governing body.”
Right of No right of succession Sec. 2
succession
Q: What may be the sources of liability of corporation?
Extent of Partners are liable Stockholders are
A: liability to third personally and liable only to the
persons subsidiarily for extent of their
1. Vicarious partnership debts investment as
2. Direct personal obligation represented by the
3. May arise out of different sources of obligation (Aquino, XPN: Limited partners shares subscribed by
2011) them
Transferability Cannot transfer interest Right to transfer
NOTE: Tort may concur with contractual obligation subject to the of interest without the consent of shares without the
proscription against double recovery. all other existing prior consent of the
partners because other stockholders
Doctrine of corporate responsibility partnership is based on
the principle of delectus
NOTE: This may be applied to cases involving corporate negligence personarum
doctrine: Term of For any period May not be formed
a. Hospitals existence stipulated by the for a term in excess
b. Schools partners of 50 years
extendible to not
In these cases, the liability of these establishments/corporations is more than 50 years
direct and primary and not merely vicarious. in any one instance
Dissolution At any time by the will By the consent of
of any or all of the the State
partners
Distinctions between a partnership and a corporation Laws which Civil Code Corporation Code
govern
Q: Distinguish a partnership from a corporation.
Similarities between a partnership and a corporation
A:
a. Juridical personality separate and distinct from that of the
Partnership Corporation individuals composing it;
Manner of Mere agreement of the By law or by b. Can only act through agents;
creation parties operation of law c. Composed of an aggregate of individuals;
Number of By only 2 persons At least 5 d. Distributed profits to those who contribute capital to
business
incorporators incorporators
e. A partnership is taxable to income tax
ADVANTAGES AND DISADVANTAGES
Corporation as a partner
Q: What are the advantages of a corporation?
GR: A corporation cannot enter into partnership with other
corporations or with individuals A:
XPN: 1. The capacity to act as a legal unit

2. Limitation of or exemption from individual liability of
1. Joint venture where the nature of such venture is in line shareholders
with the business authorized by their charters (JM Tuason 3. Continuity of existence
&Co. Inc. v. Bolanos) 4. Transferability of shares
NOTE: It need not be registered with the SEC provided it 5. Centralized management of board of directors
does not result in the formation of a new corporation or 6. Professional management
partnership 7. Standardized method of organization and finance
2. Joint venture between a foreign corporation licensed to do 8. Easy capital generation(Aquino, 2011).
business in the Philippines and a domestic corporation or
an individual Q: What are the disadvantages?
RATIO: A:
a. Corporation can only act through agent and is not bound 1. It is prone to double taxation
by the acts of anyone else, while in a partnership, each 2. They are subject to a greater governmental regulation and
partner binds the firm control
b. In entering into a partnership, the identity of the 3. Burdened with an inefficient management if shareholders
corporation is lost or merged with that of another cannot organize to oppose management
c. Public policy: this is inconsistent with the policy of the law 4. Limited liability of stockholders may at times translate to
that the corporation shall manage its own affairs limited ability to raise creditor capital
separately and exclusively or officers chosen by the 5. It is harder to organize compared to other business
stockholders or members. organizations
d. Such arrangement would subject the assets to risks and 6. It is harder or more complicated to maintain
liabilities not contemplated by the stockholders 7. The owners or stockholders do not participate in the day-
to-day management (Aquino, 2011).
GR: Only natural persons are considered legally capable of entering
into a contract of partnership CLASSES OF CORPORATIONS (Sec. 3)
XPN: Corporations may enter into partnerships with other Stock Created and operated for the purpose of making a
corporations or individuals provided: corporation profit which may be distributed in the form of
dividends to stockholders on the basis of their
1. All corporation partners must be managing partners and invested capital
the articles of partnership must stipulate that all the Non-stock a. Do not issue stock and distribute dividends to
partners are and shall be solidarily liable for the corporation their members;
obligations of the partnership; b. Created not for profit but for the public good
2. Statute or charters or articles of incorporation must and welfare
expressly allow the corporations to allow the corporations c. Charitable, religious, social, literary scientific,
to enter into partnership agreement civil and political organizations and societies
3. Nature of business venture is in line with the business
authorized by law or the articles of incorporation; GR: A corporation may be organized either as a stock or non-stock
4. If one of the partners is a foreign corporation, it must like educational institutions
obtain a license to transact business in the country.
XPN: Banks and close corporations—always stock corporation;
As a limited partner religious corporations—non-stock.
a. No existing Philippine law expressly prohibiting a foreign Other classifications of corporation

corporation from becoming a limited partner;
b. Corporate investor can make a passive investment in a As to number of persons who compose them
partnership (like in case of corporations); Corporation Consisting of more than 1 member or corporator
c. Thus, corporation would not be bound beyond the amount aggregate
of its investment by the acts of the other partners who are NOTE: Does not become a corporation sole by
not its duly appointed and authorized agents and officers; mere fact that its shares of stock become vested
d. No risk that a corporate limited partner would be solidarily in one person because they can be sold or
liable with the partnership transferred again.
e. To encourage and facilitate domestic and foreign
investments in the country. Corporation Special form usually associated with the clergy

sole (Sec. 110)
As to whether they are for religious purposes or not d. Quasi-public-private corporations which
Ecclesiastical Organized for religious purposes: have accepted from the State the grant of
franchise or contract involving the
a. Corporation sole performance of public utilities but which
b. Religious societies (Sec. 109) are organized for profit. They are private
Lay Organized for a purpose other than for religion: corporations that perform public service.
a. Eleemosynary i. Public utilities

b. Civil ii. Public service corporations
As to whether they are for charitable purposes or not iii. Electric, water, telephone and
Eleemosynary Devoted for charitable purposes or those transportation companies.
or charitable supported by charity iv. Business in which they are engaged are
corporation impressed with a public interest
Civil corporation Established for business or profit
As to State under or by whose laws they have been created Q: What is the test?
Domestic Incorporated under the laws of the Philippines
A: The purpose of the corporation.
Foreign Formed, organized, or existing under any laws
other than those of the Philippines.
NOTE: If the corporation is created by the State
As to their legal right to corporate existence
as its own agency or instrumentality for political
De jure Existing in fact and in law
or public purpose connected with the
De facto Existing in fact but not in law
administration of government, then it is a public
Corporation by A group of persons which holds itself out as a
corporation. Otherwise, it is a private
estoppel corporation as a corporation and enters into a corporation notwithstanding that it is created to
contract with a third person on the strength of
promote public good, interest, or convenience
such appearance cannot be permitted to deny although the whole, or substantially the whole
its existence in an action under said contract
interest in the corporation belongs to the State.
(Aquino, 2011)
As to whether they are corporations in a true sense or limited
As to whether they are open to public or not sense
Close Limited to selected persons or members of a
True One which exists by statutory authority
family
Quasi- Exists without formal legislative grant:
Open Open to any person who may wish to become a corporation
stockholder or member thereto
a. Corporation by prescription- one
As to their relation to another corporation which has exercised corporate powers
Parent or Related to another corporation that it has power for an indefinite period without
holding to elect the majority of the directors of such interference on the part of the
corporation other corporation sovereign power and which by fiction
Subsidiary Related to another corporation that the majority of law is given the status of a
of its directors can be elected by such other corporation;
corporation.
b. Corporation by estoppel- one which in
One in which another corporation owns at least reality is not a corporatopm because it
a majority of the shares and thus has control. is so defectively formed but is
Affiliated One related to another by owning or being considered a corporation in relation to
owned by common management or by long- those only who, by reason of their acts
term lease of its properties or other control or admissions, are precluded from
device. asserting that it is not a corporation.
As to whether they are for public or private purpose As to the manner of creation
Public Formed or organized for the government of a Corporation A corporation directly created by Congress
portion of the State for the general good and created by through a special law. Such corporation must be
welfare; or special law a government owned of controlled corporation
Private Formed for private purpose, benefit or end: (Aquino, 2011)
Corporation A corporation created under the:
a. Stock created under a a. Corporation Code of the Philippines
b. Non-stock general law b. Old Corporation Law (Aquino, 2011)
c. GOCC- created and organized by the Corporation by A corporation that was not formally organized as
government or which the government is a prescription such but has been duly recognized by
majority stockholder immemorial usage as a corporation with rights
and duties enforceable under the law (Aquino,
i. Are private corporations not public as 2011).
they are not established for the Others
government of a portion of the State. Going public When it decides to list its shares in the stock
ii. GSIS, NPC,PNR.
exchange. These includes corporations that will 1. To prevent granting of special privileges to one body of
make initial public offering of its shares (Aquino, men without giving all others the right to obtain them in
2011) the same conditions;
Going private When it would restrict the shareholders to a 2. Prevent bribery and corruption of the legislature.
certain group. In a sense, these also include
closed or closely held corporations (Aquino, Governing law
2011).
A corporation created by a special law or charter is primarily
Q: What are the important distinctions between public and private governed by such law and suppletorily, by the Corporation Code:
corporations?
a. Not inconsistent with
A: b. Made expressly applicable by special laws
a. Governmental control Gonzales v. PNB

b. Public corporations may be created without the consent of
the locality to be affected whereas the consent of the PNB having a charter of its own, was not governed by the
incorporators is necessary to the creation of a private Corporation Code. In view of its charter, the provision of Sec. 74 of
corporation the Code with respect to the right of a stockholder to demand an
c. Taxation, liability for torts or negligence of officers and inspection or examination of the books of the corporation does not
agents, and to various other questions. apply even in a supplemental capacity to said bank.
Q: Are GOCCs public corporations? Q: What law governs the employees and officers of GOCCs with
original charters—created by special law?
A: No, they are regarded as private corporations. They are organized
under the Corporation Code. A: They are placed under the Civil Service and thus subject to Civil
Service Law.
Dual status of public corporations
Q: What about those incorporated under the general incorporation
Public or municipal corporations possesses 2 kinds of power: law—Corporation Code?
a. Governmental or public (municipal government)- A: They are governed by the Labor Code.
i. Maintenance of peace and order Government as a member of a corporation

ii. Not liable for damages occasioned by the
negligent or wrongful actions of its officers, Jurisdiction of Q: Does the SEC have jurisdiction over
agents, or employees SEC corporations with original charter?
b. Proprietary or private (corporate legal individual) A: SEC has no jurisdiction over corporations with
original charter or created by special law.
i. Operation of public market
GR: It has no power to interpret the law creating
Q: What is the test if a corporation is performing either of these it
functions?
NOTE: It can rule on the status of a corporation as
A: It is whether the act performed is for the common good or to whether it is a GOCC.
whether it is for the special benefit or profit of the corporate entity.
Rights, powers Mere fact that the government happens to be a
or privileges majority stockholder of a corporation does not
make it a public corporation.
CREATION BY SPECIAL LAWS OR CHARTERS (Sec. 4)
NOTE: As a member of a corporation, the
Incorporation of a private corporation by a special act government never exercises its sovereignty; it
acts merely as a corporator.
Sec. 4 authorizes the creation of private corporations by special laws
or charters. The enactment of special act creating a private
corporation is subject to the limitation that such corporation shall be
owned or controlled by the government.
Q: What is the reason for the abovementioned rule?
A:

CORPORATORS AND INCORPORATORS, STOCKHOLDERS and
MEMBERS (Sec. 5) 1. To amend the articles of incorporation (Sec. 16)
2. Power to extend or shorten corporate term (Sec. 37)
Components of a corporation 3. Increase/decrease corporate term (Sec. 38)
4. Incur, create or increase bonded indebtedness (Sec. 38)
a. Corporators 5. To deny pre-emptive right (Sec. 39)
6. Sell, dispose, lease, encumber all or substantially all of
i. Compose the corporation as stockholders or corporate assets (Sec. 40)
members 7. To invest in another corporation or business or for any
ii. Term includes incorporators and stockholders purpose other than the primary purpose (Sec. 42)
8. To declare stock dividends (Sec. 43)
b. Incorporators 9. To enter into management contract with another
corporation (Sec.44)
i. Corporators mentioned in the articles of 10. Delegate the power to the board to amend the by-laws
incorporation (Sec. 48) (Aquino, 2011)
ii. Originally forming and composing the
corporation; and Q: What are the instances when the majority of the outstanding
iii. Who executed and signed the articles of capital is necessary?
incorporation and
iv. Acknowledge the same before the notary public A:
NOTE: All incorporators are corporators but a 1. To enter into management contract with another
corporator is not necessarily an incorporator. corporation under certain conditions if any of the
circumstances is absent (Sec.44)
a)
Principal function is to incorporate the 2. To adopt, amend or repeal the by-laws (Sec. 48)
corporation 3. The power to revoke the power of the board to amend the
b) An incoporartor will forever retain his by-laws which was previously delegated by the
status as such notwithstanding that he stockholders (Sec. 48)
has ceased to be a corporator. 4. To fix issued value or price of non-par value shares (Sec.
c) AOI cannot be amended by deleting his name or 62) (Aquino, 2011)
substituting it with that of another
d) Only natural persons can be Other Classes
incorporators
e) All incorporators in a stock corporation 1. Promoters- Person who bring about or cause to bring
must now own at least 1 share of the about the formation and organization of a corporation
capital stock of such corporation (Sec. by:
10).
c. Stockholders i. bringing together the incorporators or persons
interested
i. Owners of shares of stock in a stock corporation ii. procuring subscriptions or capital for the
ii. Also known as shareholders corporation
iii. May be natural or juridical persons iii. setting in motion the machinery which leads to
the incorporation of the corporation itself
Q: When is a corporation classified as a stock iv. not necessarily being incorporators
corporation?
2. Subscribers
A:
i. Persons who agreed to take and pay the original,
1. Must have capital stock divided into shares; and unissued shares of a corporation
2. Authorized to distribute to the holders of such ii. May not be a stockholder
shares dividends or allotments of the surplus
profits on the basis of the shares held. Q: When does a subscriber become a
stockholder?
d. Members
A: It is from the time his subscription is accepted
i. Corporators of a corporation which has no by corporation or the corporation’s officer is
capital stocks accepted by him or unless he is recorded as such
in books of the corporation.
Shareholders iii. Incorporators are subscribers but a subscriber
need not be an incorporator.
Q: What are the instances when the concurrence of stockholders
representing 2/3 of the outstanding capital is necessary? 3. underwriter
A: i. usually an investment banker who:

a. agreed to buy an entire issue of stockholders AOI;
securities or a substantial part thereof; b. Relate with section 81 (Appraisal right)
or
b. has guaranteed the sale of an issue by
agreement to buy from the issuing Classification to comply with constitutional or legal requirement
party any unsold portion at a stated
price. Constitutional or legal requirement
c. Has agreed to use his best efforts to
marker all or part of an issue a. Prescribing the minimum percentage of capital stock
d. Has offered for sale stock he has ownership of Filipino citizens in corporations engaged in
purchased from a controlling any business or activity reserved for Filipino citizens
stockholder. b. Set the maximum limits for stockholdings in corportators
declared by law to be vested with public interest
Agreement or contract with a corporation c. Classification of shares of stock into Class A (exclusively for
Filipinos) and Class B (either Filipinos or foreigners)
Between a. There shall be an agreement between the
the corporators and the corporation creating a Expediency and monitoring purposes
corporators contractual relation between them;
and the b. A person cannot be a member except by his a. Par value of one class of shares may be more than the
corporation own agreement or contract others
Between a. Ordinarily the contract is between each b. Since the constitution does not distinguish between
each individual member and the whole body of common and preferred shares, the latter kind of shares
member members in their collective capacity, should be included in the computation of the foreign
and the represented by the corporation; ownership limit for domestic corporations.
corporation b. Contract between each member and the
corporation SHARES PRESUMED TO BE EQUAL IN ALL ASPECTS
Doctrine of Equality of shares
CLASSIFICATION OF SHARES (Sec. 6) Q: Explain the Doctrine of Equality of shares?
Power to classify shares A: Under this doctrine, all stocks issued by the corporation are
presumed to be equal with the same privileges and liabilities,
Q: Why is the corporation allowed to make classification of shares? provided that the AOI is silent on such differenced (Aquino, 2011).
A: The legislative intent is focused on making the business In the absence of any provision in the AOI and in the certificate of
organization attractive by making it flexible in providing for the stock to the contrary, all stocks, regardless of their class
financial arrangements within the corporate entity itself (Aquino, nomenclature, enjoy the same rights and privileges and subject to
2011). the same liabilities.
GR: A corporation has the unrestricted freedom to issue such classes Authority to classify shares of stock
or series of shares as the prospects and needs of its business may
require to attract investors. a. Board of Directors – no authority to classify shares of
stock where the AOI are silent on the matter;
XPN: Unless restricted by law or provision of the AOI b. A corporation cannot:
Q: What are series? i. Without express authority in the AOI; and

ii. Without amendment thereof
A: Series refers to the subdivision of a class of shares
issue preferred shares with superior rights and privileges
NOTE: There must be at least one class of stock with voting rights than other shares.
c. Subscription contracts covering such shares are void.
Q: When may the classification of shares be made?
Consent of stockholders to change terns and preferences of shares
A:
a. Corporation cannot without the consent of the
By the a. First determine the number of shares stockholders, change the terms and preferences of classes
incorporators which a corporation shall issue as stated of shares of stocks provided therein.
in the AOI filed with the SEC.
RATIO: AOI or the charter of the corporation is the
By the board a. After the corporation comes into contract between the corporation and the stockholders.
of directors existence, they may be altered by the
(BOD) and the BOD and stockholders by amending the b. Any special agreement between a particular subscriber
and the corporation by which he is allowed to subscribe
for shares upon different terms from other subscribers is c. Additional shares may not be issued unless
invalid. the AOI are amended by vote of
stockholders
Reclassification of shares Subscribed a. Amount of capital stock subscribed,
capital whether fully paid or not;
Shares that are originally common shares may be reclassified into stock b. Connotes an original subscription contract
preferred shares. Reclassification of shares is a legitimate exercise of for the acquisition by a subscriber of
corporate powers under the Corporation Code (Aquino, 2011). unissued shares in a corporation
Outstanding a. Portion of the capital stock which is issued
Q: Distinguish reclassification of shares from exchange of shares. capital and held by persons other than the
stock corporation itself;
A: b. Total shares of stock issued to subscribers
or stockholders, whether or not fully or
RECLASSIFICATION OF SHARES EXCHANGE OF SHARES partially paid except treasury shares/
Does not always bring any There would be shifting of the c. Subscribed capital stock and issued or
substantial alteration in the balance of stock features like outstanding capital stock are synonymous
subscriber’s proportional priority in dividend declarations since subscribed capital stock can be issued
interest (Aquino, 2011) or absence of voting rights even if not fully paid (as distinguished from
(Aquino, 2011) Certificate of stock);
d. Yet, an issued share may not have the
Right to vote of all classes of shares status of outstanding shares (e.g. treasury
shares)
a. If one class of shares has the right to vote, all other classes Paid-up Portion of the subscribed or outstanding capital
are presumed to have the same voting power; capital stock that is actually paid
Eg. With par value and without par value, common and stock
preferred Actual Refer to the amount of capital stock actually
b. Stockholders have 1 vote for each share held by them, capital subscribed and paid for
which excludes fractional voting; stock
c. Right to vote may be denied by implication as where the Unissued a. Portion of the capital stock that is not
AOI provides that only holders of common stock shall have capital issued or subscribed;
the right to vote. stock b. Does not vote and draws no dividends
Legal a. Amount equal to the aggregate par value
Authority of BOD to fix terms and conditions of preferred shares capital and/or issued value of the outstanding
capital stock;
a. Only when authorized by the AOI b. When par value share are issued above
b. In such case, the preference enjoyed by the preferred par, the premium or excess is not to be
stock will not appear in the AOC considered as part of the legal capital;
c. In case of no par value shares, the entire
CAPITAL STOCK consideration received forms part of the
legal capital and shall not be available for
Q: What is a capital stock? distribution as dividends;
Stated Refer to the portion of the amount contributed by
A: capital purchasers of no par value stock that is credited to
the capital account
a. The amount fixed in the AOC to be subscribed and paid in
or agreed to be paid by the stockholders of a corporation CAPITAL
in money, property, services, or other means at the
organization of the corporation or afterwards and upon Q: What is capital?
which it is to conduct its business;
b. Money value assigned to a corporation’s issued shares, A:
constituting the legal capital of the corporation;
c. Represents the equity of stockholders in the corporate a. Indicates the entire property or assets of the corporation;
assets; b. Amount invested by the stockholders plus the
d. Limits the maximum amount or number of each class of undistributed earnings less losses and expenses;
shares that may be issued by the corporation without c. Portion of the net assets paid by the stockholders as
formal amendment of the AOI; consideration for the shares issued to them, which is
e. Remains the same even if the actual value of the shares as utilized for the prosecution of the business of the
determined by the assets of the corporation is diminished corporation;
or increased—unaffected by profits and losses. d. Include all balances or installments due the corporation
for shares of stock sold by it and all unpaid subscription for
Authorized a. Refers to the amount of capital stock shares.
capital specified in the AOI;
stock b. Synonymous with capital stock where the
shares of the corporation have par value;
Stock dividends Nature of share of stock
a. It refers to the amount that the corporation transfers from a. Each share represents a distinct and undivided share or
its surplus profit account to its capital account. interest in the common property of the corporation
b. Loosely termed as trust fund b. Such interest is indirect, contingent, remote, conjectural,
consequential, and collateral;
Q: Distinguish between capital stock and capital. c. It is inchoate, or a mere exepectancy of a right in the
management of the corporation and to the share in the
A: profits thereof and in the properties and assets thereof on
dissolution, after payment of corporate debts and
CAPITAL STOCK CAPITAL obligations
An amount; abstract Actual corporate property; d. Stockholders therefore are not entitled to intervene in a
a concrete thing litigation involving corporate property
An amount fixed in the AOI Fluctuates or varies from e. Constitute property distinct from the capital or tangible
and is unaffected by profits day to day according as property of the corporation and belong to the different
and losses there are profits or losses owners;
or appreciation or f. Are incorporeal in nature; shares are personal property of
depreciation of corporate the stockholder
assets g. Do not constitute an indebtedness of the corporation to
May be greater or lesser the shareholder
than the amount of capital h. Not credits as to make the shareholder or creditor of the
stock corporation
When issued, belongs to Belongs to the corporation i. Typifies a proportionate or aliquot part of the
the shareholders corporation’s property
Always personal May either be real or j. Corporation, as a separate entity, has a property of its own
personal property which consists chiefly of real estate
Q: Distinguish between capital stock and legal capital. Certificate of stock
A: a. A written acknowledgement by the corporation of the

interest, right, and participation of a person in the:
CAPITAL STOCK LEGAL CAPITAL
i. management,
Merely an amount and remains unchanged except as outstanding
shares in increased or reduced in number or amount ii. profits, and
iii. assets of the corporation
Limits the maximum amount or Sets the minimum amount of
number of shares that may be the corporate assets which for
b. Formal written evidence of holder’s ownership of one or
issued without formal the protection of the corporate
more shares
amendment of the AOI creditors, may not be lawfully
c. Convenient instrument for the transfer of title
distributed to stockholders
STOCK OR SHARE OF STOCK

Q: Distinguish between share of stock and certificate of stock.
a. One of the units into which the capital stock is divided;
A:
b. Represents the interest or right which the owner has:
i. In the management of the corporation—right to
SHARE OF STOCK CERTIIFCATE OF STOCK
vote;
An incorporeal or intangible Tangible property
ii. In a portion of the corporate earnings—
dividends; property
iii. Upon its dissolution and winding up, in then Represents the right or interest Written evidence of that right or
property and assets of the corporation of a person in a corporation interest
remaining after the payment of corporate debts May be issued even if the May not be issued unless the
and liabilities to creditors. subscription is not fully paid subscription is fully paid
Q: Distinguish between capital stock and share of stock. XPN: no par value shares
Situs is the State where the Situs at a place whee it is
A: corporation has its domicile located or at the domicile of the
which is ordinarily the State owner, even though the
CAPITAL STOCK SHARE OF STOCK under whose law it was created corporation is domiciled
Used in a collective sense Used in a distributive sense elsewhere
Signify the whole body of shares Refer to the stock in the hands Situs of share of stock retains that of the issuing corporation, even
of stock in the corporation of the stockholders and thus, though the certificate is without the State and is owned by a
belongs to them nonresident

Possession is not essential to c. Corporations are prohibited the holder;
ownership of stock from issuing multiple voting c. Relate with Section 6
and non-voting common d. The enumeration under
RATIO: Right to stock may exist shares nor can they limit Sec. 6 does not include the
independently of the certificate the maximum number of election of directors or
votes per stockholder trustees as one of the
Situs of shares of stock for certain purposes irrespective of the number natters on which non-voting
of shares he holds shares may vote
PURPOSE SITUS d. Only preferred or e. There shall be a class or
For purposes Domicile or residence of the corporation: redeemable shares may be series of shares which have
of i. Place where the principal office of the deprived of voting shares complete voting rights
execution, corporation is located; e. Founder’s shares may be
attachment ii. Shares or stocks shall be attached by the given the exclusive right to
and officer executing the order by leaving vote and be voted for in the
garnishment with the president or managing agent election of directors for
thereof, a copy of the order and a notice limited period
stating that the stock or interest of the f. Whenever a vote is
party against whom the attachment is necessary to approve a
issued, is attached in pursuance of such particular corporate act,
order such vote refers only to
For purposes Province or city in which the corporation has its stocks with voting rights
of principal office or place of business XPN: In cases when even
registration non-voting shares may also
of chattel vote
mortgages g. One share, one vote not
on shares of one stock holder, one vote
stock
For purposes GR: Situs of intangible property is at the domicile or COMMON PREFERRED
of property residence of the owner; a. One which entitles the a.
One with stated par value
taxation holder thereof to a pro rata which entitles its holder to
XPN: When it is inconsistent with express provisions division of the profits and in certain preferences over
of statute or when justice does not demand that it its assets upon dissolution the holders of common
should be, as where the property has in fact a situs without preference or stock
elsewhere. advantage in that respect b. Can only be issues with a
over other stockholders or stated par value
E.g shares of stock in a domestic corporation of a class of stockholders but c. Designed to induce persons
nonresident foreigner are taxable in the Philippines equally with all other to subscribe for shares of a
stockholders expect corporation
CLASSES OF SHARES IN GENERAL preferred stockholders d. Payment of dividends or the
b. Holders stand upon an distribution of the assets of
PAR VALUE NO PAR VALUE equal footing without corporation in case of its
a. One with a specific money a. One without any stated extraordinary rights or dissolution ahead of the
value fixed in the AOI and value appearing on the face privileges common stockholders or
appearing in the Certificate of the Certificate of stock; c. Complete voting rights such other preferences as
of Stock; b. Does not state how much may be stated in the AOI;
b. Purpose is to fix the money it represents; GR: Cannot be deprived e. Are presumed to be voting
minimum subscription or c. Always has an issued value- XPN: As provided by law although they are rarely
issue price of the shares in the consideration fixed by given voting privileges
order to assure CRs that the the corporation for its d. Residual owners of the f. Guaranteed stock- payment
corporation would receive issuance; corporation of dividend is guaranteed
a minimum amount for its d. No par value stockholders e. Can get only the assets left g. Interest bearing stock-
stock; have the same rights as over in case of liquidation corporation agrees
c. Watered Stock- shares holders of par value stock; after all other securities absolutely to pay interest
issued less than par value holders are paid before dividends are paid to
d. Remains the same f. Normally has preference in common stockholders is
regardless of the market the matter of management legal only when construed
value or book value g. A corporation may issue as requiring payment of
VOTING NON-VOTING more than one class of interest as dividends from
a. Share with a right to vote a. Share without right to vote common stock, being net earnings or surplus only
b. Customary to give the right b. If a stock is originally issued designated as Class A and h. Do not lose the voting
to vote to the common as voting stock, it may not Class B. rights in all matters
stock and to withhold it be deprived of the right to affecting the corporation
from the preferred vote without the consent of PROMOTION SHARE
a. Issued to promoters or those in some way interested in
the company, for incorporating the company, or for Par value a. Represents the amount of money or
services rendered in launching or promoting the welfare of property contributed by the shareholder to
the company the capital stock of the corporation
b. Shares as are issued to those who may originally own the b. The assets of the company cannot always
mining or valuable rights connected therewith, in be equal to the par value of the
consideration of their deeding the same to the mining outstanding stock, the assts being
company when the company is incorporated constantly in a state of fluctuation as the
SHARES IN ESCROW business prospers or declines
a. Share subject to an agreement by virtue of which the Book value a. Par value does not always reflect its book
share is deposited by the grantor or his agent with a third value or its actual or true value which may
person to be kept by the depositary until the performance be determined by dividing the total
of a certain condition or happening of a certain even stockholders’ equity or the net value of the
contained in the agreement; total corporate assets by the number of
b. Makes the depositary a trustee under an express trust shares issued or outstanding;
c. Legal title remains in the grantor until the condition is b. Does not attach to unissued or reacquired
fulfilled shares
d. Before the condition is fulfilled, the grantee or holder is Market a. Par value and book value may be more or
not yet the owner of shares and thus not entitled to the value less than market value which may be
rights belonging to a regular stockholder defined as the price at which a selling seller
CONVERTIBLE SHARE would sell and a willing buyer would buy
a. Changeable by the stockholder from one class to another b. Is affected by law of supply and demand
class at a certain price and within a certain period Liquidation The amount a stockholder would receive upon the
b. GR: A stockholder may demand conversion at his pleasure value dissolution and liquidation of the corporation
XPN: Unless restricted by the AOI (Aquino, 2011)
c. A corporation cannot issue additional stocks if the Redemption The price per share at which the corporation may
authorized common stock is fully subscribed value redeem its shares (Aquino, 2011)
d. Conversion is not automatic. An amendment of the AOC is Issued or The selling price of the shares fixed by the Board or
required to formalize the conversion which must not result Stated in the AOI (Aquino, 2011)
in watering of stock or issuance of stocks in excess of the value
authorized capital stock of the corporation
Presumption as to value of corporate stock
ESCROW SHARES
Escrow are not reflected in the AOI. Escrow shares result by virtue of a. Corporate stock is “at par” when it is worth its face value,
a transaction to place shares in escrow until the happening of an and is “above par” or at a “premium” when it is worth
event or fulfillment of a specified condition like payment of the more.
subscription price to the corporation or the purchase price to a b. No presumption exists that corporate stock is worth its par
shareholder (Aquino, 2011) or face value
FOUNDER’S SHARE c. Others say that there is presumption that corporate stock
REDEEMABLE SHARE is worth its par or face value
TREASURY SHARE
Statutory restrictions regarding the issuance of no par value shares
Convertability of shares
a. Banks, trust companies, insurance companies and building
Preferred GR: Preferred shares cannot be converted into and loan associations shall not be permitted to issue no
shares into common par value shares of stock
common b. Preferred shares of stock may be issued only with a stated
XPN: Unless expressly provided in the AOI as to their par value
convertability feature c. Shares of stock without par value shall be deemed fully
paid and non-assessable and the holder of such shares
NOTE: The terms of the preferred share contract shall not be liable to the corporation or its creditors in
cannot be changed without the consent of the respect thereto—meaning that the holder shall not be
stockholders liable beyond the issued price.
No par Allowed by SEC provided there would be no change d. Cannot be issued for a consideration less than the value of
value share in the stockholders’ percentage interest in the total five pesos per share
into par assets of the corporation. e. The consideration received for no par value shares shall be
value treated as capital, and therefore shall not be available for
The individual allocation of the shares as converted distribution as dividends.
should be based on the average issue value of the no
par value shares and not in the individual actual Consideration for no par value shares
contribution of the stockholders.
a. Make it easier for corporations against the interest of the
Nature of par value/ book value/market value investor

b. A no par value share has no par value but it has always an Stock The fact that the preferred stockholders were
issued value based on the consideration for which it is issued to formerly corporate creditors gives them no greater
issued creditors right as against creditors.
c. No par value share may not be issued for less than 5.00
d. While all par value stocks must be issued at a uniform Limitations regarding issuance of preferred shares
value or price, no par value stock may be issued from time
to time at different prices or values although the holders Q: What are the 4 legal limitations regarding preferred shares?
of all these shares are entitled to share equally in the
distribution of the profits and assets of the corporation A:
Kinds of preferred shares 1. Preferred shares deprived of voting rights in the articles of
incorporation shall still be entitled to vote on matters
Preferred Preference in the distribution of the assets of the enumerated in Sec. 6 (par. 6)
as to corporation in case of liquidation 2. The preferences of preferred shares must not be violative
assets of the provisions of the Code
Preferred Entitled to receive dividends on said share to the extent 3. Preferred shares may be issued only with a stated par
as to agreed upon before any dividends at all are paid to the value
dividends holders of common stock 4. The Board of Directors may fix the terms and conditions of
preferred shares of stock or any series thereof only when
Corporation is not bound to pay dividends unless BOD so authorized by the Articles of incorporation and
declares them. conditions shall be effective upon filing a certificate
thereof with the SEC
Holders of common stock may receive dividends only
after the satisfaction of the prior claims on dividends of Authority of BOD to fix terms and conditions of preferred shares
preferred stockholders
Benefits from Enables the board to tailor its securities to meet
authority changes in the market conditions which cannot be
Preference among preferred shares given foreseen at the time of incorporation or later
amendment of the AOI
GR: Preferred shares enjoy the same preferences or privileges
Concurrence a. Need not be concurred by 2/3 of the
XPN: Unless a classification is provided in the AOI of outstanding capital
stockholders b. It would defeat the very purpose for which the
Preferred stockholders not creditors of corporation not required authority was granted—to allow the
corporation to respond quickly to the
Both common and preferred stockholders are no different from fluctuating conditions in the market.
ordinary investors willing to share in the profits and losses of the
enterprise. Blanket a. Contrary to Sec. 6 to give BOD blanket
authority not authority to fix terms and conditions of
Lien upon Preferences granted to preferred stockholders do not contemplated preferred shares without stating the
corporate give them a lien upon the property of the corporation privileges, preferences, restrictions or rights of
property nor make them creditors of the corporation the preferred shares
Stock Stock cannot be issued with a fixed interest instead of b. Unless certain standards as to the issue of
issued with dividends inasmuch as this will make the contract of preferred shares are stated or spelled out in
a fixed subscription one of loan and thus make the the AOI, such authorization becomes a
interest corporation a debtor of the subscriber. dangerous power which may adversely affect
the rights of shares already issued
Shareholders are risk takers who invest capital in the
business and who can look only to what is left after KINDS OF PREFERRED SHARES
corporate debts and liabilities are fully paid.
AS TO DIVIDENDS
Stock Dividends payable by the corporation may be in the Cumulative Non-Cumulative
issued with nature of interest as where the parties, intended the a. Entitles the holder thereof a. Entitles thereof to the
dividends repurchase by the corporation of preferred shares not only to the payment of payment of current
payable in with agreed cumulative dividends of a fixed current dividends but also dividends only
the nature percentage per annum to dividends in the arrears b. If dividends are nor
of interest declared in a giver year, the
Stock Does not make stockholders creditors b. If the stipulated dividend is right to the dividends for
issued with not paid in a given year, it that particular year is
dividends Such guarantee may have the possible effect of shall be added to the extinguished
payable making the dividends cumulative—making the profits dividend which shall be due
guaranteed of one year make up for the deficiencies of the the following year
preceding year or years Participating Non-Participating

Gives the holder thereof not a. Entitles the holder thereof b. Redeemable at a fixed date or at the option of either the
only the right to receive the to receive the stipulated issuing corporation or the stockholder or both at a certain
stipulated dividends at the preferred dividends and no redemption price.
preferred rate but also more
participate with the holders of b. The balance is given entirely Q: What is redemption?
common shares in the remaining to the common stocks
profits pro rata after the c. In the absence of an A:
common shares have been paid agreement, dividend should
the amount of the stipulated be deemed noncumulative a. Repurchase
dividend at the same preferred and non-participating b. Reacquisition of stock by a corporation which issued the
rate stock in exchange for cash or property,
Cumulative Participating i. whether or not the acquired stock is cancelled,
a. Combination of the cumulative and participating share ii. retired or
iii. held in treasury.
b. Shareholder is entitled not only to the dividends in the arrears
but also to the participation with the holders of common stock Q: When may redeemable shares be issued?
in the remaining profits
A: They may be issued only when expressly so provided in the
FOUNDER’S SHARES (Sec. 7) articles of incorporation.
Q: What is a Founder’s share? It has no inherent power in this respect.
A: These are shares issued to the organizers and promoters of a NOTE: Common shares are never redeemed.
corporation in consideration of some supposed right or property.
Redemption regardless of existence of unrestricted retained
a. Share in the profits only after a certain percentage has earnings
been paid upon a common stock
b. Special privileges over other stock as to voting and as to a. This is different from Sec. 41. The power of the
division of profits in excess of a minimum dividend on the corporation to acquire its own shares for the purposes
common stock stated therein is subject to the condition that there be
unrestricted retained earnings in its books to cover the
Special a. Special rights and privileges not enjoyed by shares purchased or acquired;
rights the owners of other stocks such as: b. Strict compliance with statutory or contractual provisions
and i. preference in the payment of of redemption is essential. The retirement or redemption
privileges dividends and/or of stock by a corporation is different from a purchase by a
ii. distribution of assets in case of corporation of its own stock;
liquidation c. Redeemable shares may be redeemed regardless of the
b. rights to convert the shares into other shares existence of unrestricted retained earnings, provided that
c. Right to cumulative dividends to encourage the corporation has assets in its books to cover debts and
them to make large investments liabilities inclusive of capital stock;
Exclusive a. This right is for a limited period not exceeding
right to 5 years subject to approval of the SEC, the Q: May a corporation redeemed its shares if it is insolvent?
vote and period to commence from the date of the said
be voted approval. A: No, redemption may not be made where the corporation is
RATIO: To protect the interest of the other insolvent or if such redemption may would cause insolvency or
stockholders against possible abuse by a inability of the corporation to meet its debts as they mature.
minority holding founder’s shares
b. This limitation is non-extendible d. The terms and conditions affecting such shares must be
c. Limitation under Sec.7 stated not only in the AOI but also in the Certificate of
d. After the expiration of the limitation period, stock representing said shares; such provisions are in
founders shall have equal rights with the effect, a contract between the issuing corporation and the
holders of common shares preferred stockholders and strict compliance thereof is
e. Preferred shares are not affected by the essential;
provisions of Sec. 7 e. GR: Redemption is entirely optional with the corporation
and the stockholder is without right to either compel or
REMEEMABLE SHARES (Sec. 8) refuse the redemption of his stock.
Q: What are Redeemable shares or Collable shares? Maintenance of a sinking fund
A: a. SEC requires corporation to set up and maintain a sinking

fund where such cash is gradually set aside in order to
a. Usually preferred shares; accumulate the amount necessary to meet the
redemption price of redeemable shares at specified dates
in the future;
b. The fund shall be deposited with a trustee bank and shall i. Stock bonus plan for management and
not be invested in risky or speculative ventures. EEs; or
ii. Acquiring another company
Q: What is the purpose of redemption?
i. It may be held indefinitely, resold, or retired;
A: A safeguard to enable the corporation to retire an obligation or a
claim on the earnings, usually at a premium when it becomes Q: What are the limitations for treasury shares?
advisable for purposes of financing.
A:
Q: What is the effect of redemption?
1. They may be re-issued or sold again as long as they are
A: It is a repurchase for cancellation. The retirement of a class of held by the corporation as treasury shares
stock destroys all rights adhering to the shares of that class. 2. Treasury shares cannot participate in dividends because
dividends cannot be declared by the corporation to itself.
a. GR: They are considered as retired and are no longer 3. Treasury shares cannot be presented during the
issuable. stockholder’s meetings for otherwise equal distribution of
voting powers among stockholders will be effectively lost
XPN: Unless they are provided in its AOI. and the directors will be able to perpetuate their control
b. They lose their status as part of the outstanding or of the corporation
unissued authorized capital stock; 4. The amount of unrestricted retained earnings equivalent
c. They are considered as treasury shares if by provision of to the cost of treasury shares being held shall be restricted
the AOI they can be reissued; from being declared and issued as dividends (Aquino,
d. Where the reissuance of redeemed shares is prohibited, 2011).
the number of authorized shares of capital stock of
corporation is reduced accordingly and the AOI must be Acquisition from stockholders
amended to reflect such reduction.
a. If the corporation acquires the shares by purchase from
Voting rights stockholders, the transaction is a return to them of the
value of their investments in the company and a reversion
Redeemable shares may be deprived of voting rights in the AOI of the shares to the corporation;
unless otherwise provided in the Code. b. The corporation must have surplus with which to buy the
shares so that the transaction will not cause an
TREASURY SHARES (Sec. 9) impairment of its capital;
c. If the shares are donated by the stockholders, their act
Q: What are treasury shares? amounts to surrender of their stock without getting back
their investments which are voluntary given to the
A: They are shares which have been lawfully issued by the corporation.
corporation and fully paid for and later reacquired by it either by:
1. purchase, Divided restriction on retained earnings
2. redemption,
3. donation, GR: A corporation can reacquire its own shares provided it has an
4. forfeiture or adequate amount of unrestricted retained earning (URE) ton
5. other lawful means support the cost of the said shares.
a. Section 41 empowers a stock corporation to purchase or XPN: Sec. 51

acquire its own shares for legitimate corporate purposes;
b. Only surplus earnings may be used for purchase of Declaration as property divided
treasury shares;
c. Section 68-a corporation, in the absence of a qualified a. Treasury shares are unrealized income;
bidder, may bid at public sale of delinquent shares and b. Not considered part of earned, surplus profits and are not
title to the shares purchased shall be vested in the distributable as dividends either in stock or cash;
corporation as treasury shares; c. But if there are retained earnings arising from business of
d. Operates as a forfeiture of shares the corporation, treasury shares, being the property of the
e. They are not retired shares; they are regarded as property corporation may properly be distributed as property
acquired by the corporation which may be reissued or dividend;
resold by the corporation at a price to be fixed by the BOD; d. Any declaration and issuance of treasury shares as
f. Retirement of treasury shares can be effected by property dividend shall be disclosed and properly
decreasing the capital stock of the corporation in designated in the books of the corporation and in its
accordance with Sec. 38; financial statements.
g. They do not have the status of outstanding shares—they
do not constitute a liability of the corporation; Voting rights
h. May be used for a variety of corporate purposes:

a. Treasury shares have no voting rights as long as they c. Right to be and act as a corporation is a special privilege
remain in the treasury—uncancelled and subject to conferred upon a group of persons by the State;
reissue; d. Under Sec. 10, the formation of a corporation for any
b. A corporation cannot in any proper sense be a stockholder lawful purpose or purposes, provided it is in accordance
in itself and shares of stock held by it cannot be voted or with the Code, is a matter of right and cannot be
be entitled to vote for otherwise, equal distribution of restrained;
voting powers among stockholders will be effectively lost
and the directors will be able to perpetuate their control Q: What are the advantages of the corporate form?
of the corporation.
A:
Right to dividends
1. Any number of persons may unite in a single enterprise
a. Treasury shares are not entitled to dividends or asset without using their own names and with the valuable right
because dividends cannot be declared by a corporation to to contract, to sue and be sued, to hold or convey property
itself; in the corporate name, and to act as a legal unit;
b. Stock dividend may not be declared on treasury stock even 2. An individual may invest in the corporate enterprise as
on the express condition that such dividend shall also be much or as little as he sees fit and this is the limit of his
treated as treasury stock; liability since stockholders are not personally liable for the
c. They are no longer part of the outstanding capital stock. debts of the corporation;
3. They can transfer their shares without the consent of
Resale other stockholders;
4. Rights and obligations of a corporation are not affected by
a. They may be sold by the corporation at any price the BOD the death or change of individual members;
sees fit to accept even at less than par or issued value, the 5. It allows many individuals to cooperate in order to furnish
corporation having already received the full value upon the large amounts of capital necessary to finance the
their initial issuance, provided such price is reasonable gigantic enterprises of modern times.
under the following circumstances:
Q: Distinguish between corporations and associations.
i. Stockholders may rightfully complain if the price
is lower than reasonable; A:
ii. Treasury shares differ from retired or cancelled
shares: CORPORATION ASSOCIATION
Concept of Section 2 1. Indicate a collection
TREASURY SHARES RETIRED OR CANCELLED association of persons who have
SHARES joined together for a
May be sold Cannot be resold certain object;
2. Applied to
i. Sec. 9 unincorporated
ii. Sec. 36(6) society or body of
individuals
b. Sale of treasury shares should be treated as a sale of
ordinary property of the corporation; hence, the gain Possession A legal entity A creature of contract
therefrom is subject to tax; of juridical deriving its existence without a legal entity
c. Purpose of sale is to recover the amount paid by the personality from franchise separate the individuals
corporation for said shares. composing it;
Governing Corporation Code Provisions of the Civil Code
law or some other laws
Article 45 of Civil Code

Title II
Capacity to Article 46 of Civil 1. Cannot sue or be
INCORPORATION AND ORGANIZATION OF PRIVATE
act in its Code: sued, it cannot
CORPORATIONS
name enter into
Art. 46. Juridical contracts in the
Number and qualifications of incorporators (Sec.10)
persons may acquire name of the
and possess association and
Incorporation of a private corporation a mere privilege
property of all kinds, neither can it
as well as incur acquire properties
a. Incorporation is generated by agreements of a group of
obligations and bring under its common
persons;
civil or criminal name
b. Such agreement alone is not sufficient; it is necessary that
actions, in
legislative authority be obtained to put a stamp of stamp
conformity with the 2. Not competent to
of state intervention in the creation of corporations, such
laws and regulations art as agent or
power being one of the attributes of sovereignty;
of their organization. create agents or
(38a) confer upon

another authority Primary or a. Right or privilege granted to individuals by
to act on its behalf corporate the State to be and act as a corporation after
and those who act franchise its incorporation;
or purport to act as or general b. Enables them to act for certain designated
its representatives franchise purposes;
or agents c. Exempts them from individual liability for
Validity and Rule 3, Section 15 corporate debts;
enforcement d. Granted to and vests in the individuals who
of facts SEC. 15. Entity without compose the corporation and not in the
juridical personality as corporation itself.
defendant.—When two or Secondary a. Franchise to exercise powers and privileges
more persons not or special granted to such corporation to the business
organized as an entity with franchise for which it was created, including those
juridical personality enter conferred for purposes of public benefit:
into a transaction, they may i. Power of eminent domain;
be sued under the name by ii. Other powers and privileges
which they are generally or enjoyed by public utilities
commonly known. I. Only quasi-judicial corporations or those
affected with public interest are given power
In the answer of such to institute condemnation proceedings;
defendant the names and II. Unlawful to grant the right of eminent
addresses of the persons domain to purely private entities (they
composing said entity must would be using the right to take property for
all be revealed. (15a) private use);
Powers, Section 36 An unregistered b. Conferred upon the corporation after its
rights organization cannot incorporation and not upon individuals;
privileges exercise powers. Rights and c. Relate with Article XIV, Sec. 5- refers to
privileges incident to secondary franchise or the privilege to
incorporation and expressly operate as a public utility after the
granted to registered corporation has already come into being;
corporations under Sec. 36. d. The constitution prohibits the granting of a
Policy of GR: Courts will not franchise or other form of authorization for
judicial non- interfere with the internal the operation of a public utility to a
inteference affairs of an unincorporated corporation already in existence but without
association as to settle: the requisite proportion of Filipino capital.
i. disputes between
the members on Transferability of franchise
questions of
policy; Franchise is generic:
ii. discipline; or .
iii. Internal i. It may mean either the corporate or primary franchise
government. which the right granted to a group of individuals to exist
and act as a corporation;
FRANCHISE ii. Secondary franchise which is the right granted to a
corporation to exercise certain powers and privileges
Q: What is a franchise?
Primary franchise Secondary franchise
A: Inalienable May ordinarily be conveyed or
mortgaged under a general
1. Any special privilege or right affected with public interest; power granted to a corporation
2. Conferred by the State on corporations or persons and
3. Which does not belong to the citizens of the country, XPN: Franchises as are charged
generally as a matter of common right; with a public use
Cannot be sold or assigned In a public utility, its franchise
i. No persons can make themselves a body can only be sold under
corporate without legislative authority; execution, such approval of the
ii. A franchise is not exercised by private individuals Public Service Commission is
at their mere will and pleasure only but under still necessary.
such conditions, regulations and restrictions as
the government may deem necessary to impose The transferee holds the
in the public interest, security and safety property as agent of the
registered owner as far as the
Distinguish between primary and secondary franchise law is concerned

Otherwise, a corporation would Subject to levy and sale on
be created without the consent execution together with the Discovery a. Present a new product or service;
of the legislature; property necessary for the b. Simple organize another company in an
enjoyment therof; existing line of business
It may be conveyed provided Investigation a. Analysis of the needs:
there is express legislature i. Financial
authority to do so ii. Management
iii. Plant
CREATION OF THE CORPORATION iv. Material
v. Labor
Q: What are the 3 steps in the creation and organization of a b. Decision whether the estimated earnings
corporation? justify the efforts
Assembly a. Bringing together the property, money
A: and personnel into an organization;
b. Promoter must have some assurance of
1. Promotion control as:
2. Incorporation i. Patents
3. Formal organization and commencement of business ii. Leases
operations iii. Options on property
iv. Contract for services
Promotion
Nature of relations of promoters
a. Not a legal but a business term;
b. A number of business operations peculiar to the To a. Are not agents of the corporation before it
commercial world by which a company is generally corporation comes into existence;
brought into existence; NOTE: There can be no agent without a
c. The activity of promoters is not a formal part of the principal
organization of a corporation inasmuch as it occurs b. Yet, they occupy a fiduciary or quasi-trust
outside the corporate form and independent thereof; relation toward the corporation when it
d. A corporation may be formed without getting the services comes into existence and towards the
of promoters. subscribers prior to its organization, as long
as they are acting as promoters;
Promoters of the corporation c. This relation imposes upon the promoter to
act in good faith in all dealings in behalf of
Q: Who is a promoter? the corporation from dishonest promoters;
To a. They may be agents of the subscribers or
A: subscribers corporators;
or b. Even where there is no agency, the relation
1. One who takes it upon himself to organize a corporation; corporators between the promoters and the persons
2. To procure the necessary legislation; who have become, who are expected to
3. To procure the necessary subscribers to the AOI; become, subscribers for its capital stock, or
4. To see that the necessary document is presented to the corporators, or purchasers of stock from
proper officer to be recorded and the Certificate of the corporation, is one of trust and
Incorporation (COI) issued; confidence;
5. To float the company. c. Subscribers do not become partners with
the promoters of it;
Promoters are also known as: d. Stockholders cannot be held personally
liable for the compensation claimed by
1. Projectors promoters of services performed by them
2. Agents in the absence of any showing that said
3. Stewards stockholders contracted such services;
4. trustees NOTE: The corporation should alone be
liable for its corporate acts as duly
A promoter acts in the: authorized by its officers and directors.
Inter se a. Promoters do not become partners as
1. formation between themselves by:
2. establishment; and i. merely joining in an attempt to
3. control of a company prior to the incorporation and the create a corporation,
assumption of control by the BOD. ii. by uniting in subscriptions for
4. Agents of the incorporators stock, or
iii. by otherwise promoting the
Q: What are the stages in corporate formation? creating of the corporation.
A:
Liabilities of corporation for promotion fees failed;
b. Subscriber may recover it back in an action
GR: A corporation is not liable to its promoters in respect for nay at law although the money has been
payment in services rendered or expenses incurred BEFORE its applied in payment of preliminary expenses
incorporation in promoting it. or otherwise;
c. But if the subscriber agrees that the
XPN: Unless AFTER the incorporation it expressly agrees to make amount may be applied on certain
such payment or from other facts the court can infer a new contract promotional or development expenses and
to reimburse. it is so applied, the promoters are not
personally liable for the amount paid where
i. More reasonable to hold services performed or expenses the project to organize the corporation is
incurred PRIOR to organization to have been gratuitous in abandoned;
view of the general good or private benefit expected to d. It must be shown that the promoter was
result from the object of the corporation; authorized to receive it.
ii. Unjust to stockholders who subscribe and pay for stock, To each a. Rights of stockholders in a defectively
that their property be subject to claims which they have other incorporated association should be
no voice in creating governed by the laws of the State relating
thereto and not by the rules governing
a. After the organization of the corporation, it may authorize partners;
payment of compensation to promoters and the issuance to b. Partners inter se (Sec. 22-23);
them of stock unless prohibited by statute;
b. Revised Securities Act- authorized payment of such fees if the Underwriting agreements
same is provided for in the registration statement of securities
filed with the SEC. Q: What are the 4 types of underwriting agreements?
Q: What should be the amount to paid as promotion fees? A:
A: It depends upon the effort exerted, difficulties encountered and Firm Members severally but not jointly agree to purchase
the expenses incurred in promoting and organizing the corporation. commitment the whole issue outright at a particular price for
There is no hard and fast rule. resale at a price differential to the public, or to
dealers who sell at another differential to the public.
In case of mining companies, the maximum fee that had been All-or They agree to accept liability for the purchase of an
allowed did not exceed 5% of the amount paid and received on the nothing issue at a given price only if the entire issue is not
subscriptions. commitment sold—usually within 30 days period.
Standby They will purchase and distribute at predetermined
Liability of corporation on promoter’s contracts commitment prices to the public any amount of the issue not
taken by stockholders in exercising their pre-
Before a.
Since the corporation before its emptive rights.
incorporation organization, have agents contract for Best efforts a. The syndicate will use its best efforts o
and itself, or be contracted with, it is not distribute the issue to the public;
organization liable upon any contract which: b. They do not agree to purchase the issue at
i. a promoter attempts to make predetermined prices;
for it prior to its organization c. There may be a fixed price but no
ii. unless the contract is expressly guarantee on the quantity sold.
or impliedly
iii. adopted to ratified by it after Q: What is underwriting?
the organization;
b. Promoter’s contract does not ipso facto A: It is the act or process of guaranteeing the distribution and sale of
become the contract of the corporation. securities of any kind issued by another corporation.
After a. The contract must be one such as the
incorporation corporation can itself make; Q: What is incorporation?
and b. A corporation cannot assume the
organization obligations of an ultra vires contract; A: It means the performance of conditions, acts, deeds, and writings
c. Contracts entered into by promoters by incorporators, and the official acts, certification of records, which
should at most be suspended and give the corporation its existence (Aquino, 2011).
enforceable only after the incorporation
and organization of the corporation. Q: Distinguish between incorporation and creation.
Liability of promoters for failure to organize corporation
A:
To a. If money is paid to promoters for shares in
subscribers a projected corporation preliminary to INCORPORATION CREATION
organization, and the promoter fail to Refers to the performance of Includes all of the acts and
organize the corporation, it is a case of conditions, acts, deeds and doings from the enactment of
money paid on a consideration which has
writings by incorporators and the general incorporation law by d. Payment of the filing and publication fees; and
the official acts, certifications or the legislature through the e. Issuance by the SEC of the COI if all papers filed after
records which give the promotion, underwriting, verification and examination are found in order.
corporation its existence. preparation and execution and
filing of the incorporation Substantial compliance with requirements
papers and obtaining the
certificate or charter, to the Where the formation or organization of corporations is not
organization and first meeting governed by special laws, the SEC may accept and approve the AOI
and election which set the or amendments therein upon mere showing of substantial
corporation in motion full- compliance with the Corporation Code and meets the guidelines
pledged. established by the Commission.
Q: Distinguish between incorporation from corporation. i. Section 14 requires that the AOI shall contain substantially
the matters enumerated except as otherwise provided by
A: the Code or special law;
ii. Section 15 provides that the AOI shall comply substantially
CORPORATION INCORPORATION with the form prescribed therein;
a. A civil institution The act by which that institution iii. Section 17-substantial compliance relative to the approval
created by law; is created of AOI and any amendment thereto.
b. Its existence, its iv. Forms of incorporation of corporations are made available
capacities and its to the public.
powers are all
conferred by law from Documentary requirements for incorporation
some real or supposed
public benefit to result Q: What are the documentary requirements for incorporation in
from it; case of stock corporations?
c. A legal or juridical
institution A:
Effect if not incorporated 1. Name verification slip

2. Articles of incorporation and by-laws
Q: What is the effect if there was no legal incorporation? 3. Affidavit of incorporator or director undertaking to change
corporate name
A: The association of a group of men for business or other 4. List of members certified by the Corporate Secretary
endeavors of a group of men for business or other endeavors does 5. List of contributors and amount contributed certified by
not absorb the personality of the group and merge it into the the Treasurer
personality of another separate and independent entity which is not 6. Registration data sheet
given corporate life by mere formation of the group. Such 7. Additional requirements:
conglomeration of persons is incompetent to act as a corporation, a. Indorsements or clearances from other government
cannot create agents, or exercise by itself authority in its behalf agencies, if applicable
(Aquino, 2011). b. For corporations with foreign equity, submit proof of
remittance by non-resident aliens and foreign
Q: Is incorporation necessary for an association to function? corporate subscribers who want to register their
investment with BSP
A: No. Even if unregistered, the members of an association or c. For corporations with more than 40% foreign equity,
organization, by agreement, may perform acts not contrary to law, submit Application form F-100
morals, good customs, public order or public policy (Aquino, 2011). d. For corporations with PEZA, SBMA, or other economic
zones application, submit certificate of authority or
STEPS IN INCORPORATION indorsement from said government agencies (Aquino,
2011)
a. Drafting and execution of the AOI by the incorporators and
other documents required for registration; Q: What are the documentary requirements for incorporation in
b. Execution of affidavit by a temporary treasurer certifying case of non-stock corporations?
compliance with subscription and paid-up requirements as
to capital stock A:
c. Filing with the SEC of the AOI including:
i. Treasurer’s affidavit under Sec. 15 showing at 1. Name verification slip
least 15% of the entire authorized shares has 2. Articles of incorporation and by-laws
been subscribed and at least 25% of the 3. Treasurer’s affidavit
subscription has been paid in cash and/or 4. Affidavit of incorporator or director undertaking to change
property; corporate name
ii. A favorable recommendation of the appropriate 5. Registration Data sheet
government agency that such AOI is in 6. Proof of payment of subscription like Bank certificate
accordance with law. deposit of deposit if the paid up capital is in cash
7. Additional requirements: v. This is mandatory;
a. For foundations, notarized certificate of bank deposit vi. A situation wherein majority of its members are
of the contribution of not less than P100,000.00, and non-residents is allowable;
modus operandi or mode of operation executed vii. But majority of the directors or trustees of all
under oath by the President setting forth its mode of corporations must be residents of the
operation, source of its funds, the proposed Philippines;
application of said funds, and the prospective
beneficiaries of grants or endowments d. Each of whom must own or be a subscriber to at least
b. For religious corporations: Secs. 109-116 and an one share of the capital stock of the corporation.
affidavit of affirmation, or verification by the chief i. The presumption is that where an incorporator
priest, rabbi, minister, or presiding elder has a pecuniary interest in the corporation, he
c. For federations, certified list of member-associations will be concerned with the management of its
by Corporate Secretary/President affairs.
d. For condominium corporation/association, Master
Deed with primary entry of the Register of Deeds and NOTE: Unless otherwise expressly provided in the AOI, a corporation
certification that there is no other existing similar cannot impose other qualifications.
condominium association within the condominium
project (Aquino, 2011) OTHER REQUIREMENTS:
INCORPORATION e. Incorporators must have the capacity to enter into a valid

Number and qualifications contract;
i. The AOI must be acknowledged by the
a. Incorporators must be not less than 5 but not more than incorporators before a notary public;
15; ii. To secure the State and all concerned against the
i. If it exceeds 15, the excess will not be considered possibility of any fictitious name being
as incorporators; subscribed to the articles and to furnish proof of
ii. These 5 or more persons must be natural the genuineness of the signatures.
persons; f. Relate with Art. 73 of the Family Code;
iii. GR: A corporation cannot be an incorporator of g. A minor who is emancipated either by marriage or by
another corporation. voluntary concession of the parents is not qualified to be
RATIO: Artificial persons, without brain or body, an incorporator as incorporators must be all of legal age;
existing only on paper through legislative h. The Code does not prohibit the formation or organization
command and incapable of thought or action of corporations with the same stockholders/incorporators;
except through natural persons, cannot create
other artificial persons. Citizenship requirement
XPN: Duly established cooperatives and
corporations primarily organized to hold equities a. By specific constitutional and legal provisions, citizenship is
in rural banks may organize rural banks and/or a necessary qualification for incorporators in corporations
subscribe to shares of stock of any rural bank. in which a certain percentage of the capital stock is
Thus, a cooperative may become an required to be owned by Filipino citizens;
incorporator of a rural banking corporation. b. Foreign shareholders may be barred from certain
iv. In any case, a corporation may become a nationalized activities which are exclusively reserved for
stockholder in another corporation by Filipino citizens;
subscribing to or purchasing the latter’s stock; c. Enemy aliens cannot lawfully contract with the subjects of
v. A corporation could have its stockholders, the country with which it is at war
directors or officers organize a new corporation
and thereafter the first corporation could Juridical persons
acquire the stock of the new corporation.
Q: May corporations and other juridical persons be incorporators?
b. All of legal age;
A: No, because of the express provision in Sec..10 that the
c. A majority of whom are residents of the Philippines; incorporators must be natural persons (Aquino, 2011).
i. A corporation composed of entirely aliens may
be incorporated as long as the majority of the Q: What is the reason for the prohibition?
incorporators are residents of the Philippines
XPN: In case of nationalized corporations. A: It is so much easier to deal with natural persons as incorporators
ii. This means domiciled residents-physical that with corporations. If a corporation will be an incorporator,
presence in the State and an intention to remain there will be a lot of documentation that will be required in order to
therein; make sure that the juridical entity has been duly authorized by the
iii. Domicile of natural persons is the place of their stockholders to enter into a contract like AOI (Aquino, 2011).
habitual residents;
iv. It is the place where one has true, fixed, Q: Will this policy discourage investments?
permanent home and to which, he whenever
absent, has the intention of returning;
A: No, corporations can be original subscribers. The Corporation ownership in incorporations is a formal rather than a substantial
Code does not bar corporations from being subscribers who appear one and which are regularly evaded in the practice.
as such in the AOI to be filed with the SEC (Aquino, 2011). individual
Since the law permits a scheme by which all the
Q: What is the exception to the rule? shares are owned by a single individual, the latter
may incorporate provided he associates with him
A: Sec. 4 of R.A. 7353 (Rural Banks Act of 1992), upon consultation the number of persons required by law.
with the rural banks in the area, duly established cooperatives and
corporations primarily organized to hold equities in rural banks may Beneficial ownership is not necessary and a person
organized a rural bank (Aquino, 2011) who holds the legal title to stock is qualified to
become an incorporator.
Q: May LGUs organize a corporation? Subsequent Nor is the existence of the corporation originally
accumulation formed by the required number of incorporators
A: No. However, the local government officials may organize of shares in affected by the subsequent accumulation of all the
corporations but subject to limitations imposed under the LGC of one shares in the hands of one individual
1991, and the Code of Conduct and Ethical Standards for Public individual
Officials and Employees (Aquino, 2011).
Capacity
CORPORATE TERM (Sec. 11)
Q: What is capacity to act? Term of Corporate Existence
A: It is the power to do acts with legal effect. Q: What is the term of a corporation?
Q: Give examples of restrictions on capacity to act, hence not A:

allowed to be incorporators?
1. The term specified in the AOI not exceeding 50 years,
A: unless sooner legally dissolved; or
2. Unless its registration is revoked upon any grounds
1. Minority provided by law.
2. Insanity 3. Relate with Sec. 37.
3. Imbecility
4. Deaf-mute Q: What is the rationale for the term limit?
5. Prodigality
6. Civil interdiction (Aquino, 2011) A: The 50-year term limit is imposed by law to permit the
stockholders to decide at the end 50 years to decide whether to
Gender continue or not with the corporation. The corporation is given the
opportunity to determine at that point to wind up the affairs of the
Married woman can be incorporators (Aquino, 2011). corporation or to extend the life of the corporation for another
period not exceeding 50 years (Aquino, 2011).
Accomplished fact
State control
An incorporator remains to be an incorporator even if he will later
on cease to be a corporator or shareholder. Thus, he will still be an The state is concerned that the grant is not abused in fraud and not
incorporator even if he already transferred all his shares to another. to the detriment of other parties. For this reason, it has been ruled
Being an incorporator is an accomplished fact. that the limitations of corporate existence to a definite term is an
exercise of control in the interest of the public. (Aquino, 2011).
Requirement regarding minimum number of incorporators
mandatory Extension of corporate term
a. A de jure corporation cannot be legally formed by less
Limitations a. Term shall not exceed 50 years in any one
than the prescribed number;
instance;
XPN: Corporation Sole b. The amendment is affected before the
b. In case of educational institutions, their incorporation shall
expiration of the corporate term of
be governed by special laws and by general provisions of existence;
the Code (Sec. 106).
c. The extension cannot be done during the 3-
year period of liquidation;
Reduction of Number of stockholders after the corporation is d. The extension cannot be made earlier than
stockholders organized may become less than the minimum 5 years prior to the expiration date;
or members number required for incorporation without XPN: There are justifiable reasons therefor
to less than affecting corporate existence. as may be determined as may be
the determined by the SEC.
minimum;
Effect of a. Mere extension of the corporate term of
Beneficial The requirement of minimum number of
extension/ existence made before the expiration of the TERM
expiration original term constitutes a continuation of Authorized capital The amount fixed in the AOI to be
of term the old, and not the creation of a new subscribed and paid by the stock holders of
corporation; the corporation (Aquino, 2011)
b. In the absence of compliance with the legal Subscribed capital That portion of the authorized capital stock
requisites for the extension of the period, that is covered by subscription agreements
the corporation ceases to exist and is whether fully paid or not (Aquino, 2011)
dissolved ipso facto. Paid-up capital The amount of outstanding capital stock
c. Expiration does not produce its immediate and additional paid-in capital or premium
dissolution; paid over the par value of the shares
d. A corporation that has been reincorporated (Aquino, 2011)
after its original terms of existence have Outstanding capital The total shares of stock issued to
expired does not automatically succeed to stock subscribers or stockholders , whether or
the assets of the original corporation which not fully or partially paid except treasury
is deemed dissolved in the absence of a shares so long as there is a binding
corporate liquidation under Sec. 222. subscription agreement (Aquino, 2011)
Automatic a. Sec. 11 allows the automatic extension of Capital Includes properties and assets of the
extension the corporate existence by amendment of corporation that are used for its business or
of term the AOI within the 5-year period before the operation (Aquino, 2011)
expiration date of the existing term; Stated capital Sum of the par value of an issued par value
b. There is no limit as to the number of shares, the entire amount received for no-
extensions that may be made. par value shares and any amount
transferred by a stock dividend or other
Doctrine of Relations or Relating Back Doctrine corporate action from surplus to stated
capital. Thus, even treasury shares are
Q: Explain the doctrine of relations. included (Aquino, 2011)
A: The filing and the recording of a certificate of extension after the Filipino percentage ownership requirement regarding corporate
term cannot relate back to the date of the passage of the resolution capital
of the stockholders to extend the life of the corporation. However,
the doctrine of relation or relating back doctrine applies if the failure Corporations for a. At least 60% of capital of which is
to file the application for extension within the terms of the exploration, owned by citizens of the Philippines;
corporation is due to the neglect of the officer with whom the development, b. Capital means outstanding capital
certificate is required to be filed or to a wrongful refusal on his part and utilization of stock in case of stock corporation
to receive it (Aquino, 2011). natural persons
Public service a. At least 60% of the capital of which is
Period of corporate existence a matter of public interest corporations owned by citizens of the Philippines;
b. Participation of foreign investors in
a. State has an interest in the term of corporations; the governing body of any public
b. No agreement between stockholders can result in giving utility shall be limited to their
rise to a new and distinct personality, possessing proportionate share in its capital, and
independent rights and obligations; all the executive and managing
c. State is interested that the privilege be enjoyed only under officers of such corporation must be
the conditions and not beyond the period it sees fit to Filipino citizens.
grant and that it be not abused in fraud and to the Educational a. Other than those established by
detriment of other parties. corporations religious orders and mission
boards;
b. At least 60% of the capital of
which is owned by citizens of the
MINIMUM CAPITAL STOCK REQUIRED OF STOCK CORPORATIONS Philippines;
(Sec. 12) c. Control and administration of
educational institutions shall be
Capital stock requirement vested in Filipino citizens;
Corporations a. The first must be wholly owned and
a. Code does not set a minimum authorized capital stock as engaged in mass managed by Filipino citizens;
long as the paid-up capital as required by Sec. 13 is not media and b. While at least 70% of the capital
less than 5,000.00. advertising stock of the second must be owned
b. A minimum capital stock requirement is considered as industry by citizens of the Philippines.
arbitrary and does not assure any practical protection to Banking At least 60% of the capital of which is owned by
corporate creditors. corporations citizens of the Philippines;
Definition of Terms Corporations Capital of which must be wholly owned by

engaged in retail citizens of the Philippines;

trade ii. Policy is to require full payment
Rural banks Capital stock of which must be fully owned and of subscription by foreigners
held directly or indirectly by Filipino citizens or as it will be difficult to compel
corporations, associations, cooperatives them to pay their unpaid
qualified subscriptions when they are
Corporations At least 60% of the capital stock of which or of outside the country;
engaged in any interest in said capital is owned by citizens iii. Number of shares subscribed,
coastwise of the Philippines; the amount subscribed and
shipping the amount paid by each
Financing At least 60% of the capital of which is owned by stockholder must be stated in
companies citizens of the Philippines; the AOI;
iv. Special laws may require paid-
Corporations At least 70% of the voting capital stock shall be up capital (insurance
engaged in owned by citizens of the Philippines; corporation is 5M); pawnshop
pawnshop at least 100k; 50M for a
business financial intermediary);
Corporations At least 75% of the authorized and voting Post- a. Minimum 25% subscription and 25%
engaged in the capital stock shall be owned by citizens of the incorporation paid-up capital required in case increase
recruitment and Philippines; of the authorized capital also;
placement of i. To give assurance to the
workers, locally investing public that it is
or overseas financially and actually able to
Corporations Must be 100% Filipino owned operate and undertake to do
engaged in the business and meet its
operation of a obligations;
private detective, ii. Call by the BOD for payment of
watchman, or the balance of subscriptions is
security guard required only when there is no
agencies fixed date for payment in the
Under the Flag In the purchase of articles for the government, contract;
law preference shall be given to materials and iii. Not required that each and
supplies produced, made, or manufactured in every subscriber shall pay 25%
the Philippines, and to domestic entities. of his subscription. The paid up
requirement is met as long as
Domestic entities means any citizen of the 25% of the total subscription is
Philippines or any corporate body or paid although some subscribers
commercial company at least 75% of the have paid less than 25% or
capital stock of which is owned by citizens of even have not paid any
the Philippines. amount;
iv. It would appear that the
minimum 25% paid up
requirement applies only to par
value shares because a
AMOUNT OF CAPITAL STOCK TO BE SUBSCRIBED AND PAID FOR
subscriber to no par value
PURPOSES OF INCORPORATION (Sec. 13)
shares must pay in full his
subscriber.
Minimum subscription and paid-up capital
Computation of the 25% subscription requirement
Pre- a. Sec. 13 requires at least 25% of the
incorporation amount of the authorized capital stocks
Where the Minimum subscription should be 25% of the
has been actually subscribed and that at
capital stock amount of the authorized capital stock or 25% of
least 25% of such subscription paid;
consists only the aggregate value of all the shares of stock the
b. In no case shall be paid-up capital be less
of par value corporation is authorized to issue;
than 5000.00.
shares
c. Violation may subject erring
In par value stock corporations, is shall always be
incorporations and/or directors for
based on the amount of the authorized capital
prosecution as provided in Sec. 144.
stock irrespective of the class, number and par
value of the shares.
i. The SEC has the power to
Where the Shall be computed on the basis of the entire
require that the authorized
capital stock number of authorized shares;
capital stock to be not less
consists only
than a certain amount such
of no par The issued price of no par value shares need not be
that the 25% paid-up capital
value shares fixed in the AOI;
will be more than 5k;

Where the Requirement as to par value is as indicated above
capital stock and for the no par value shares, the 25% is based Contents and form of AOI
is divided into on the number of said no par value shares.
par value SECTION 14
shares and no
par value a. Enumerate the mandatory matters;
shares b. May include such other matters as are not inconsistent
with law and which they may deem necessary and
Subscription of corporations convenient:
i. Classes of shares
Domestic a. May subscribe initially to the capital ii. Provisions on preemptive right
corporations stock of another proposed corporation c. Contents of AOI may be held valid as an agreement
but their subscriptions cannot be taken between the parties thereto, even though the validity of
into consideration in the computation of such may be subject to question;
the 25% subscription and 25% paid-up d. Sworn statement of the treasurer elected by the
capital requirement of the law; subscribers showing compliance with the requirement as
b. A corporation cannot become to the minimum amount of the subscribed and paid up
incorporators under Sec. 10 capital stock;
Foreign a. Whether resident or nonresident, may e. May provide other matters or items as long as they are not
corporations subscribe to the stocks of domestic contrary to any provision of the Code or special law.
corporations as long as they are
authorized by their charters to hold SECTION 15
shares in other corporations;
b. Their subscription shall not be counted in Provides the form of the AOI of all domestic corporations
the computation of the minimum
subscription and payment requirements a. Affidavit of the treasurer of the corporation concerning
the amount of capital stock subscribed and paid;
b. It is not to be confused with the matter required to be
certified in the Affidavit of the treasurer—that at least 25%
of the authorized capital stock has been subscribed and at
least 25% of the total subscription has been paid;
CONTENTS OF AOI (Sec. 14)
c. Must be written in any of the official languages—English or
FORM OF AOI (Sec. 15)
Filipino duly signed and acknowledged by all the
incorporators;
Articles of Incorporation (AOI)
d. A public instrument;
e. Sec. 15(11) restrictions to serve as notice to all the persons
Q: What is an AOI?
who may be dealing with the stock corporation and is
intended to deter the issue or transfer of shares in favor of
A: It is a document prepared by the persons establishing a
aliens in violation thereof;
corporation and filed with the SEC containing the matters required
f. The incorporator may delegate to an attorney-in-fact the
by the Code.
signing of the AOI in a special power of attorney to such
effect.
a. It defines the charter of the corporation and the
contractual relationships between:
Filing of the AOI
i. the State and the corporation
ii. the stockholders and the State
iii. corporation and stockholders Actual a. Mere recording of the AOI without the
filing or intention or the fact of allowing the same
b. copy of the articles filed which is returned with the
registration to remain in the office of the SEC is not
Certificate of Incorporation issued by the Commission
with the sufficient filing to complete the
under its official seal becomes its corporate charter
SEC organization of the corporation or vest it
enabling the corporation to exist and function as such;
c. a corporation created by special law has no AOI required with corporate powers;
b. Literal filing of the papers is necessary;
Q: Who are bound by the contents of the AOI?
Rule where a. Does not have to file with the SEC in its AOI
A: the and by-laws since the grantee of such
corporation special charter draws its life not from
1. The corporation created by compliance with a general law, but from a
2. Shareholders special law direct act of Congress
3. State (Aquino, 2011) Rule with a. 2 or more corporations may enter into joint
respect to venture through a contract if the nature is
NOTE: The State cannot disregard the provisions of the AOI without joint in line with the business authorized by their
any valid reason. It cannot whimsically revoke the AOI (Aquino, venture charters, which contract cannot be
2011). registered with it, provided that the joint
venture will not result in the formation of a
new partnership or corporation. b. A property right;
b. If the parties want the joint venture to be c. Right in rem
treated as a separate entity or have a d. Cannot be impaired or defeated by
separate personality because they intend to subsequent appropriation by another
secure for the joint venture project a TIN of corporation in the same field.
its own from the BIR, registration with the Part of name a. Character of the corporation is not
SEC is necessary in order to have a legal necessarily controlled by its nane;
personality to obtain a separate TIN.
Q: Must the corporate name reflect the purpose of the
Power of SEC to reject AOI corporation?
Compliance a. Duty of the SEC, on presentation of AOI A: No. The purpose of the name is for identification and not to give
with statute and tender of proper fees: an identification of its purpose (Aquino, 2011).
i. To file the articles;
ii. To issue a COI Purpose or purposes of the corporation
Is controlled by the provisions of the
statute Purpose Clause
b. If the AOI substantially comply with the
Statute, the SEC has no discretion but may Q: What is the purpose clause?
be compelled by mandamus to file them.
c. Yet, it is under no duty to file AOI not A: Purpose clause- states the specific purpose or purposes for
entitled to be filed for any reason and which the corporation is being incorporated;
hence it is not be compelled by mandamus
to act in such a case a. Creates an authorization to the management to enter
Truthfulness a. GR: The officer concerned has no contracts and transactions which may be considered as
of matters discretionary power to look beyond the included within or incidental to the attainment of said
stated face of the incorporation papers and purposes;
determine from matters outside of such b. Impose implied limitations on the powers of the
papers whether or not to file the papers; corporation by the exclusion of lines of activity which are
b. Cannot consider extraneous matters; not covered;
c. Ordinarily, if the association has complied c. No legal need to repeat in the AOI the powers granted by
with all the pre-requisite requirements, law upon the corporation;
and its purpose is a lawful and authorized d. Non-stock Corporation may include a purpose which
one, conditions cannot be imposed on would change or contradict its nature as such.
granting the certificate;
d. SEC is clothed with judicial discretion or Q: What is the importance of a purpose clause?
arbitrary power
Lawfulness a. It does not necessarily follow that it has no A: It assures that persons who invest in corporate entities would be
of object or authority to pass upon the lawfulness of aware of the business the corporation is designed to engage in
purpose the object or purpose of the corporation as (Aquino, 2011). Also:
expressed in the AOI;
b. SEC has no authority exercise discretion in a. The person who intends to invest his money in the
receiving and registering AOI, but it may business will know where and on what kind of business or
exercise judgment in the determination of activity his money will be invested
the question of law whether or not the b. The directors and officers will be informed regarding the
objects of a proposed corporation are scope of business they are authorized to act
lawful; c. A third person will be aware if the transaction he has with
the corporation is within the authority of the corporation
Name of the corporation (Aquino, 2011).
Importance a. Acquires personality under the name Q: What are the general limitations on the purpose of the purpose
stated in the COI; clause?
b. Power of succession by its corporate
name; A:
c. Identifies and distinguishes it from other
corporations, firms or entities 1. It cannot be created or formed for purpose or function of
d. Authorized to transact business; which a corporate body is incapable (ex: practicing a
e. Essential to its existence and to its profession)
identity. 2. It cannot be created for a purpose that is contrary to law,
Nature a. Corporate name is regarded as of the morals, or public policy (ex: creation of a municipal
nature of a Trademark even though corporation)
composed of individual names and its 3. It cannot be organized for 2 or more incompatible
simulation may be restrained; purposes (ex: General Banking Law expressly prohibits
banks from being engaged in insurance business)
4. The corporation may not be organized for a purpose that the corporation as to the kinds of
is contrary to its nature (Aquino, 2011) business in which it may engaged;
b. Dealings which are entirely irrelevant to
Purpose or purpose must be lawful the purposes are authorized and called
ultra vires;
Effect in case a. A corporation the primary object of c. The AOI of a manufacturing corporation
unlawful which is without statutory authority can need not state the particular kind of
have no lawful existence even though manufacturing in which it is proposed to
some of its declared purposes may be engage, unless it is required by statute;
lawful; d. In forming a charitable corporation, it is
b. A ground for the rejection or disapproval not necessary to specify with exactness
by the SEC of the AOI; who are to be the ultimate recipients of
Where a. The word unlawful is not used by the the charity.
powers Code exclusively in the sense of malum May not be a. The purposes should not be stated
merely in se or malum prohibitum. indefinitely indefinitely; otherwise, the AOI may be
unauthorized b. Used to designate the powers which stated rejected;
by law corporations are not authorized to b. It is not also sufficient to state that the
exercise, or contracts which they are not purpose is to carry on any business which
authorize to make or acts which they are may be deemed profitable.
not authorized to do—ultra vires.
c. A corporation cannot be formed for Primary purpose must be stated
practice of law, medicine or other
learned professions in the absence of a. Shall state which the primary of main purpose and which
express authority in the corporation law; is/are secondary or subsidiary purpose/purposes;
NOTE: The practice of a profession is not b. The law allows a corporation to have secondary purposes
a business and is open only to persons because the primary purpose may not turn out to be
with necessary qualification; profitable;
d. However, the law permits the formation c. Corporation may have only one purpose;
of a partnership for the exercise of a d. GR: Sec.42 prohibits a corporation from investing its funds
profession; for any purpose than the primary purpose for which it was
Determination a. GR: Question as to whether the organized;
of question of purposes for which a given corporation XPN: It is approved by both its BOD or trustees and its
lawfulness has been formed are lawful is to be stockholders or members. No such disclosure is required in
determined by the description of those case of a partnership.
purposes as stated in the AOI;
b. A corporation is not illegal unless it is Q: What are the 2 kinds of purpose of a corporation?
shown that the end it has in view is
illegal or the means by which it proposes A:
to attain that end are illegal;
c. Where the object of a corporation is not PRIMARY SECONDARY
illegal, the fact that such corporation There must only be one May be several
afterwards entered upon illegal projects Other purposes not allied or
does not make it an illegal corporation incidental to the primary
and such illegal acts cannot be urge as a purpose
defense
Inquiry into a. Best proof f the purpose of a corporation Q: What is the importance of making a distinction?
purposes is its AOI and by-laws;
other than b. AOI-must state the primary and A: To determine which investment of corporate funds would require
those stated secondary purposes of the corporation; the authority the Board and Stockholders under Sec. 42 of the
c. By-laws outline the administrative Corporation Code (Aquino, 2011).
organization of the corporation to insure
or facilitate the accomplishment of said Q: Is a statement which provides that a corporation will carry on
purposes; any business which may deem profitable allowed?
d. SEC has no authority to inquire whether
the corporation has purposes other than A: No, such is in vague terms which is not sufficient. Vague and
those stated, and mandamus will lie to general terms must be avoided (Aquino, 2011).
compel it to issue the COI
Q: Must all the powers be stated in the AOI?
Purpose or purposes must be stated with sufficient clarity
A: No, it need not. Other powers are either implied or incidental
May be a. The effect of broad purposes or objects is (Aquino, 2011).
stated in to confer wide discretionary authority
broad terms upon the directors and management of

Place where principal office of corporation located
Purposes must be capable of being lawfully combined
City or a. The AOI must state the place where the
Sec. 10 allows the formation of corporations for any lawful municipality principal office of the corporation is to be
purpose/s, the purpose, where there are more than one, must be within the established or located, which place must
capable of being lawfully combined. Philippines be within the Philippines;
b. In order to fix the residence of the
a. Banks are prohibited from directly engaging in insurance corporation in a definite place instead of
business as the insurer; allowing it ambulatory for effective
b. Insurance companies are not allowed to engage in banking regulation and supervision of the
operations; corporation;
c. Manifest purpose of excepting such corporations from the c. City or municipality where the principal
general incorporation law is that they should be office is to be located;
restrained by strict requirements securing the safe
conduct and correct administration of their affairs; SEC Circ. No. 3, 2006.
d. Secondary purpose need not be allied to each other or to
the primary purpose provided they are not contrary to It is now required by the SEC that all corporations
law; and partnerships applying for registration should
e. But a non-stock corporation (educational and religious state in their AOI or Articles of Partnership:
corporation) may not include a purpose which would
change or contradict its nature as such; a. Specific address of their principal office,
f. SEC may reject the AOI of a non-srtock corporation if its which shall include, if feasible:
purpose is to engage in election campaign or partisan 1. Street number
political activity. 2. Street name
3. Barangay, city or municipality
Q: What are the reasons for statement of purpose/s? b. Specific residence address of each
incorporator, stockholder, director,
A: trustee, or a partner
a. A person who intends to invest his money will know Place where The place of the principal office does not mean the
where and in what kind of business or activity his money its books place where the business of the corporation is
will be invested; and records transacted but the place where its books and
b. Directors and officers of the corporation will know within are records are ordinarily kept and officers usually meet
what scope of business they are authorized to act; and ordinarily for the purpose of management the affairs and
c. May know by perusal of the articles whether the kept and transacting the affairs and transacting the business
transaction or dealing he has with the corporation is meetings of the corporation
within the authority of the corporation or not. held
Residence at For practical purposes, a corporation is in a
Q: What is the effect where primary or secondary purposes place where metaphysical sense a resident of the place where its
unauthorized? its principal principal office is located as stated in the AOI filed
office is with the SEC.
A: located
The place where the principal office of the
a. If the primary purpose of the corporation as stated in the corporation is located determines its residence and
AOI is an unauthorized one, the corporation has no legal the venue in an action by or against it.
existence even though other secondary lawful purposes
are included; NOTE: A corporation has only one residence at a
b. If the principal lawful purpose is specified, but the AOI or time.
COI assumes for the corporation the existence of powers
which it is not permitted to exercise, then this additional A corporation cannot be allowed to file personal
and unauthorized assumption may be treated as actions in a place other than its principal place of
surplusage and the corporation regarded as entitled to business unless such place is also residence of a co-
exercise lawful powers only. plaintiff or a defendant
Q: What is the effect where the corporation engages in its Change of An amended AOI stating new addresses must be
secondary instead of its primary purpose? address filed with the SEC.
A: NOTE: If the new address is located within the same

city or municipality, no corporate document is
GR: Primary purpose of a corporation as indicated in the AOI required to be filed with the SEC except notice
determines its classification. regarding the change of address
XPN: Where the corporation actually engages in one of its secondary Q: What is the importance of the principal office?
purposes instead of its primary purpose.

A: The principal office of the corporation is considered its place of 1. The amount of its capital or money contributed or donated
residence (Aquino, 2011). by specified persons
2. The names, nationalities, and residences of the donors or
a. The principal place of business may determine the venue contributors
of court cases involving corporations 3. The respective amount contributed by each
b. Summons and notices
Formulas:
Incorporating directors or trustees
Authorized capital stock = No. of shares X par value
Q: What are the matters which must be specified in the AOI? (in case of shares with par value)
Authorized capital stock = total of the products X par value

A: (in case of shares with diff. par value) of the number of share of such shares
In each class
1. Name
2. Nationalities NOTE: In case of shares without par value, the AOI need only state
3. Residence of the incorporators such fact, together with the number of shares into which said capital
4. Show at least a majority of the incorporators and residents stock is divided.
of the Philippines
The reason for this is that the price of no par value shares vary from
Q: What will enable the SEC to determine prima facie the time to time, and therefore, the total amount of the capital stock
compliance regarding the requirements of ownership by Filipino cannot be known until all of the shares are issued.
citizens?
Q: What is the rule in cases of businesses of corporation reserved
A: Statement of Nationalities of the incorporators for Filipino citizens?
Q: Is there a required the number of incorporators? A: Corporations which will engage in any business or activity
reserved for Filipino citizens shall provide in their AOI the restriction
A: against the transfer of stock or interest which reduce the ownership
of Filipino citizens to less than the required percentage of the capital
GR: It shall not be less than 5 nor more than 15 stock as provided by existing laws.
XPN: The board of directors of a non-stock corporation may be more Corporation de jure
than 15 in number as may be fixed in their AOI or by-laws (Sec. 92)
GR: In order to become a corporation de jure, the provisions
Q: What is the term of office of the incorporating directors of requiring the incorporation papers to be acknowledged as well as
trustees? assigned must be complied with.
A: Until their successors are duly elected and qualified. They are XPN: The acknowledgement of the signatures of the incorporators is
intended to be replaced by the regularly elected directors or not part of the AOI.
trustees who shall hold office for 1 year when the corporation is
organized by the adoption of by-laws at the first meeting of
stockholders or members.
Capital stock/capital and subscribers/contributors
Q: For stock corporations, their AOI must also indicate what

matters?
A:
a. The amount of its authorized capital stock in pesos

b. The number of shares into which it is divided
c. The par value in pesos of each share
d. The names, nationalities and residences of the original
subscribers
e. The amount of capital stock subscribed and paid by each
on his subscription
f. If some or all of the shares are without par value, such fact
Q: In case of non-stock corporations, what are the matters which

must be stated in the AOI?
A:

AMENDMENT OF AOI (Sec. 16) i. Acceptance of original charter; and
Q: What is a charter? 1. Application for a charter is sufficient

evidence of consent on their part;
A: It is an instrument or authority from the sovereign power 2. Once granted, no acceptance need be
bestowing the right or privilege to be and act as a corporation. shown;
3. They may be considered as having
NOTE: This term is used only with reference to special corporation made an offered and the State as
by act of the legislature. In case of corporation organized under a having accepted it.
general law, however, the corporation’s charter is not limited to its 4. If the Legislature offers a charter, an
AOI. acceptance must be shown;
5. An act of the Legislature authorizing
Q: Distinguish between Franchise and Charter. persons to become a corporate body
is, until accepted by persons
A: authorized, nothing but an offer on the
part of the State, which may be
FRANCHISE CORPORATE CHARTER withdrawn by it at anytime;
The right and privilege itself of Applies to the instrument
being a corporation bestowing such right and ii. Acceptance of amendment to existing charter;
privilege.
1. This is the right reserved to the State
Components of corporate charter when the charter was granted;
2. Though the State may reserve the right
As to a. The law under which it is organized; to amend the charter of a private
corporations b. AOI; corporation, it cannot compel the
formed c. By-laws; and members to accept the charter as
under the d. All applicable provisions of the amended, nor can it compel them to
general Constitution and the general laws of the accept the original charter;
corporation State in force at the time the corporation 3. Acceptance of an amendment may be
law, the is incorporated which are much a part of implied from the conduct of the
charter its charter as though expressly written corporation or its members and it will
consists of: therein. be conclusively presumed if the
As to a. Special law which creates the corporation; powers conferred by the amendatory
corporations b. Executive order of the president; act are exercised.
created by c. Rules and regulations applicable to such
special law, corporations; and B. Between the corporation and the stockholders
the charter d. All laws applicable thereto, including the
consist of: Corporation Code provisions of which a. The stockholders are presumed to have entered into such
apply suppletorily. contact with knowledge of the provisions thereof;
b. They are bound thereby;
Nature of corporate charter c. Rights as stockholders are defined and limited by the
charter.
Three-fold nature of a corporate charter
C. Between the stockholders inter se
A corporate charter is a contract:
a. Contract between stockholders;
a. Between the State and the corporation; b. Protection against attempted action by the corporation (in
b. Between corporation and its stockholders (or members); so far as the interest of dissenting stockholders are
and concerned.
c. Between the stockholders inter se. c. See section 81 (instances of appraisal right).
A. Between the State and the corporation Reserved power of the state to amend corporate charter
a. Corporations are created by an act of the sovereign but Constitutional a. Constitutional authority of Congress to
the Legislature cannot bring a private corporation into and statutory change or amend the charter of a private
existence of its own accord and without the consent of the authority corporation for the operation of a public
members of compose it; utility is expressly reserved by Sec.11,
b. Apply the principles governing offer and acceptance in the Art. XII of the Constitution.
formation of contracts. b. Statutory authority to alter or amend
c. The consideration for the grant of powers and privileges the corporate charter is impliedly
by the State is found in the liabilities and duties which the reserved by Sec. 145 of the Code:
incorporators assume by accepting the terms specified in
the charter. i. Limitation with respect to
vested rights that have accrued required vote of stockholders at a meeting duly called for
at the time of the enactment of the purpose. A mere written assent would not also be
the amendatory law; sufficient.
ii. Prohibition against laws NOTE: In such case, nothing can be done by proxy.
impairing the obligations of
contracts (Sec. 10, Art. III). Limitations on power of corporation to amend
c. Under the reserved power to repeal the a. Amendment of any provision or matters stated in the AOI
corporate charter, the legislature may is not allowed when it will be contrary to the Code, special
terminate corporate existence. law, or change any provision in the AOI stating an
Exercise of a. Dissolution of a corporation without accomplished fact;
power cause is void as impairing the obligation b. It must be for legitimate purpose;
of contract between incorporators and c. Must be approved by the required vote of the BOD or
the State. trustees and the stockholders or members;
b. With respect to franchise of a public d. Original articles and amended articles together must
utility, the only limitation is that the contain all provisions required by law to be set out in the
power can be exercised only “when AOI;
common good requires.” e. The articles, as amended, must be indicated by
underscoring the change or changes made, and a copy
Power of stockholders or members to amend AOI thereof duly certified under oath by the corporate
secretary and a majority of the directors or trustees
Power a. Conferred by Sections 16 (amendments stating that the amendment/s have been duly approved by
expressly in general—matters other than the the required vote of the stockholders or members must be
granted foregoing, including a change in the submitted to the SEC;
corporate name), 37 (extension or f. Filing fees must be paid;
shortening of the corporate term), and g. Amendments shall take effect only upon the approval of
38 (increasing or decreasing of the the SEC;
capital stock). i. Deemed approved by the SEC from the date of
b. Section 36(4); filing if not acted upon within 6 months from
c. Amendment must be approved by a said date for a cause not attributable to the
majority of the BOD or trustees. corporation, assuming that the amendments are
Matters not a. Portion stating the names of the not illegal;
subject to incorporators and the first set of ii. If the delay is attributable to the corporation, the
amendment directors/trusees; amendment cannot take effect without the
RATIO: This is an accomplished fact approval of the SEC;
b. Place and date of the execution of iii. Automatic approval under Sec. 16 does not apply
articles and the original subscriptions of to the dissolution of corporations in the light of
the incorporators cannot be changed or Sec.120;
amended; h. If the corporation is governed by special law, the
c. Names, etc of the subscribers, the amendments must be accompanied by the favorable
treasurer of the corporation elected by recommendation of the appropriate government agency
the subscribers and the witnesses cannot to the effect that they are in accordance with law;
be amended except to correct mistakes. i. In case of foreign corporations, they are merely required
to file, within 60 days after the amendment to the AOI
Necessity of stockholders’ or members’ meeting for amendment becomes effective with the SEC and in proper cases, with
the appropriate government agency, a duly authenticated
a. Amendment may also be effected by the “written assent” copy of the AOI;
of the stockholders: j. Such portion of the AOI which states an established or
i. representing at least 2/3 of the outstanding accomplished fact at the time of incorporation cannot be
capital stock of the corporation; or changed or amended.
ii. 2/3 of its members.
GROUNDS WHEN AOI OR AMENDMENT MAY BE REJECTED OR
NOTE: This means that such action need not be taken at a DISAPPROVED (Sec. 17)
meeting and upon a vote and even holders of non-voting
shares or non-voting members are entitled to vote on the Grounds for rejection of AOI or amendment thereto
amendment.
NOTE: The grounds are not exclusive.
b. If the amendment consists in extending or shortening the
corporate term (Sec. 37) or increasing or decreasing the a. SEC is required to give the incorporators a reasonable time
capital stock (Sec. 38), a meeting of the stockholders or with which to correct or modify the objectionable portions
members is necessary. of the AOI or amendment when the same is rejected or
c. In a close corporation, if the amendment of the AOI refers disapproved for non-compliance with the requirements of
to any of the matters mentioned in Sec. 103, the same the Code;
shall not be valid or effective unless approved by the
b. The decision of SEC is appealable by petition for review in CORPORATE NAME (Sec. 18)
accordance with the pertinent provisions of the Rules of
Court; Limitations upon use of corporate name
c. In case of corporations governed by special laws, the same
must be accompanied by the favorable recommendation Similarity GR: A corporation may choose and use any name
of the appropriate government agency (Monetary Board with another they see fit.
of Central Bank) to the effect that they are in accordance trade name
with law; XPN:
d. Before a foreign corporation can lawfully transact business
in the Philippines, it must first obtain a license to transact a. Identical with or
business in the country and a certificate of authority from b. Prejudicially similar to a name which was
the appropriate government agency; previously adopted and which is being
e. SEC shall not accept the AOI of any stock corporation used by another existing corporation or
unless accompanied by a sworn statement of the treasurer unicorporated association or a natural
elected by the subscribers showing the amount of the person as trade name; and
capital stock subscribed and paid; and c. Contrary to existing law
f. Action of SEC is not a ministerial function but involves the
exercise of discretionary power. i. As long as a corporation is existing
regardless of whether or not it is in
Suspension or revocation of certificate of registration of operation, its corporate name cannot be
corporators used by another group;
ii. To avoid confusion and unfair and
GROUNDS fraudulent competitions, opening the
door to frauds, promoting the evasion of
Under PD No. 902-A, the SEC may suspend or revoke: legal obligations and duties;
i. After proper notice and Test of a.

Priority of adoption;
ii. hearing infringement b.
Whether the similarity is such as to
mislead a person using ordinary care and
the franchise or certificate of registration of corporations, discrimination and the court must look
partnerships or associations upon the following grounds: beyond the record as well as the names
themselves;
a. fraud in procuring its Certificate of incorporation; c. Proof of actual confusion need not be
b. serious misrepresentation as to what the corporation can shown;
do or is doing to the great prejudice of, or damage to the d. Suffices that confusion is probably or
general public; likely to occur
c. refusal to comply with or defiance of a lawful order of the Part of name a. Corporate name shall contain the word:
Commission restraining the commission of acts which i. Corporation
would amount to a grave violation of its franchise; ii. Incorporated
d. continuous inoperation for a period of at least 5 years; iii. Foundation
e. failure to file by-laws within the required period; and b. Must submit an affidavit containing an
f. failure to file required reports in appropriate forms as unqualified undertaking to change the
determined by the SEC within the prescribed period. corporate name in the event that
another corporation, firm or entity has
EFFECTIVITY acquired a prior right to the use of said
name or one similar to it, signed by at
a. The SEC order of revocation is immediately effective; least 2 incorporators.
b. It may not continue to operate its business and issue Prohibited Prohibition regarding the use of certain words as
shares; use of certain part of the corporate name such as those which
c. Yet, it may sell its assets pursuant to Sec. 122 but it may words imply that a corporation is engaged in an activity
only purchase property if such purchase will be consistent not allowed by law to engage in:
with liquidation;
d. It may sue for the purpose of recovering its property; a. Using of the emblem, official seal and
e. Capacity of a corporation to institute an ejectment suit is name of the UN, both in its full or
not affected by the subsequent suspension and revocation abbreviated form, for commercial or
of Certificate of Registration (COR). business purpose;
b. Using the word “bonded” as a trade
LIFTING OF ORDER OF REVOCATION name or business name of those
operating or maintaining any warehouse
a. Lifting restores the corporation to its original status as if not licensed under Act. No. 3893;
there was no revocation order issued against it; c. No person, association or corporation,
b. Restoration of capacity to exercise all powers of a duly unless duly authorized to engage in the
registered corporation under the Corporation Code. business of:
i. Bank
ii. Quasi-bank have become distinctive so as to
iii. Trust entity distinguish not only the product and its
iv. Savings quality but also the name of the
v. Loan association producer of the service.
shall advartise or hold out as being engaged in Use of trade Requirements:
such business or use in connection with its name of
business title the word or words: another a. Corporate name shall not be identical,
i. Bank corporation misleading or confusingly similar to one
ii. Banking already registered by another
iii. Banker corporation with the SEC; and
iv. Quasi-bank b. Applicant shall at least contain one or
v. Quasi-banking more distinctive words to the proposed
vi. Quasi-banker name to remove the similarity or
vii. Savings and loan association differentiate it from the registered
viii. Trust corporation name.
ix. Trust company Use of a Requirements:
person’s full
d. No bank person, association or name or a. If he is a stockholder of the corporation
corporation, doing business of banking surname and;
but not authorized under Rural Bank Act b. Has consented to such use;
shall use the words “Rural Bank” as part c. If the person is already deceased, the
of its name or title; “savings and loan consent shall be given by his/her estate;
association (Sec. 7 of RA No. 3779); d. SEC may require an explanation for the
development bank (Sec. 16, RA No. reason for the use of a person’s name;
4093); “National” (Sec. 35 of PD No. e. Meaning of initials used in a name shall
694); be stated by the registration the AOI or
e. UN, Olympic, and Bureau; in a separate document signed by an
f. Financing company or finance company incorporator or director,
or finance and leasing company, Doctrine of A word or phrase originally incapable of exclusive
investment company or investment risk; secondary appropriation with reference to an article on the
g. Lending company and lending investor or meaning market might nevertheless have been used so long
pawnshop and so exclusively by one producer with
h. Practice of profession regulated by refe3rence to his article that the word or phrase
special law provides for permissible use has come to mean that the article was his product.
of the profession name in a firm,
partnership, or association; CASE:
i. Corporation which is a subsidiary of a
foreign firm may carry the name of the a. Philippine Nut Industry Inc. v. Standard
principal company with word Phil. or Brands, Inc.
Philippines; b. Lyceum of the Philippines v. CA
NOTE: Written consent of the mother Where a. Protection of prior user is not limited to
company must be submitted. business of guarding its goods or business from
j. Name of an internationally known junior actual market competition with identical
foreign corporation or one similar to it corporation or similar products of the parties but
may not be used by a domestic different or extends to all cases in which the use by
corporation unless it is a subsidiary and noncompeting the junior appropriator of the name is
the parent company consented to such likely to lead:
use; i. Confusion as to Source
k. Unless otherwise authorized, the use of: ii. Connection with the activites
i. National of the infringer;
ii. Bureau iii. When it forestalls the normal
iii. Commission potential expansion of its
iv. State business.
l. If full name of a person forms part of the
corporate name, the consent of such Remedy of corporation whose name has been adopted by another
person or his heirs must be obtained.
Injunction Corporation has an exclusive right to the use of its
Use of a. Merely descriptive of goods, services, name, which may be protected by injunction:
generic, places where made, character of
geographical business or name of the maker; a. Fraud upon the aggrieved corporation-
and b. GR: Corporation cannot acquire such i. Misleading
descriptive right is such names as to have their use ii. Likely to injure the exercise of its
terms and by others enjoined; corporate functions, regardless
names XPN: Secondary meaning acquired or
of intent; Former a. Mere fact that the former name is
iii.It is fraud on the corporation name of indicated in the certificate of filing of
which has acquired a right to same amended AOI would militate against
that name and perhaps carried corporation anyone using said name;
on its business thereunder, that b. Said previous name cannot be
another should attempt to use appropriated or used by any other person
the same name, or the same for a certain period to avoid confusion
name with slight variation Names of The corporate names of merged or consolidated
b. Interference with its business- merged or corporations may not be used by another
a. GR: Right of one corporation to consolidated corporation, without the consent of the surviving
enjoin the use of the name of a corporations corporation although there is dissolution of the
similar name by another depends absorbed corporation.
on whether such use has Name of a. Shall not be used by another corporation
interfered with the former’s dissolved within:
business without regard to corporation i. 3 years from the approval of the
whether it is commercial, trading or whose dissolution; or
or otherwise. registration ii. 6 years from the date of revocation
De- a. If restrained from using a name chosen, it has been b. Unless it has been allowed at the time of
registration may choose another name; revoked dissolution or revocation by stockholders
b. Section 18- empowers SEC to de-register a or members who represent majority of
corporate name deceptively similar to that the outstanding capital stock or
already used by an existing corporation for membership of the corporation
protection of the complaining corporation Name of New corporation is in the same position as the
and of the public. dissolved original corporation would have been had it
corporation continued to exist and may therefore enjoin the use
acquired by of such name by another.
Change of corporate name new
corporation
Compliance A corporate name is an artificial name and is selected Name of When the corporate name is abandoned due to the
with with an object and may be changed and a new one corporation dissolution of the corporation through expiration of
formalities taken. dissolved its corporate life, such corporate name may be used
through by another corporation.
Requisites: expiration of
term
1. Amendment of the AOI;
2. Filing of the amendment with the SEC Misnomer of a corporation
NOTE: Mere approval by the stockholders of the GR: Mere misnomer of a corporation in a bond, note or other deed
amended AOI does not automatically change the or contract does not render the same invalid or inoperative but the
name of the corporation as of that date. corporation may sue or be sued thereon in its true name.
Effectivity a. When a change of name is approved, it s
required that the commission must issue an Nor will a grant or conveyance to or by a corporation be avoided
amended COI under the amended name. because of a misnomer.
b. It is deemed effective:
i. as of the date of SEC’s approval of A corporation if sued by the wrong name is bound if duly served.
the amended articles; or
ii. from date of filing with it if not COMMENCEMENT OF CORPORATE EXISTENCE (Sec. 19)
acted upon within 6 months from
the date of filing for a cause not Acquisition of juridical personality
attributable to the corporation.
Effect a. An authorized change in the name of the Issuance of Corporation commences to have juridical personality
corporation has no more effect upon its certificate and legal existence only from the moment the SEC
identity as a corporation than a change of of issues to the incorporators a COI under its official
name of natural person upon his identity; incorporati seal.
b. It does not affect the property, rights or on (COI)
liabilities of the corporation, nor lessen or a. COI is a final determination of the
add to its obligations; corporation’s right and competence to
c. It must sue and be sued in its new name; transact business or enter into contracts in
d. Not a new corporation nor the successor of its name;
the original corporation.
Q: What is the effect of non-registration?
Use of changed or abandoned corporate names
A:

b. An entity without necessary corporate legal NOTE: Stockholders of a de facto corporation enjoy exemption from
personality has the status of an personal liability for corporate obligations as do stockholders of de
unregistered association and members are jure corporations.
personally liable for their acts or contracts;
c. COI gives juridical personality to a Valid law
corporation
d. Places it under jurisdiction of the There must be a law authorizing it to be a corporation de jure for
Commission; there cannot be a corporation de facto when there cannot be one
e. Jurisdiction is not affected even if the de jure.
authority to operate certain specialized
activity is withdrawn by the appropriate a. There cannot be a corporation de facto under an
regulatory body other than the SEC. unconstitutional statue for such statute is void and a void
f. Corporation must formally organize and law is no law;
commence the transaction of its business b. Corporation cannot be recognized as having a de facto
or the construction of its works within 2 existence when its purpose is prohibited by law or
years from the date of its incorporation or contrary to public policy;
otherwise, its corporate powers shall cease c. Neither can there a corporation for the practice of a
and it shall be deemed dissolved. learned profession in the absence of law expressly
Filing of a. In case of religious corporations, the SEC is permitting the organization of such corporations.
AOI not required to issue a COI;
b. SEC. 112 states that from and after the Bona fide attempt to incorporate
filing with the commission of the AOI, the
chief archbishop shall become a There must be a bona fide attempt to comply with the requirements
corporation sole. of the law which goes far enough to amount to colorable compliance
Registratio a. Cooperatives acquires juridical personality with the law.
n of upon registration with Cooperatives
cooperativ Development Authority; Creation of Q: Cite examples of defects which will preclude the
e b. Need not be registered again with the SEC corporation creation of even a de facto corporation.
precluded
A:
DE FACTO CORPORATION (Sec. 20)
1. Absence of AOI;
Q: What is a de jure corporation? 2. Failure to file AOI with the SEC; and
3. Lack of COI from the SEC
A: It is one created in strict or substantial conformity with the
mandatory statutory requirements for corporation and the right to NOTE: Filing of AOI and the issuance of COI may be
exist as a corporation cannot be successfully attacked or questioned considered essential for the existence of a de facto
by any party even in a direct proceeding for that purpose by the corporation.
State. Creation of Q: Cite examples of defects which do not preclude
de facto the creation of a de facto corporation.
Q: What is a de facto corporation? corporation
results A:
A: It is one which actually exists for all practical purposes as a
corporation but which has no legal right to corporate existence as 1. AOI fails to state all the matters required by
against the State. Code to be stated or state some of them
incorrectly;
It is one which has not complied with all the requirements necessary 2. Name of corporation closely resembles that
to be a de jure corporation but has complied sufficiently to be of a pre-existing corporation that will tend
accorded corporate status as against third parties although not to deceive the public;
against the State. 3. Incorporators or a certain number of them
are not residents of the Philippines;
Q: What are the requisites of a de facto corporation? 4. Acknowledgement of AOI or COI is
insufficient or defective in form or it was
A: acknowledged before the wrong officer;
5. Percentage of Filipino ownership of the
1. A valid law under which a corporation with powers capital stock required for the business is
assumed might be incorporated; less than that prescribed by law;
2. Bona fide attempt to organize a corporation under such 6. Minimum paid-up capital stock has not
law; and been paid and received by the corporate
3. Actual use or exercise in good faith or corporate powers treasurer contrary to his affidavit;
conferred upon it by law. 7. Failure to submit its by-laws on time
NOTE: The above are inadvertent or minor defects or

which can be excused to prevent injustice.
Colorable compliance with law In case of de facto corporation, its existence as corporation cannot
be collaterally attacked either by the State or by private individuals.
There must be colorable compliance with the statute, but there
need not be a substantial compliance. Substantial compliance makes a. State must bring direct proceeding—quo warranto- against
the corporation de jure. the corporation to oust it from the exercise of corporate
powers usurped by it and to have it dissolved;
a. Mere naked claim and assumption of corporate name and b. As to individuals dealing with it as corporation—the
capacity will not be sufficient to give a pretended stockholders or members of both are alike protected from
corporation the de facto status. individual liability for debts except to the extent provided
b. It is not enough to show that the associates have intended by the charter or act of incorporation.
to incorporate and have agreed among themselves to act
and have acted as if they were a corporation; Direct attack/collateral attack of corporate existence
c. The efforts to incorporate must give an appearance of
sufficiency of compliance with statutory requirements so Direct attack Collateral attack
that the incorporators may in good faith suppose that they One whereby the state, in a One whereby corporate
have actually become incorporated. proceeding for that purpose, existence is questioned in some
attacks the existence of an incidental proceedings not
User of corporate powers in good faith association claiming to be a provided by law for the express
corporation. purpose of attacking the
There must be showing of actual user or exercise of corporate corporate existence.
powers or franchise. Can only be instituted by the
government through the
User a. User consists in an enjoyment and Solicitor General by quo
contemplated exercise of such corporate franchises warranto proceedings.
and powers as would be given by law to
an association if the attempted Rule against collateral attack
organization has been perfected;
b. Corporate acts as distinguished from acts Rationale a. Based on public policy
which might as well be performed by an b. Individual right is not evaded—if The State
incorporated association or from acts of as grantor of the authority to incorporate
individuals which would not be corporate remains silent, an individual would not be
acts if there were a charter. allowed and permitted to raise the inquiry;
Duty to a. Must act in good faith in claiming to be c. It would produce endless confusion and
correct defect corporation and exercising corporate hardship and probably destroy the
if discovered powers; corporation if the legality of its existence
b. The privilege of de facto existence is lost could be questioned in every suit to which
if after the incorporation, the it is a party
incorporators discovered that they have When rule When the lack of right or the wrongdoing of the
not complied substantially with the law not corporation is in issue because such as denial of its
and still continued transacting business applicable right to enforce contracts entered into without
as a corporation without doing anything compliance with prohibitions of express or implied
to correct the defect statutory or public policy.
Q: What is the basis of de facto doctrine? Where organization not even a de facto corporation
A: Direct or Failure to comply with the condition precedents

collateral prevents the coming into existence of any
a. To promote the security of business transactions and to attack corporation either de jure or de facto:
eliminate quibbling over irregularities;
b. Third person will rarely be prejudiced if the company is a. GR: Question may be raised collaterally as
recognized as a corporation in spite of minor defects in its well as directly and by private individuals as
formation; well as by the State;
c. Unjust to allow a wrongdoer to quibble over such XPN: Estoppel
objections to escape liability from wrongdoing; b. Question is whether or not there is a
d. Unjust to allow a claimant against a supposed company to corporation de facto. If there is, he cannot;
assert the individual liability of innocent passive investors otherwise, he can.
on ground of flaws in the formal steps of incorporation Capacity to If party is not either de jure or de facto, it has no legal
when they have attempted in good faith to comply with sue or be capacity to sue and be sued
statutory requisites and the objecting party is not sued
prejudiced. Liability as a. The incorporators are liable as partners
partners together with stockholders who subscribed
Questioning validity of corporate existence to stocks knowing the failure of the

attempted incorporation of the business; all respects valid and even against the
b. It is the regular courts not the SEC that state, except in direct proceedings to arrest
have the jurisdiction over disputes or its usurpation of power
controversies among them. Liability to property of de facto corporation is subject to taxation
taxation in the same manner as though it were a de jure
Estoppels A private person may be barred from raising the corporation and under statutes relative to the
as a objection on the ground that he is stopped by his taxation of corporations of the latter class
defense conduct, as having dealt with the pretended Binding valid and binding against all persons except the State
corporation as a corporation or by having held it out effect of
to the public as legally constituted corporation. contracts
Protection Entitled to protect itself from unauthorized acts
Proof of corporate existence against
unauthoriz
Proof of de a. In quo warranto proceedings to test the ed acts
jure right of an alleged corporation to exercise
existence corporate powers, corporate existence de Liabilities of officers and members of de facto corporation
jure must be shown;
b. It must be made to appear that there is a In general a. officers and directors of a de facto
valid law creating or authorizing such a corporation is subject to all liabilities and
corporation that there was a valid penalties attending to officers and directors
organization under it and a substantial duly chosen by a corporation de jure;
compliance with all conditions precedent. b. their acts are binding when such acts would
Proof of de a. If the question is raised collaterally, it is be within the power of such officers if the
facto sufficient if a de facto existence be shown; corporation were one de jure
existence b. Admissible whenever the question comes Liability as a. members of de facto corporation cannot be
up collaterally: partners to held liable as partners by third persons who
i. as in a criminal prosecution for third deal with them merely on account of a
forgery or any other crime persons technical defect in the formation of the
against an alleged corporation; corporation;
or b. In contrast, where an attempt to organize a
ii. in a civil proceeding other than corporation fails by omission of some
proceedings by the state to test substantial step or proceedings, there are
the existence of the alleged liable as partners.
corporation. c. QUESTION: Whether what has been done
c. Necessary to show: toward incorporation and organization is
i. a law under which the alleged sufficient to constitute a corporation de
corporation might have been jure or de facto.
formed, Liability When persons associate together and do business as
ii. a colorable bona fide compliance among a corporation and the latter is defectively organized,
with that law and themselves their rights, duties and liabilities should be
iii. an assumption or user of determined and governed by the express or implied
corporate powers. terms, conditions and limitations contemplated by
Proof of a. necessary to show facts that will operate as their agreement.
facts an estoppel;
operating b. where a person contracted or dealt with an CORPORATION BY ESTOPPEL (Sec. 21)
as an association as a corporation—prima facie
estoppels evidence of the corporate existence of the Estoppel to deny corporate existence
body as against him, as in action by the
alleged corporation on a subscription to its An unincorporated association which represented itself to be a
stock. corporation will be stopped from denying its corporate capacity in a
suit against it by third person who relied in good faith on such
Powers and liabilities of de facto corporation representation.
In general a. de facto corporation is practically as good It cannot allege lack of personality to be sued to evade its
as a de jure corporation; responsibility for a contract it entered into and by which it received
b. has same powers and is subject to the same advantages and benefits.
liabilities, duties and responsibilities;
c. bound by such acts as might rightfully Principles as a. An organization which has not complied
perform if it were a corporation de jure to de facto with the condition precedent to even de
d. under the protection of the same law and corporation facto existence is not a corporation;
governed by the same legal principles as de not b. Yet, the incidents of a corporate existence
jure corporations; applicable may exist as between the parties by
e. it occupies the same position as though in virtue of an estoppel;

c. Ostensible corporation; term is a corporation by estoppel. It can no longer existing
d. A corporation de facto cannot be created fact and in law except only for purposes of liquidating its
by estoppel, the only effect of an estoppel affairs;
being to prevent the raising of the c. The doctrine of estoppel applies to both domestic and
question as to the existence of a foreign corporations;
corporation. d. Third persons who deal with such corporation recognizing
Jurisdictional a. Doctrine of corporation by estoppels it as such and the pretended corporation itself, are
requirements cannot override jurisdictional estopped from denying its corporate existence and raising
not subject requirements; and the defense of its lack of corporate personality for the
to estoppel b. Jurisdiction is fixed by law and is not purpose of:
subject to agreement of the parties. i. defeating a liability growing out of the
Reason and a. Principles of equity and is designed to contractual relation between them and such
foundation prevent injustice and unfairness; entity; or
of the b. When there is no third person involved ii. any tort committed by it as such;
doctrine and the conflict arises only among those e. But one who is induced to deal with an apparent
assuming the form of a corporation who corporation by fraud will not be estopped to dney the
know that it has not been registered— corporate existence.
there is no corporation by estoppel. f. Persons not stockholders or members who assume to act
c. Applies only to third party when he tries as corporation knowing it to be without authority to do so
to escape liability on a contract from shall be liable as general partners for all debts, liabilities,
which he has benefited on the irrelevant and damages incurred or arising as a result therof.
ground of defective incorporation.
d. Since it cannot create agents or confer Persons liable as general partners
authority on another to act in its behalf—
those who act or purport act as its QUERY: Are both active and inactive members of an unsuccessfully
representatives or agents do so without attempted corporation liable as partners?
authority and at their own risk;
e. A person acting or purporting to act on American Law
behalf of a corporation which has no valid
existence assumes such privileges and GR: Active managerial stockholders are liable as partners, upon
obligations and becomes personally liable failure of the attempted incorporation, both de jure and de facto.
for contracts entered into for other acts
performed as such agents. i. Managing stockholders are personally liable as
partners;
Corporation by estoppel without de facto existence ii. But the subscribers are not;
iii. Creditors of the supposed corporation could recover
RULE: A corporation must have at least a de facto existence before from subscribers to stock and inactive members of
there can be an estoppel to deny its existence. the corporation to the extent only of their unpaid
subscription.
Yet, estoppel prevails notwithstanding that not all the three
requisites necessary to constitute as association of persons a de Pioneer Insurance and Surety Corp. v. CA
facto corporation are present. Thus, corporation by estoppel may
arise even if no de facto corporation exists. While stockholders of defectively incorporated association become
partners inter se, such relation does not necessarily exist, for
a. Corporation by estoppel has no real existence in law; ordinary persons cannot be made to assume the relation of
b. It is neither de jure nor de facto; partners, as between themselves, when their purpose is that no
c. Exists only between persons who misrepresented their partnership shall exist; it should be implied only when necessary to
status and the parties who relied on the do justice between the parties.
misrepresentation.
One who takes no part except to subscribe for stock in a proposed
Estoppel of persons dealing with a corporation corporation which is never legally formed does not become a
partner with other subscribers as liable as such in an action for
A party may be estopped fro denying its corporate existence. settlement of the alleged partnership and contribution.
a. Stockholders or members of a pretended or ostensible Lim Tong Lim v. Philippine Fishing Gear Industries
corporation:
i. Who participated in holding it out as a Yet, a third party who, knowing an association to be
corporation are generally estopped or precluded unincorporated, nonetheless treated it as a corporation and
to deny its existence received benefits from it, may be barred from denying its corporate
ii. Against creditors for purpose of escaping liability existence in a suit brought against the alleged corporation.
for corporate debts or for unpaid part of a
subscription of stock Under law on estoppel, those acting in behalf of a corporation and
b. Corporation which continues its business instead of those acting in behalf of a corporation and those benefited by it,
liquidating its affairs after the expiration of its corporate knowing it to be without valid existence, are liable as partners.
EFFECTS OF NON-USE OF CORPORATE CHARTER AND CONTINUOUS Formal organization and commencement of business
INOPERATION OF A CORPORATION (Sec. 22)
a. Legal existence is achieved from date the SEC issues a COI
Statutory requirements before and after incorporation under its official seal
b. But formal organization brings it to life
a. Provisions which are mandatory- non-compliance with its
terms will prevent the creation of a de jure corporation; Acts Q: What is formal organization?
b. Provisions which are merely directory- a departure will not constituting
have the same effect. formal A: It is the process of structuring the cooperation so
organization that it can carry out the purposes for which it has
NOTE: Strict compliance with the term of the statute is not required. been incorporated.
The law requires only substantial compliance. Yet, there are
conditions which cannot be dispensed with. a. Adoption of the by-laws
b. Filing of by-laws with the SEC (Sec. 46)
Mandatory provisions Directory provisions c. Election of BOD and of officers by the BOD
Prescribe formalities for Regarded as relatively pursuant to the by-laws (Sec. 25);
incorporation which are inconsequential so that failure d. Establishment of the principal office
designed to protect the public. to comply with a directory e. Providing for the subscription and
provision will not be fatal to a payment of capital stock;
valid incorporation. f. Taking such steps as are necessary to
May either be condition enable the corporation to transact the
precedent or subsequent legitimate business
Substantial Strict compliance is not required
Condition precedent compliance
sufficient
a. They are those conditions non-compliance of which will Acts a. Performance of preparatory acts geared
prevent the legal existence of corporations; constituting toward the fulfillment of the purposes for
b. Examples: commencem which it was established:
ent of i. Entering into contracts
i. Filing of AOI with the SEC (Sec. 14); business ii. Negotiation for lease or sale of
ii. Issuance of COI by the SEC (Sec. 19); properties to be used as
iii. Minimum number of 5 incorporators (Sec. 10); business or factory site
iv. Legal requirement under Sec. 13 that 25% of the Effect of a. Continuous inoperation for 5 years- shall
authorized capital stock must be subscribed and subsequent be a ground for the suspension or
25% thereof paid. continuous revocation of its corporate franchise or
inoperation COI but notice and hearing in such case
Condition subsequent are required under PD No. 902-A.
b. Corporation continues to exists
a. They are those conditions to be complied with after notwithstanding its non-operational
acquiring corporate existence in order that a corporation status, until revocation or cancellation of
may legally continue as such; its COR or is dissolved in accordance with
b. Sec.22- two required acts of organization and law.
commencement of its business operations: c. Yet, it the non-use is due to causes beyond
its control, the effects mentioned shall not
i. Failure to comply with which will result in the take place.
automatic cessation of corporate powers and
the dissolution of corporation;
ii. Not even a de facto corporation and thus may be
attacked collaterally; TITLE III
iii. Corporation may be treated as corporation by BOARD OF DIRECTORS/ TRUSTEES/OFFICERS
estoppel;
iv. According to SEC, the dissolution under Sec. 22 is BOARD OF DIRECTORS OR TRUSTEES (Sec. 23)
not automatic. The SEC will take action on the
non-operational status of a corporation only Structure of the corporate organization
after the lapse of 2-year period;
v. Yet, the corporation is given a chance to show TRI-LEVEL STRUCTURE
that its failure to organize and commence
business is due to causes beyond its control. a. At the base are the shareholders or members whose vote
is required to elect the BOD and to pass on other major
c. Non-compliance will not affect the corporate existence corporate actions;
although it can be a ground for proceedings by the State to
forfeit its charter
d. E.g: Sec 74—keeping of books and records
b. Next level: directors who constitute the policy-making faith or negligence;
body of corporation and select the officers annually; c. GR: Business judgment rule- courts
business of a corporation shall be managed by its BOD; cannot undertake to control the
c. At the top: officers who have some discretion but in discretion of the BOD about
general deemed to execute administrative matters as to which they
i. BOD and corporate officers are referred to as have the legitimate power of action and
management. They are corporate officers given the contracts intra vires are binding upon the
authority to implement the policies determined by the corporation and courts will not interfere.
BOD as the governing body of the corporation. XPN: unless such contracts are so
ii. Corporate powers may be directly conferred upon unconscionable and oppressive as to
corporate officers or agents by statute, the AOI, by-laws amount to wanton destruction of the
or by resolution or other act of the BOD. rights of the minority.
d. As to its corporate and management
Corporate powers exercised by BOD or trustees decisions, the State will generally not
interfere with the same;
Corporations being invisible can only act and contract through the e. Its acts or contracts are presumed to be
aid and by means of individuals- those holding corporate offices or valid and regular;
agents properly appointed as such. f. Any corporate act which does not fall
under any of the transactions requiring
Governing a. Corporation can act only through its BOD- stockholder’s or member’s approval can
body of the stock corporation and BOT(trustees)-non- be carried out by mere board resolution
corporation stock corporation; although the activities or transaction
b. They are the governing body of the involved may span beyond the term of
corporation chosen by the stockholders or directors or trustees and entail
members; obligations to be borne by succeeding
c. Contracts or acts of a corporation must be boards;
made either by the BOD or BOT or by g. Minority directors or stockholders cannot
corporate officer duly authorized by the come into court upon allegations of want
board; of judgment of lack of efficiency on part
d. In the absence of authority or valid of the majority and change the course of
delegation from the BOD or BOT, no administration;
person can validly bind a corporation.
Binding a. Stockholders or members elect a BOD or
effect of BOT to oversee the management and RATIO:
stockholders’ operation of the corporation; a. Stockholders may have all the profits but shall turn over to
action b. Stockholders or members are not agents a small and compact body-BOD- the exclusive authority to
of the corporation and cannot bind it; manage and control the transaction of its business and the
c. Stockholders or members only have use of its assets, power of stockholders being limited to a
indirect control through their votes few specified matters concerning internal affairs;
XPN: some powers reserved by law to b. Necessary to efficiency especially in large organization;
stockholders, directors or trustees— c. Stockholders are too numerous and scattered and
unfamiliar with the business of a corporation;
i. To determine policy d. If they are not satisfied with the policies or management
ii. Enter into contracts of the BOD, the remedy is to replace them;
iii. Conduct the ordinary business of the e. In a close corporation, the AOI may provide that the
corporation (not requiring the consent business of the corporation shall be managed by the
or approval of the stockholders); stockholders of the corporation rather than by a BOD.
d. Contracts between a corporation and Nature of powers of BOD or BOT

third persons must be made by or under
the authority of its BOD or BOT and not by Original and a. Stockholders do not confer nor do they
its stockholders; undelegated revoke these powers;
e. Fiduciary relationship between b. They are received from the State in the act
stockholders and the BOD; of incorporation;
f. It is the prerogative and discretion of the c. They cannot exercise powers which the
BOD of a parent or holding corporation to corporation does not possess;
choose its nominees in the BOD of its d. Acts of management pertain to the board
subsidiaries; and those of ownership to the
stockholders or members;
Extent of a. As long as the BOD act honestly and their
juridical acts or contract do not disregard the Delegation Holds that directors are the officers and agents of
review rights of the minority, the courts will not theory the corporation, representing the interests of that
interfere; abstract legal entity and of those who owns shares
b. Not liable for losses not amounting to bad of stock and as such, they can bind the corporation
provided they act within the scope of their policy, the general manager may bind the company
authority. without formal authorization of the BOD established by:
Directly a. GR: The stockholders or members cannot
conferred by control their actions or exercise of i. Proof of course of the business;
statute judgment vested in them by virtue of their ii. Usages and practices of the company;
office; iii. Knowledge of the BOD of acts and doings of its
b. Once directors or trustees are elected, subordinates in an about the affair of the
stockholders or members relinquish corporation.
corporate powers to the board as d. Ratification in a subsequent meeting:
provided by law.
i. Express- by formal affirmative vote or resolution
Limitations on powers of BOD or BOT of the board
ii. Implied-by acts showing approval or adoption of
a. See Sections 31-34; the contract or by acceptance and retention of
b. 3 limitations: benefits showing therefrom;
iii. Such ratification relates back to the time of the
i. Limitations or restrictions imposed by the contract and is equivalent to original authority.
Constitution, statutes, AOI, or by-laws of the e. Directors or agents held out by the corporation to the
corporation; public as possessing power to those acts:
ii. Cannot perform constituent acts- acts involving i. May be presumed from the act of recognition;
fundamental or major changes in the ii. Stockholders are the residuary owners, and the
corporation which require the approval or rule requiring director’s meetings to authorize
ratification of the stockholders or members; acts is for their benefit
iii. Cannot exercise powers not possessed by the f. Where the stockholders, by acquiescence, invest the
corporation. executive officers with powers of the directors as the usual
method of doing business, the board being inactive;
c. Powers referred only to the ordinary business transactions g. Waiver of the necessity of the BOD;
of the corporation does not extend beyond the h. By stockholder’s agreement as where nor CRs, minority
management of ordinary corporate affairs nor beyond the stockholders, or other persons of the public are affected;
limits of its authority; NOTE: Mere lack of quorum in the board alone where the
d. Directors of a corporation presumptively serve without body is not inactive would not justify stockholder’s action;
compensation and in the absence of express agreement or i. By-laws may create an executive committee with authority
resolution in relation thereto, no claim can be asserted to act on such specific matters within in the competence
therefor. of the board;
j. Entering into management contract under which it
Powers exercised by the BOD/T as a Board delegates the management of its affairs to another
corporation for certain period of time;
GR: k. In a close corporation.
a. BOD/T must act together as a body in a lawful meeting,
not individually or separately, in order to bind the Power of directors or trustees to delegate authority
corporation by their acts;
b. They must meet as directors or trustees and act at a GR: In the absence of authority from the BOD, no persons can validly
meeting at which there is quorum. bind a corporation.
RATIO: i. Although it cannot complete abdicate its power and

responsibility to act for the juridical entity, the board may
a. A meeting is necessary in order that any action may be expressly delegate specific powers to the president or any
deliberately adopted, after opportunity for discussion and of its officers;
an interchange of views; and ii. Directors/trustees may delegate to agents of their own
b. Agents of the corporation managing its affairs, directors or appointment the performance of any act what they
trustees have no power acting individually to bind the themselves can legally perform;
corporation. iii. This is true even in matters involving the exercise of
judgment and discretion;
XPNs: RATIO: Necessity and usage for the directors or trustees
cannot attend to the details and current business of the
a. Where there are extraordinary situations or conditions to corporation.
justify the act of stockholders or corporate officers to iv. The delegation must be for specific purposes
make a board action as nothing more than a mere
formality;
b. Directors happen to be the sole stockholders; XPNs:
c. When the acts of the general manager are authorized by
the BOD either expressly or impliedly, to bind it by a. Discretionary powers which are vested exclusively in the
contract- as a matter of general practice, custom and BOD or are especially delegated to them;

b. They cannot delegate entire supervision and control of the stockholders of record of the corporation, it follows
corporation to others for this is contrary to Sec. 23; that there must at least be 5 stockholders in a
c. Neither can it delegate special powers especially conferred corporation
upon it by a resolution of the stockholders or members of Ordinary GR: May be more than 15 but not less than 5 in
the corporation. non-stock number with a term of office of 1/3 of their number
corporation expiring every year
Term of office of directors or trustees XPN: Unless otherwise provided in the AOI or by-
laws
One year GR: The directors/trustees/officers of the Close The AOI may provide that the business of the
corporation shall serve only for the term as fixed in corporation corporation shall be managed by its stockholders
the by-laws. rather than by a board of directors in which case no
meeting of stockholders need be held to elect
Q: What is a term? directors
Non-stock Shall not be less than 5 nor more than 15 provided
A: It is the fixed and definite period of tine which educational that the number shall be in multiples of 5 with a
the law prescribes that an officer may hold office corporation term of office of 1/5 of their number expiring every
and hold-over does not change the length of term year
but results in the shortening the period served by Corporation No board of directors or trustees as it consists of
his successor. sole one member or corporator only
Religious Shall not be less than 5 nor more than 15
Hold-over a. Upon failure of quorum at any meeting of societies
the stockholders or members called for an
election, the directorate naturally holds Election of less than the required number
over and continues to function until
another directorate is chosen and Q: What is the effect of failure to elect the required number of
qualified; directors or trustees?
b. Failure to elect does not terminate the
terms of incumbent officers nor dissolve A: It does not invalidate the title of those elected as long as they
the corporation constitute a quorum. It merely gives rise to vacancies of seats in the
c. “hold over” implied that the office has a board which may be filled up in a subsequent special stockholder’s
fixed term which has expired, and the meeting duly called for the purpose.
incumbent is holding the succeeding term;
d. The corporation should as soon as Qualifications of directors or trustees
possible, call a special meeting for such
purpose with proper notice given to all STOCK a. Every director (including incorporating
stockholders or members; CORPORATIONS director) must own at least 1 share of
e. RATIO: It accords validity to what would the capital stock
otherwise be deemed as dubious b. The share of stock held by the director
corporate acts and gives continuity to a must be registered in his name on the
corporate enterprise in its relation to books of corporation
outsiders. c. Every director must continuously own
f. The old holdover officer is a de facto at least a share of stock during his
officer and by fiction of law, his acts as term; otherwise, he shall automatically
such are considered valid and effective; cease to be a director
g. The regular election of directors as stated d. A majority of directors must be
in the by-laws cannot be dispensed with residents of the Philippines
by the board in order to extend the term NON-STOCK a. Must be members in good standing
of the incumbent. CORPORATIONS b. A majority of them must be residents
Modification a. Unlike in case of non-stock corporations of the Philippines
of term and educational corporations, stock
corporations are not authorized to divide Q: What does the phrase “must be residents of
members of its BOD into groups with each the Philippines” mean?
group having a different term of office;
b. Term of office being fixed by law, the A: It refers to legal residence (animus manendi)
same cannot be shortened or extended by from which a person could or might depart or be
agreement of the parties or by those absent temporarily for a certain purpose and to
interested in the position. which he always intended to return.
Number of directors or trustees to be elected Natural persons contemplated by law
Stock GR: Not less than 5 nor more than 15; GR: Only natural persons can be elected as directors or trustees and
corporation XPN: Otherwise provided by the Code or special law they must be elected among the stockholders or members
Since members of board are required to be

XPN: A corporation which owns shares of stock or is a corporate entering the duties of his office has the
member of another corporation can designate by board resolution effect of validating his election as director
its officer or representative to sit in the latter’s board and thus Co-owners of Where the system of absolute community governs
qualifying him to be elected as director or trustee (SC Opinion 05-06, shares the property relations between the husband and
2005). wife, they shall be considered as one stockholder.
Citizenship requirement Reason for the requirement
GR: No citizenship requirement demanded of the members of the A man with a financial interest at stake will devote more attention to
board of directors the business.
XPNs: Additional qualifications in the by-laws
1. Corporations not organized under the Corporate Code. a. Additional qualifications may be prescribed by the by-laws
Example: General Banking Act of 2000, Rural banks, and but their qualifications may not be modified if such
registered investment companies modification would be in conflict with the requirements
2. Under the Constitution, aliens may not be elected as prescribed in the code;
directors or officers of corporations engaged in business or b. By-laws may not provide that a director need not be
industries which are totally or partially nationalized owner of stock;
business or industries c. An amendment to the by-laws to the effect that no person
shall qualify or be eligible for nomination or election to the
Stock ownership requirement BOD if he is engaged in any business which competes with
or is antagonistic to that of the corporation was sustained
Holder of GR: The person who holds the legal title to the as valid;
legal title stock as shown by the books of the corporation is d. Additional qualifications of directors or trustees cannot be
qualified although some other person may be the enforced unless approved by the stockholders or members
beneficial owner of the stock recorded in his name and contained in the by-laws of the corporation.
NOTE: A mere proxy who is not a stockholder Effect of want of eligibility

cannot be elected as a member of a corporation’s
board of director or trustees a. Votes cast for a person who is not eligible as director
Voting A voting trustee may now be considered as the cannot elect him;
trustee legal owner of the shares transferred to him by b. Yet, the ineligibility of a person who has been elected an
virtue of a voting trust agreement, and therefore, officer will not invalidate his acts as such;
eligible to office of director. c. Persons dealing with a corporation are not required to
Transferee of a. A person to whom one share of stock has ascertain whether the directors/trustees/officers have the
qualifying been transferred for the purpose of qualifications prescribed by the by-laws;
share qualifying him as a director is eligible. d. Acts of officers are valid so far as third persons are
b. Ownership of the qualifying share need only concerned although he may not possess the qualifications
be in a nominal capacity, with the beneficial prescribed.
title remaining in the transferor who or
which actually owns the share. ELECTION OF DIRECTORS/TRUSTEES (Sec. 24)
c. The transfer need not comply with the
restrictions in the AOI such as giving the Election of directors or trustees
corporation the right of first refusal thereon
or prohibiting the transfer of founder’s Q: What are the limitations or conditions in the election of
shares directors/trustees?
Pledge or A person to whom shares have been transferred
pledgor of on the books of the corporation as pledge is not A:
shares qualified to be a director because he holds the
shares merely as security and not as owner 1. In a meeting called for the election, there must be present
Subscriber of Cannot be eligible as director since the holder does in person or by representative authorized to act by written
shares held in not become the owner of said shares until the proxy, the owners of majority of the outstanding capital
escrow conditions for their release are fully met stock, or if there be no capital stock, a majority of the
Transferee of The subsequent purchase by him of shares does members entitled to vote:
shares he not revest him with title to his former position a. In determining the majority of the outstanding
previously capital stock, non-voting stocks are to be taken
sold into account although they are not entitled to
Transferee at a. It is not essential to the validity of the vote;
time of election of one as a director that he be a b. Voting is based on the number of shares (1
assumption legal owner of stock at the time of the share-1 vote);
of office election. c. Creditors of the corporation cannot be given the
b. His subsequent acquisition of stock before right to vote at the meeting for election of
directors/trustees
2. Election must be by ballot if requested by any voting
stockholder or member; this is the exception rather than Straight Every stockholder may vote such number of shares
the rule; voting by viva voce or roll call is valid; voting for as many persons as there are directors to be
3. Stockholder cannot be deprived in the AOI or in the by- elected
laws of his statutory right to use any of the methods of Cumulative A stockholder is allowed to concentrate his votes and
voting in the election of directors; voting for give one candidate as many votes as the number of
4. No stock delinquent for unpaid subscription shall be voted; one directors to be elected multiplied by the number of
5. If quorum is present, the candidates receiving the highest candidate his shares shall equal.
number of votes shall be declared elected;
NOTE: The law requires plurality and not majority; Q: What is the purpose/advantage of cumulative
delinquent stock is not included in determining the voting?
existence of the required quorum;
6. In case of failure to hold an election, the meeting may be A: To give the minority stockholders representation
adjourned from day to day or time to time but it cannot be in the board of directors by electing one or more
adjourned sine die or indefinitely; directors
7. Requisite notice must be given.
NOTE:
Q: Is it required that a director/trustee be physically present at the
meeting at the time of nomination and election? a. A director elected because of the vote of
minority stockholders who united in
A: cumulative voting cannot be removed
without cause
GR: No. b. It is possible for minority stockholders to
obtain greater representation that it is
XPN: Unless it is otherwise provided by the by-laws. entitled to if the group controlling the
majority of the shares does not cumulate
NOTE: But a director/trustee cannot attend or vote by proxy at its votes or cumulates them improperly
board meetings.
Q: May minority stockholders demand as a matter
Where directors/trustees merely designated of right for proportionate representation in the
board of directors of its subsidiaries?
a. Mere designation by stockholders or by corporate officer
without the election of the directors in the manner as A: No. It is the sole prerogative of the board of
provided will not be sufficient. directors of a parent or holding corporation to
b. Election of directors cannot be the subject of a contract or choose its nominees in the board of directors of its
agreement among stockholders. subsidiary
Cumulative A stockholder may cumulate his shares by multiplying
Time of annual election voting by also the number of shares by the number of directors
distribution to be selected and distribute the same among as
a. Since the tenure of directors or trustees is one year, the many candidates as he shall see fit
election must be held substantially once in each year.
b. The Code does not provide when the first election of NOTE: In electing the directors by cumulative the
directors or trustees shall be held total number of votes cast by a stockholder shall not
c. The by-laws may provide the time for holding the annual exceed the number of shares owned by him as shown
election of directors or trustees in the books of the corporation multiplied by the
number of directors to be elected
Postponement of the election
Q: May the board of directors change the date of the annual Formula
meeting prescribed in the by-laws of the corporation?
Cumulative voting system:
A:
1. A x B
GR: No. C + 1
XPN: Justifiable reason and proper notice is given to stockholders or 2. D x C=E

members
Legend:
Example: Lack of quorum
A = Total number of outstanding shares entitled to vote (at meeting)
NOTE: The meeting must be held within a reasonable time from the B = Number of directors desired to be elected
date it has been postponed. C = Total number of directors to be elected
D = Number of shares necessary to elect desired number of directors
Methods of voting E = Number of votes required to elect desired number of directors
4. A director who cannot be trusted may leak such
Refer to pp. 250-252 (De Leon, 2010) information to the harm of the corporation
5. It tends to be used in practice by persons who are
Right of stockholder to use cumulative voting motivated by narrow selfish interests rather than by
broader interests of the stockholders
Q: What is the nature of right of cumulative voting? 6. Each board meeting becomes a skirmish in a continuing
battle since opposition groups use cumulative voting to
A: It is a statutory right. A stockholder may or may not exercise the secure the control of the compay.
right as he shall see fit.
Voting in a non-stock corporation
GR: A corporation is without power to deprive the stockholders of
its use or even restrict the right to vote to only one way or method GR: Members of non-stock corporations may cast as many votes as
there are trustees to be elected but may not cast more than 1 vote
Q: What are the situations involving cumulative voting? for one candidate.
A: XPN: Unless otherwise provided in the AOI or in the by-laws
1. Case growing out of conspicuous management or board Separate voting by zones or regions not allowed
failures
2. Those grounded on conflicts of important business Q: Is separate voting by zones or regions allowed?
interests among stockholders or between stockholders
and management A: No since it is necessary that at least a majority of the members
3. Clashes of strong personalities entitled to vote must be present at the meeting held for the
4. Stockholders are convinced that the BOD was purpose.
unrepresentative of, and insensitive to stockholder’s
interests NOTE: The by-laws of a non-stock corporation can validly provide in
5. Struggles for control of the corporation its by-laws for the election of trustees by category:
6. Cases of “anglers”—opposition leaders who appeared to a. Age bracket
seek board membership in order to push narrow and b. Regional area (SEC Opinion, Feb. 22, 1972
selfish interests of their own
CORPORATE OFFICERS, QUORUM (Sec. 25)
Arguments for cumulative voting
Corporate officers
Q: What are the arguments for cumulative voting?
a. BOD/T formulates the broad policy of the corporation and
A: directs the conduct of its business operations;
b. Task of actual management and carrying on the details of
1. It is basically fair. It is only equitable that stockholders with business operations and corporate policy are delegated to
a large stake in the corporation have the opportunity to the officers elected by it and over whom it exercises
gain representation on the BOD in proportion to their supervision;
holdings c. By-laws may and usually do provide for such other officers
2. Minority representation does not constitute a breakdown and that where a corporate office is not specifically
of the principle of majority rule since the number of indicated in the roster of corporate officers in the by-laws
directors elected by each group will vary with its of a corporation, BOD may also be empowered to create
proportions of ownership additional officers as may be necessary;
3. Unless minority groups can gain representation on the
BOD, they may fail to get an adequate voice in policy Principal or executive officers of a corporation:
4. It represents potential power to assert stockholders’
points of view i. President;
5. Minority representation can be helpful in protecting or ii. Vice-president;
advancing the interests of minority groups. iii. Treasurer;
iv. secretary
Arguments against cumulative voting
d. However, if by-laws enumerate the officers to be elected
Q: What are the arguments against cumulative voting? by the board, the provision is conclusive and the board is
without power to create new offices without amending
A: the by-laws except where it is empowered by the by-laws
to create additional officers as may be necessary;
1. It means the election of directors who are, by their nature, e. Board may create appointive positions other than
partisans of particular interests groups positions of corporate officers but the persons occupying
2. The BOD is an integral part of the management team such positions are not considered as corporate officers;
3. Disharmony in the BOD can dissipate and destroy the
energy of management and lead to an atmosphere of Corporate employees
uncertainty and inaction at the top level
Q: What do you mean by officers? of the BOD;
iii. Yet, Sec. 47 permits the
A: It refers to those elected by the board or stockholders/ members, corporation to provide a term
occupying positions involving the exercise of authority and power in longer than 1 year for its
the management of corporate affairs. corporate offices, other than
directors or trustees.
Q: Who are employees? b. Contracts of employment for life or
indefinite period of officers and other
A: They refer to those whose duties are of a clerical or manual key personnel are generally invalid
nature. because they bind the hands of future
BOD; they also deprive the members of
Q: What is an office? the corporation of the opportunity to
become officers of corporation.
A: It is a creation of the charter of a corporation. Removal a. Power to remove an officer for cause
inheres in every corporation as part of
Election of officers by the board its existence;
i. In instances where the term
a. Directors/trustees of the corporation are elected to their of an officer is not fixed by
office by the stockholders or members to represent them contract or by-laws, he may
in the affairs of the corporation at the stockholders’ or be removed at any time with
members’ meeting; or without cause at the
b. In turn, election of the administrative officers are pleasure of the said body;
entrusted to the BOD/BOT; Thus, the BOD by vote of ii. Election of successors to
majority of all or entire number of its members may elect corporate officers after the
a vice-president, general manager, an auditor and such expiration of their term does
other officers as the needs and nature of the business may not constitute their dismissal;
demand; iii. Relationship of a person to a
c. The AOI of a close corporation may provide that all officers corporation is not determined
or employees shall be elected by the stockholders, instead by the nature of the services
of BOD (Sec. 97); performed but by the
d. In a non-stock corporation, the officers may be directly incidents of the relationship
elected by the members unless otherwise provided for in as they actually exist.
the AOI or by-laws;
e. In firms engaged in nationalized activities, aliens are Positions concurrently held by the same person
banned from being appointed to management positions;
f. Code requires that the president must be a director. Other a. Directors or trustees and officers elected shall perform the
officers may be elected or appointed although they do not duties enjoined on them;
own shares of stock of the corporation; b. Any 2 or more positions may be held concurrently by the
g. Sec 25 requires the election of new set of officers same person except as provided in Sec. 25;
immediately after the newly elected members of the c. Positions of the president and secretary or treasurer are
board; considered as incompatible with each other due to the
h. No prohibition as to the right of any elected board very nature of their office;
member who is also a stockholder to participate in the d. No prohibition in law against stockholder being a director
election of the president. or officer of 2 or more corporations;
e. Code does not prohibit a corporate officer from occupying
Compensation, terms of office and removal the same position in another corporation organized for the
same purpose. Yet, it may be prohibited by special law,
Compensation a. The board has the power to fix the AOI, or by-laws.
salaries of the corporate officers whom
it appoints; Acceptance of office and taking of oath of office
b. It may grant bonuses to them subject to
the test of reasonableness a. To make one an officer, his consent as well as
Terms of a. May be fixed in the by-laws, otherwise appointment or election is necessary;
officer they shall be deemed for 1 year and i. One who does not accept the office or act as an
until their successors shall have been officer, is not an officer although he may have
elected by the board; received stock after his election;
i. Under Sec. 25, the term of the ii. No formal acceptance is necessary. Acceptance
officers of the corporation of an office may be presumed without any act to
cannot extend beyond that of the contrary.
the directors; b. No provision which requires the taking of an oath to
ii. Under Sec. 23, term of qualify the directors or officers;
directors is only 1 year, since i. Oath of office constitutes no part of the office
they shall be elected itself;
immediately after the election
ii. Acceptance will suffice unless the taking of an
oath is required by the corporate by-laws in Inherent That authority to act and bind the corporation which
which case they are not de jure but de facto authority the officer has by reason of his office, although it may
officers until they have taken their oath. or power not be sanctioned by express authority
Express Includes every power or authority expressly conferred
Sources of powers or authority of corporate officers authority upon him by law and by-laws of the corporation
Implied Includes all incidental authority as it is necessary,
a. Officers authority is determined by his actual office and authority usual, and proper to effectuate to main authority
not by the description he may use in acting for the expressly conferred
corporation; Apparent If an officer or agent is held out by such corporation, or
b. Authority may be derived from: or has been permitted to act for it in such a way as to
i. Some provision of statute; ostensible justify third persons who deal with him in assuming
ii. AOI; authority that he is doing an act or making a contract within the
iii. By-laws; scope of his authority, the corporation is bound
iv. Resolution of the BOD or BOT provided that the thereby;
resolution does not attempt to delegate non- This is a question of fact.
delegable. Authority a. A corporation places an officer or agent in
c. By virtue of Sec. 23, the board may in its best judgment by such a position or situation that persons of
and for the best interest of the corporation, appoint or estoppel ordinary prudence are justified in assuming
authorize the President or another officer to act for and in that he has authority to perform the act in
behalf of the corporation, but in all the cases such officers question, is estopped from denying the
shall be under the ultimate direction of the board. officer’s or agent’s authority;
b. Where similar acts have been approved by
Extent of powers or authority of corporate officers the BOD as a matter of general practice,
custom and policy, a corporate officer may
Determination Full extent of the powers of any particular officer bind the company without formal
of authority is determined by inquiring into: authorization of the board;
c. Apparent authority may be ascertained
a. Authority which he has by virtue of his through:
office; i. General manner in which the
b. Authority which is expressly conferred corporation holds out an officer or
upon him or is incidental to the agent as having the power to act or
effectiveness of such express authority; the apparent authority to act in
c. As to third persons dealing with him general;
without notice of any restriction ii. The acquiescence in his acts of a
thereof, the authority which the particular nature.
corporation holds the officer out as d. It is not the quantity of similar acts which
possessing or is estopped to deny; and establishes the apparent authority but the
d. Nature of the corporate business must vesting of a corporate officer with the power
also be taken into consideration. to bind the corporation.
Exemption a. Officers who acted for an in behalf of
from liability the corporation within the scope of Extent of authority of particular officers
their authority and in good faith do not
become liable with the corporation for CHAIRMAN OF THE BOARD (COB)
the consequences of their acts;
b. When they exceed their authority, the a. Designated as the general manager or chief executive
corporation is not bound unless it has officer of the corporation (CEO);
ratified them. b. If one is designated, the president is frequently designated
Authority to a. Lack of authority of the corporate the chief administrative or chief operating officer (COO) or
bind by officer t bind the corporation by the successor to the chairman’s executive duties in his
contract contract executed in its name is a absence or disability;
defense which should be especially c. Where the president is the CEO, the duties of the
pleaded by the corporation; chairman relate to the presiding at meetings of the board
b. Corporate policies need not be in and of committees of which he is a member, and of
writing. But a verbal promise made by stockholders or members, and carrying out such other
the corporation, obligating itself, cannot duties as board shall assign;
bind the corporation in the absence of a d. The duty of the COB as presiding officer is not executive
board resolution to that effect. one;
e. If a vice-chairman is appointed, he presides at the
Classification of powers or authority of corporate officers meetings in the absence of the chairman.
General principles of agency applicable to agents of individuals PRESIDENT

govern the relation between the corporation and its officers or
agents, subject to the AOI, by-laws or relevant provisions of law: a. Must be a director or trustee of the corporation;
b. Cannot act as president and secretary or as president and DUTIES:
treasurer at the same time;
c. President is the only officer required by law to be a c. Duty to keep and make its records and make proper
member of the BOD; entries of the votes, resolutions and proceedings of the
d. Thus, upon expiration of his term as a member of the BOD, shareholders and directors in the management of the
he automatically ceases to be president for lack of corporation and all other matters require to be entered on
qualification; the records;
e. Powers are such only as conferred upon him by BOD or d. Issues notices of meetings and has custody of the
BOT or vested in him by the by-laws: corporate seal which he issues when attesting the
i. Otherwise, he has from his office and alone no signatures of the officers to important documents;
more power over the corporate property and e. Not obliges to include everything that is said in the
business than has any other director; minutes as long as he accurately transcribes what has
ii. Unless there is a charter or by-law provision to taken place;
the contrary, the president may bind the f. The Secretary’s certification is sufficient for a third party to
corporation by contract in the ordinary course of rely on. Otherwise, business transactions would become
business, provided that the same is reasonable; tortuously slow and unnecessarily hampered;
iii. Also, a person dealing with the president is g. He is a ministerial officer who cannot bind the corporation
entitled to assume that he has the authority to unless he is especially authorized to do so.
enter into contracts that are within the scope of
the powers of the corporation; TREASURER
iv. Yet, where the president acts in matters not
within the scope of his authority although they a. May not hold at the same time the position of president;
may relate to the company’s business, the b. The law does not require that the treasurer shall be a
corporation cannot be bound; resident and a citizen of the Philippines;
v. Rule on Agency: The agent must act within the
scope of the agency. He may do such acts as may CONTRA VIEW:
be conducive to the accomplishment of the
purpose of the agency; i. Being the holder of the purse, the treasurer is
vi. Nonetheless, the unauthorized act of the agent entrusted with the authority to receive, keep,
is subject to ratification: and disburse funds of the corporation;
a. Implied from the acceptance of ii. Need to provide to local investors ample
benefits protection from the danger of getting victimized
f. Shall preside at all meetings of the directors/trustees as by foreign nationals;
well as of stockholders or members UNLESS otherwise iii. Thus, by nature of their functions, good
provided in the by-laws or in the absence of the chairman corporate practice dictates that the treasurer
or vice-chairman; must be a resident of the Philippines.
g. President cannot delegate the powers and duties of his
position to any member of the BOD/BOT; c. Entrusted with the authority to receive and keep the
h. In some corporations, the chairman is made the CEO with money of the corporation and to disburse them as they
most of the important and substantial powers and duties may be authorized;
ordinarily given to the president with the latter as the COO d. No inherent power to bind the corporation by contracts or
in charge of daily operations and carrying out the policies to borrow money in behalf of the corporation;
and instructions laid by the BOD.
Q: Who is a comptroller?
VICE-PRESIDENT
A: He is an officer appointed to control accounts and to check
a. Officer next-in rank to the president; expenditures.
b. Fifth-wheel: a conditional officer who acts as president in
case of death, absence, disability of the president to act; GENERAL MANAGER
c. To replace the president in case of the latter’s death,
incapacity etc.; a. Power to bind the corporation by acts within the scope of
d. No authority to enter into contracts in behalf of the his apparent authority;
corporation; b. The principal officer of the corporation, having the general
e. If the vice-president is also a secretary or a treasurer, he charge of those business matters for the carrying on of
cannot act as president at the same time; which the company was incorporated;
f. There can be more than 1 vice-president. c. Has the implied or ostensible power to do any act which is
usual or necessary in the ordinary transaction of the
SECRETARY company’s business.
a. Must be a resident and a citizen of the Philippines; Requisites for board meeting
RATIO: As the custodian of corporate records, he should at
all times be available in the regular conduct and Q: What are the requisites for the validity of corporate acts?
operations of the corporation;
b. He need not be a director unless required by the by-laws; A:
required quorum cannot meet and bind the
1. Meeting of the directors or trustees duly assembled as a corporation by any act or resolution. All that
board; the directors or trustees present can do is to
2. Presence of the required quorum; adjourn.
3. Decision of the majority of the quorum or in other cases, a
majority of the entire board; and Proxy and constructive presence not allowed
4. Meeting at a place, time, and manner provided in the by-
laws. a. On account of their responsibility to the corporation and
their being voted into office presumably because of their
NOTE: The BOD/T may adopt its own internal rules in the conduct of personal qualifications, directors or trustees cannot validly
its meetings provided that the sane will not run counter to the act by proxy;
provisions of the Code, AOI, and by-laws; b. They must attend the meetings of the BOD/T and act in
person and as a body;
QUORUM c. Each director or trustee cannot delegate his power or
assign his duties to another director or corporate officer or
Q: What is quorum? to any person;
d. Constructive or electronic presence is not a substitute for
A: It is such number of the membership of a collective body as is actual presence required under Sec. 25.
competent to transact its business or do any other corporate act.
Another corporation as director or trustee
Number a. A majority of the number of
required directors/trustees as fixed in the AOI shall General rule a. A corporation is not qualified to occupy
for constitute a quorum for the transaction of the position of director because it
presence corporate business; cannot act by itself but only through its
of b. Majority means number greater than half or officers and agents;
quorum more than half of any total; b. It cannot attend personally board
c. It would be at least one-half plus one of the meetings as a director and whoever
number of directors as fixed in the articles represents it as a director is doing so in
and such quorum remains the same even his capacity as the proxy of the
though there may be vacancies; director/trustee.
d. Director is disqualified by reason of personal Through a a. The appointment of a receiver for a
interest in the matter before a director’s receiver corporation terminates the powers of
meeting, loses, pro hac vice, his capacity as a the corporate officers as to the
director and he cannot be counted for the property in possession of the receiver
purpose of making a quorum, nor can the where the receivership is a general one,
vote of such director be counted for the and not merely for preservation;
purpose of determining whether passed by a b. General receiver succeeds to all the
majority vote. rights of the BOD;
Number a. GR: Majority of the quorum of the board will c. The corporation under receivership may
required be sufficient to adopt a proposal where the be represented in the BOD/T of another
for Code requires approval of certain corporate corporation through its receiver.
approval acts or entering into a management contract Through an a. Only members of a non-stock
of without stating that it shall be by majority authorized corporation can be elected to sit in its
corporate vote of the board; representative board;
acts b. If the majority is used, the number of votes b. A candidate should meet the
required to approve such acts shall be at least qualification for membership as
one-half plus one of the entire membership. prescribed in its by-laws.
Number a. The Code gives the corporation the power to
provided require a number greater than the majority of REPORT OF ELECTION OF DIRECTORS/TRUSTEES AND OFFICERS
greater the board members to constitute the quorum (Sec. 26)
than necessary to transact business;
majority b. A given corporation with nine (9) directors, Report of elections and vacancies
the presence of 5 members will be sufficient
to hold a board meeting and a vote of 3 will 1. Secretary of any other officer of the corporation shall
be enough to pass a board resolution; submit to the SEC:
c. Yet, the same corporation can provide in its a. Names
AOI or by-laws, that the required quorum b. Nationalities
shall be 7 members; in this case, a vote of at c. Residences of the directors/trustees and officers
least 4 members is necessary for the approval elected
of any board resolution. But the vote of a which must be done within 30 days after the meeting in
majority of all members of the board or at which they were elected; and
least 5 members of board with 9 directors 2. Heirs of the director/trustee/officer in case of latter’s
shall be required for the election of officers. death, the secretary or any other officer of the corporation
d. Less than the number to constitute the or director/trustee or officer himself, shall immediately
report to the Commission any death, resignation, or b. They may continue to exercise these
cessation in any manner of holding office of a powers until they are removed from office
director/trustee or officer. and replaced by other legally constituted
directors and officers.
RATIO: Powers or a. A de facto BOD may legally perform such
acts within acts as are within the scope of the
a. To give public information of the nature of business, the scope of business of the corporation;
financial condition and operational status of the corporate b. A de facto president may do such acts
corporation together with information on its key officers business pending a determination of who are the
or managers; lawful officers of the company as are
b. Knowledge of facts concerning the corporation’s financial necessary to keep its machinery in motion.
resources and business responsibility. Right to a. De facto officers do not have the same
possess rights as de jure officers since they may be
DISQUALIFICATION OF DIRECTORS/TRUSTEES OR OFFICERS office and to ousted from office in a proper proceeding
(Sec. 27) salary and they cannot recover the salary of the
office;
a. Disqualification of anyone convicted by final judgment of b. Yet, in the Cojuangco case, the SC held
an offense punishable by imprisonment for a period that private respondents who were
exceeding 6 years or a violation of the Code as declared de facto officers in good faith—
director/trustee/officer of any corporation. are thereby legally entitled to the
emoluments of the office until they vacate
RATIO: To avoid the election or appointment of unworthy the same or are removed in an action for
officers in view of the fiduciary character of their positions; quo warranto or replaced by the election
b. Offense need not involve moral turpitude; of other persons.
c. If the duration is based on a violation of the Code, the
duration of the imprisonment is immaterial, but the Validity of contracts and acts of de facto officers
commission of the violation must have taken place within
5 years prior to the date of the election or appointment. As to a. Contracts and acts of de facto officers, when
third acting within the scope of their authority are
De facto directors/trustees or officers persons binding as the acts of the officers de jure so
far as third persons are concerned;
Q; When is a person considered an officer or director de facto? b. A corporation is bound by acts of its de facto
officers;
A: c. Principle of estoppel
Where a. Acts of de facto officers cannot be collaterally
a. When he is in possession of the office and is exercising the de facto attacked for it is only through direct attack
duties thereof under color or appearance of right, but is officers (quo warranto) can the election or
not an officer or director de jure on account of irregularity ousted appointment of a de facto officer be
in his election; or from questioned;
b. ineligibility or disqualification resulting from a non- office b. The fact that a de facto officer is subsequently
residence or not being a stockholder; or ousted from office cannot be set as a defense
c. failure to take an oath of office or file a written acceptance by a corporation to escape liability for acts its
of trust when required by statute or charter or by-laws. ostensible officer.
Example: REMOVAL OF DIRECTORS OR TRUSTEES (Sec.28)
i. directors are elected before the amendment increasing Powers of stockholders or members to remove directors or
the number of directors had become effective upon its trustees
approval by the SEC and they act as such without
objection;
Generally a. Law does not specify cases for removal of a
director or trustee nor even require that
d. A person is not a de facto officer or director where he is
removal should be for sufficient cause or
not holding office under some appearance or color of right
reason;
or where he is not in actual possession of the office;
b. It is the policy that stockholders shall be the
e. There cannot be a de facto office nor de facto officer,
ultimate masters to make the corporate
where there is no corresponding legally constituted office.
government responsible to the owners;
f. Technically, it applies to public officers only.
c. Non-election of a director or trustee after
serving 1 year is not a case of dismissal or
Powers and rights of de facto officers in general
removal but expiration of his term.
Where director a. A director or trustee may be removed by the
All powers a. De facto directors and officers may
or trustee prescribed vote without cause subject to the
of de jure exercise all powers of de jure officials so
elected by limitation that a director or trustee cannot
official as bind all persons who acquiesce in their
cumulative be removed without cause if the effect of
management and direction;
voting such removal is to deprive minority nt of has acquired jurisdiction to appoint a receiver,
stockholders or members who united in receiver these may thereafter be removed and others
cumulative voting to elect such director, if appointed in their place by the court in the
right of representation to which they may be exercise of its equity jurisdiction;
entitled under Sec. 24; b. But where the properties and assets of the
b. This proviso is necessary to protect the corporation are amply protected by the
minority against any abuse by the majority appointment of a receiver, such removal is
since there is no cumulative voting in the unnecessary and unwarranted in view of Sec. 28.
removal of directors; Institution A quo warranto proceeding may be brought against a
c. Rule does not apply where the removal is of quo person who usurps, intrudes into, or unlawfully holds
initiated by the minority stockholders or warranto or exercises an office in a corporation created by
members themselves. proceeding authority of law.
Where a. Incumbent directors or trustees cannot be s
removal done removed merely by electing a new set of
by electing directors or trustees; Q: What are the requisites for removal of directors or trustees?
replacement b. directors or trustees can only be removed by
at least 2/3 of the outstanding capital stock A:
or of the members entitled to vote;
c. vacancies in the board can be filled by mere 1. Removal must take place either at a regular meeting of the
majority (or plurality) of vote; corporation or at a special meeting called for the purpose;
d. removal shall take place either at a regular or 2. Previous notice to the stockholders or members of the
special meeting called for the purpose and corporation of the intention to propose such removal at
after previous notice to stockholders or the meeting;
members of the corporation of the intention 3. Removal by a vote of the stockholders holding or
to propose such removal at the meeting. representing 2/3 of the outstanding capital stock, or its
Where a. in case of disqualification by operation of members.
replacement law, there is no need to follow the said
elected not procedure; Q: Can a director or trustee be removed as a stockholder?
qualified b. mere declaration of such disqualification is
sufficient to remove him from office. A: No.
Where a. a director who has been removed by the
replacement stockholders who elected another person in Notice of meeting
elected not his place cannot be compelled to vacate his
qualified office where it is shown that the successor is For a. Notice must expressly state the intention to
not qualified not being an owner of any removal propose such removal;
share and under the by-laws of said b. Notice of a special meeting to consider
corporation, directors shall serve until the amendments of by-laws and reorganization of
election and disqualification of their duly the BOT cannot be considered as notice
qualified successors; contemplated by Sec. 28;
b. Yet, under Sec. 28, the removal of a director c. Previous notice of the intention to propose such
does not depend on the qualification of his removal is not required.
successors as long as the removal has been For a. Vacancy created may be filled by election at the
duly made. choosing same meeting without further notice or at any
replaceme regular or at any special meeting called for the
Power of the board to remove a member nts purpose after giving the prescribed notice;
b. Stockholders or members who have removed a
a. BOD/BOT has no power to remove one of its members as director or trustee are also given the power to
director/trustee choose his replacement at the same meeting.
b. Neither can it replace the vacancy cause by removal
effected by the stockholders or members of the Resignation of directors or trustees
corporation
Right to a. Fact that the law requires directors or trustees
RATIO: As officers deriving their title from the stockholders or resign at any (unless removed) to continue until successors
members, they can be removed only by the power that appointed time are elected and qualified, does not prevent a
them. The board cannot indirectly usurp or disregard the same. director or trustee to resign;
b. A corporation continues to exist despite the
Power of court to remove directors or trustees resignation of the directors or trustees.
Liability for a. A director cannot resign as part of fraudulent
General a. Code does not confer upon the Courts the power wrongful scheme to prejudice the corporation or its
Rule to remove a director or trustee or any appointed resignation stockholders and make profit to his own
officer of a corporation; advantage;
b. Power of removal is on the corporation itself. b. If a director quits under the circumstances
Appointme a. Other authorities held however that if the court which occasioned a deprivation of profits to

the corporation, it is but right that he should
repair and make good such loss. Grounds for Q: Under what grounds can a director or
Form and a. A resignation need not be in any particular replacement trustee be replaced?
report of form; during term
resignation b. It may be oral or in writing but it must clearly A:
show an intent to resign;
c. Code requires the resignation of a director or 1. Resignation
trustee to be immediately reported to the 2. Removal
SEC. 3. Position is otherwise lawfully vacated.
Effectivity of a. GR: Resignation of a corporate official
resignation becomes complete and his office becomes NOTE: Temporary absence does not result in
vacant the moment the resignation is made to vacancy
the proper officer or body;
XPN: Unless a future date of acceptance is Tenure of Person elected to fill a vacancy holds office only
required. successor for the unexpired term of his predecessor
b. It is not necessary that the resignation be Prohibition a. In the absence of vacancy, no one can be
accepted or that someone be elected to take against election elected (even as an alternate) to take the
his place in order to make the resignation of alternate in place of an incumbent director who is
effective (notwithstanding a provision in case of temporarily absent only
statute, charter or by-laws that the officers temporary b. Otherwise, there will be two directors for
shall hold office until their successors are duly vacancy the same position which is irregular and is
elected. not sanctioned by law.
c. RATIO: The inaction or refusal of the BOD
should not impose upon him a future liability Filling of vacancies
or responsibility which he does not undertake.
1. By stockholders or members
Abandonment of office and failure to attend meetings
Q: Under what instances may a director or trustee be filled by the
Acceptance of Q: What is the consequence of acceptance of stockholders or members?
incompatible a position incompatible to his office?
office A:
A: It is presumed that he has abandoned his
office as director. a. If the vacancy results from the removal by the
Absence for an a. A director who absented himself from all stockholders or members or the expiration of term;
unreasonable meetings for nearly a year and b. If the vacancy occurs other than by removal or by
period of time announced his refusal to act as an officer expiration of term, such as death, resignation,
and stockholder, is deemed to have abandonment, or disqualification, if the remaining
abandoned his position as a director; directors or trustees do not constitute a quorum for the
b. Abandonment is implied resignation of purpose of filling the vacancy;
his office as director. c. If the vacancy may be filled by the remaining directors or
Mere absence or Yet, mere absence or continued failure to trustees but the board refers the matter to the
continued failure attend meetings where there has been no stockholders or members;
to attend resignation does not have the effect of d. If the vacancy is created by reason of an increase in the
meetings vacating his seat or terminating his term of number of directors or trustees.
office unless there is some express provision
to such effect. 2. By the members of the board
Specified number a. Where the general authority to remove
of unjustified directors or trustees rests with the If still constituting a quorum at least a majority of the members are
absences as stockholders or members, a corporation empowered to fill any vacancy occurring in the board other than by
ground for is empowered to prescribe in the by-laws removal by the stockholders or members or by expiration of term.
automatic attendance in the board meetings as a
disqualification qualification device such that a specified a. This avoid the expenses and inconveniencies attending the
number of unjustified absences may be a calling of stockholders or members meeting;
ground for automatic disqualification. b. Power of board of directors or trustees is not suspended
This need not be approved again by the by vacancies in the board unless the number is reduced
stockholders or members; below a quorum;
b. These by-laws are written into the c. Board has no power to fill any directorship or trusteeship
charter of the corporation by reason of an increase in the number of directors or
trustees which results in a vacancy becomes effective
upon its approval.
VACANCIES IN THE OFFICE OF DIRECTOR OR TRUSTEE (Sec. 29)
3. Where vacancy caused by resignation of a holdover director
Vacancies in the office of director or trustee

a. Stockholders and not the remaining members of the board b. Stockholders cannot ratify a board’s action fixing their own
have the power to elect a director to fill the vacancy; salaries;
b. Hold-over period is not part of the director’s original term c. Stockholders themselves must fix the compensation.
of office nor is it a new term;
c. Vacancy referred to in Sec. 29 contemplates a vacancy Limit to compensation
occurring with the director’s term of office;
d. When a vacancy is created by the expiration of a term, a. Total yearly compensation of directors shall not exceed
there is no more unexpired term to speak of; 10% of the net income before income before income tax
e. It shall be the corporation’s stockholders who shall possess of the corporation during the preceding year;
the authority to fill a vacancy called by the expiration of a b. RATIO: To curb the practice of close corporations to grant
member’s term. excessive bonuses to their directors to reduce the taxable
income of such corporations and for the protection of
COMPENSATION OF DIRECTORS (Sec. 30) stockholders as well as the corporate creditors and
prospective investors;
Compensation of directors or trustees c. Insurance Code does not contain any prohibition as against
the BOD of a corporation securing insurance policy on the
a. A corporation is authorized to provide in its by-laws for the life of its members and making the directors the
compensation of directors or trustees; beneficiaries instead of the corporation;
b. Otherwise, the directors or trustees shall not receive any d. Premium paid thereon is analogous to a continuing bonus
compensation, unless authorized by a vote of the and gift and thus falls within the context of additional
stockholders representing at least a majority of the compensation.
outstanding capital stock or a majority of the members Per diems of directors
entitled to vote;
c. Any compensation to the officers of a corporation without Power of the directors to fix per diems for themselves is conferred
proper authorization in the by-laws or by the vote of the by law itself.
stockholders may be recovered in a stockholder’s suit;
d. Amount of compensation of directors must be fixed either Q: What is per diem?
in the by-laws or in the resolution of the stockholders;
e. Stockholders cannot delegate to the board of directors the A: It is a daily allowance given for each day an officer or employee
authority to fix the amount of their own compensation; was away from its home base or permanent station. It is limited to
f. Sec. 30 also applies to non-stock corporation. pay for a day’s service.
Directors without authority to grant themselves compensation a. Directors are entitled to per diems regardless of whether
or not it is authorized by the by-laws or by stockholders;
Directors have no authority to grant compensation to themselves b. Per diems granted to directors should not be included in
their total yearly compensation for purposes of the 10%
limitation;
For usual and a. GR: When directors perform nothing c. Members of the board may receive compensation in
ordinary more than the usual and ordinary addition to reasonable per diems when they render
services duties of their office, they are not services to the corporation in a capacity other than as
entitled to salary or other directors or trustees;
compensation; d. Sec. 30 however does not specify who is to set the amount
b. RATIO: Directors render services of the per diems and what amounts shall be considered
gratuitously and that the return reasonable;
upon their shares adequately e. Per diems received without proper authorization or found
furnishes the motives for services to be unreasonably excessive may ordinarily be recovered
without compensation. in a stockholder’s suit.
For services a. It is doubtful whether a director is
outside their entitled to compensation when they Compensation of corporate officers
regular duties render extraordinary or unusual
services; Corporate a. Such officers, not being directors and
officers who having no control over the funds and
Q: What are extraordinary or are not property of the corporation do not
unusual services? directors occupy the relation of trustees to the
corporation;
A: Services which are not properly b. If they are elected or appointed to
incidental to their office and are perform valuable services for the
rendered outside their regular corporation there arises an implied
duties. promise on the part of the corporation to
b. Corporate directors presumptively pay a reasonable compensation for
serve without compensation. services rendered, even in the absence of
an express contract;
a. Stockholder’s resolution or agreement for the payment of c. Also applies to employees hired by the
compensation for such services would be valid; corporation.
Corporate a. They are entitled, in addition to per
officers who diems as directors, to compensation as A:
are officers such corporate officers and the amount
thereof may be fixed by mere board 1. When he consents to the issuance of watered stocks; or
resolution in the absence of provision to 2. Having knowledge thereof, does not forthwith file with the
the contrary in the by-laws and subject corporate secretary his written objection thereto;
to the provision of Sec. 32; 3. He is made by specific provision of law to personally
b. May take the form of salaries or fringe answer for his corporate action;
benefits such as housing, membership in 4. When he agrees to hold himself personally and solidarily
clubs, company cars, stock options, etc. liable with the corporation.
LIABILITY OF DIRECTORS, TRUSTEES, OR OFFICERS a. They are not liable for business losses incurred
(Sec. 31) because of honest bad judgment not amounting
to bad faith or gross negligence; or
Nature of directors/trustees position b. For money claims of discharged employees
where no malice or bad faith can be attribute to
Agents or a.Directors are agents of the him in terminating their employment ;
trustees for the corporation; c. Bad faith is a question of fact; it imparts a
corporation b. Occupy a fiduciary relation to the dishonest purpose or some moral obliquity and
corporation; conscious wrong doing. It means breach of duty
c. They are “trustees;” through some motive or interest or ill-will; it
d. Each stockholder is a cestui que trust partakes of the nature of fraud; it is never
according to his interest and shares; presumed.
e. In the performance of their official
duties they are under obligations of Liability for secret profits
trust and confidence to the
corporation and its stockholders and a. The director/trustee or officer guilty of violation of duty
must act in good faith and for the shall be held accountable for the profits which would
interest of the corporation; otherwise have accrued to the corporation;
f. Springs from the fact that they have b. Private or secret profits must be accounted for;
control and guidance of corporate c. Fact that the agreement whereby a person is to receive a
affairs and property and hence, of the secret profit is made prior to the time he becomes an
property interest of the stockholders; officer does not change the rule;
Agents or The moment such a corporation becomes d. Fact that the profits were derived from transactions ultra
trustees for the insolvent, its directors are trustees of all the vires does not relieve the director/trustee or officer from
stockholders or creditors liability;
members/ e. A director guilty of disloyal act against the corporation is
creditors required to account for the profits obtained by him from
business opportunity which should belong to the
Q: What are the cases when the directors/ trustees or officers are corporation.
liable for damages?
DEALING OF DIRECTORS/TRUSTEES/ OR OFFICERS WITH THE
A: CORPORATION (Sec. 32)
GR: Officers of the corporation are not personally liable for their Self-dealing directors/trustees/or officers
official acts unless it is shown that they exceed their authority
GR: Sec.32 renders voidable a contract of such corporation with one
XPNs: or more of its directors/trustees or officers.
1. He willfully and knowingly votes or assent to patently Sec. 32 does not require that the corporation suffers injury or
unlawful acts of the corporation; damage as a result of the contract.
2. Guilty of gross negligence or bad faith in directing the
affairs of the corporation; XPN: The contract shall be valid and cannot be set aside merely
3. He acquires any personal or pecuniary interest in conflict because of the relationship of the parties:
with his duty as such director or trustee.
a. All the conditions enumerate in Sec. 32 are present;
Q: Who will be held liable for all damages resulting there from b. Not all the conditions set forth are present but the
suffered by the corporation, its stockholders or members or other corporation elects not to question the validity of the
persons? contract without prejudice to the liability of the
consenting directors or trustees for damages under Sec.
A: It is the erring board members or officers shall be jointly and 31;
severally (or solidarily) liable for all damages. NOTE: The dissenting stockholder or member may file a
derivative suit in behalf of the corporation;
Q: When does person liability validly attach?
c. In case of contract with a director or trustee, only third profits by refunding the same, notwithstanding that the he risked his
condition is present, if the contract is ratified by the funds in the venture;
required vote of the stockholders or members in a
meeting called for the purpose, provided that full a. Rests on unfairness of an officer or director taking
disclosure of the adverse interest of the directors or advantage of an opportunity for his own personal profit
trustees involved is made at such meeting; when the interest of the corporation justly calls for
d. If the contract is with an officer of the corporation, it must protection;
have been previously authorized by the board. b. Section 34 applies to directors. If the disloyalty is
committed by an officer, he is liable under sec. 31.
CONTRACTS BETWEEN CORPORATIONS WITH INTERLOCKING
DIRECTORS (Sec. 33) Q: When is the doctrine not applicable?
Contracts between corporations with interlocking directors A: Corporate opportunity of which corporate directors cannot take
advantage for their personal benefit is a business opportunity which
a. Sec. 33 recognizes as valid contract between 2 or more has an inherent aptitude of being integrated into the existing
corporations which have interlocking directors as long as business of the corporation.
there is no fraud and the contract is fair and reasonable
under the circumstances; a. Does not preclude a director from engaging in a distinct
b. Yet, if the interest of the interlocking director in one enterprise of the same general class of business as that
corporation is substantial—his stockholdings exceed 20% which his corporation is engaged, so long as he acts in
of the outstanding capital stock and in the other merely good faith;
nominal rules of Sec. 32 on self-dealing directors shall b. Where the opportunity is one which is not essential to the
apply insofar as the latter corporation is concerned; corporation’s business or where the director or officer
c. Sec. 32 does not apply where the corporation allegedly does not exploit opportunity by employment of
prejudiced is a third party, not one of the corporations company’s resources or where the director or officer
with interlocking directors. embracing opportunity personally is not brought into
direct competition with the corporation;
Evils of interlocking directories c. Where the corporation is definitely no longer able to avail
itself of thee opportunity which may arise from financial
Validity of by- a. By-laws prohibit a director of a insolvency or from legal restrictions or from any other
laws corporation from serving at the same factor which prevents it from acting upon the opportunity
prohibiting time as a director of a competing for its own advantage;
interlocking corporation; d. Rule is pursuant to the rule that one who occupies a
directories b. By means of interlocking directories one fiduciary relationship to a corporation may not acquire, in
man or group of men have been able to opposition to the corporation, property in which the
dominate and control a great number of corporation has an interest or intangible expectancy or
corporations to the detriment of the which is essential to its existence.
small ones dependent upon them and to
the injury of the public; this could lead to Ratification by stockholders of disloyal act
collusion and combination in restraint of a. Guilty director will only be exempt from liability to the
trade or blunt the edge of rivalry corporation to account for the profits he realized if his
between the corporations and eliminate disloyal act is ratified by the vote of the stockholders
competition. owning or representing at least 2/3 of the outstanding
No absolute a. Under sec.33, contracts between capital stock;
prohibition of corporations having directors in common b. Sec. 34 is silent on whether the disloyal director shall be
interlocking are not rendered void or voidable on that allowed to vote his shares in ratification of his acts.
directories ground alone;
b. An individual may be a stockholder in EXECUTIVE COMMITTEE (Sec. 35)
different corporations and it is not
unusual to find a director or corporate Executive Committee
officer occupying the same position in
another corporation not only because he Need for an executive committee
has investments therein but also because
his services may have been proven to be a. Sec. 35 recognizes an already existing corporate practice in
valuable. the Philippines dictated by necessity owing to the growing
complexities of modern business where BOD delegates to
DISLOYALTY OF A DIRECTOR (Sec. 34) an executive committee corporate powers to assure
prompt and speedy action and solution to important
Doctrine of “corporate opportunity” matters without need for a board meeting especially
where such meetings cannot be readily held;
A director who, by virtue of his office, acquires for himself a business b. Such committee directly manages the operations of the
opportunity which should belong to the corporation, thereby corporations thereby reducing the work of the board
obtaining profits to the prejudice of such corporation, is guilty of
disloyalty and should therefore account to the latter for all such Express provision in the by-laws
b. In an earlier opinion, the SEC held that all members of the
a. The executive committee must be provided for in the by- executive committee must be directors of the corporation;
laws and composed of not less than 3 members of the but if the acts of the committee will be merely
board; recommendatory in nature and shall not be carried out
b. The board cannot create or appoint an “executive without the formal approval of the BOD acting through a
committee” to perform some of its functions in the majority of the quorum, alternate representation may be
absence of authority in the by-laws. In such case, the allowed in the committee such that members thereof may
principle on de facto officers may be applied insofar as not be directors of the corporation;
third persons are concerned;
c. In so far as the corporation is concerned, the unauthorized Ultimate control by the board
act of appointment of an executive committee may be
subject to Sec. 144 which provides for the penalties for a. If the committee is made up of persons who are not
violation of any of the provisions of the Code. directors, such committee shall be subject to the normal
restrictions and requirements relating to undue abdication
Committee contemplated of authority by the board;
b. The business affairs of the committee shall be controlled
a. It is as powerful as the board, as it actually performs and all corporate powers shall be exercised under the
certain duties of the board and thus, is acting for the ultimate discretion of the board.
board itself;
b. The authority to appoint should be expressly provided in Quorum and voting
the by-laws and a provision in the by-laws stating that
authorizing the board to create such committees as the a. A majority of the committee members constitute a
board may deem necessary is not sufficient. quorum
b. Committee cannot delegate its authority even to one of its
Matters excepted from delegation by board members
a. Committee may act on specific matters within the Membership of a foreigner

competence of the board including those matters
involving the exercise of judgment and discretion; a. Foreigners are disqualified from being elected/appointed
XPN: Those matters enumerated with respect to which as corporate officers in wholly or partially nationalized
only the board duly called and assembled as such can act business activities;
upon. b. They are yet allowed representation in the BOD or
b. The executive committee can function as the board itself governing body of said entities in proportion to their
in all matters delegated to it other than the excepted shareholdings;
matters; c. RATIO: The BOD performs specific duties as a body unlike
c. Cannot validly delegate to the executive committee a corporate officers where each member of the BOD has no
blanket or general authority constituting an abdication of individual powers or authority to perform management
the corporate powers and duties vested in it by law; functions;
d. Board cannot delegate entire supervision and control of d. As the governing body which functions as a board itself,
the corporation to an executive committee for this will be membership therein shall be governed by the same law
violative of Sec. 23; applicable to the BOD as provided in Sec. 35.
Enlargement by board of restrictions
a. Sec. 35 may be enlarged by the board to cover other TITLE IV

matters; POWERS OF CORPORATION
b. Executive committee may amend or repeal any resolution
of the board unless by its express terms it is not so Corporate Powers and Capacity (Sec. 36)
amendable or repealable;
Powers of a corporation has reference to the corporation’s capacity
Authority to function as the board itself or right under its charter and laws to do certain things.
a. The committee may reduce the directors to little more Q: Distinguish powers, franchise and objects?
than a supervising and ratifying body;
b. A properly constituted committee composed of directors A:
has all the authority of the board to the extent provided in
the resolution of the board or by-laws Primary franchise
Membership Right to exist as an entity for the purpose of doing things embraced
within its powers.
a. Non-members of the board may be appointed as members
of the executive committee provided that there are at Secondary franchise
least 3 members of the board who are members of the
committee;
Right granted to an existing corporation to use public property for a c. Consult the general statutes to see if the act
public use, but with private profit. is illegal even in case of natural persons,
Express or a. It is illegal for a corporation to apply either
NOTE: A corporation exercises its powers for the purpose of implied its capital or profits to business for purposes
attaining its objects. grant of not contemplated by its charter;
powers b. It is important that the corporation’s
Relative powers of natural persons/partnerships and corporations intended purposes are stated with sufficient
clarity in the AOI so as to define with
Ant act not a. An individual has absolute right to fully certainty the scope of its business.
prohibited use, enjoy and dispose of his properties,
to perform all acts and to make all Express powers explained
contracts without any control except
when they are forbidden by law; Q: What are express powers?
b. This is true as regards an ordinary
partnership; A: These are powers expressly conferred upon the corporation by
c. RATIO: They do not owe their existence to law. It can be ascertained from:
the State.
Only powers a. Doctrine of limited capacity- a a. Special law creating the corporation;
granted corporation has only such powers as are b. General laws applicable to corporations;
expressly granted and those that are c. AOI.
necessarily implied from those expressly
granted or those which are incidental to NOTE: The express powers may be exercised by the corporation
its existence; whether or not such powers are stated in the AOI or b-laws for they
b. RATIO: A corporation owes its existence to are deemed vested in any corporation organized under the Code.
the State; it is without natural rights.
Other express powers of the corporation are specifically provided in
Special Capacities Sections 37 to 44.
A corporation is a juridical entity created by law and, therefore, Implied powers explained
possesses no power or authority other than what is vested by law. a
corporation is not like a natural person. A corporation can only do Q: What are implied powers?
that which the law authorizes it to perform (Aquino, 2011).
A: They are those powers which are reasonably necessary to execute
CLASSIFICATION OF RIGHTS the express powers and to accomplish or carry out the purposes for
which the corporation was formed.
Q: What are the 3 classes of powers of a corporation?
Powers merely convenient or useful are not implied if they are not
A: essential, having in view the purposes or objects of the corporation.
The purpose or purposes for which the corporation was created
1. Those expressly granted or authorized by law: delimit the implied powers.
i. Conferred by the Corporation Code; and
ii. AOI Q: What are the classifications of implied powers?
2. Those necessary to the exercise of the express or
incidental powers; and A:
3. Those incidental to its existence.
Acts in the a. Borrowing money;
Q: Who signs the certificate of non-forum shopping of a usual course of b. Making ordinary contracts;
corporation? business c. Executing promissory notes, checks or
BOE;
A: It may be signed for and on behalf of a corporation by a lawyer d. Taking notes or other securities;
who must be “specifically authorized” by the BOD in order to validly e. Acquiring personal property for use in
sign the certification. connection with the business;
f. Acquiring lands and buildings to be used
NOTE: Acts or contracts of a corporation outside the scope of its as places of business or in connection
express, implied and incidental powers are ultra vires. therewith; and
g. Selling, leasing, mortgaging or other
Determining whether an act or contract is within the scope of transfers of property of the corporation
corporate powers in connection with the running of
business.
Sources of a. Refer to the special charter or its AOI to see
Powers whether it is within the express, implied or NOTE: These acts are necessary in order to run a
incidental powers conferred; business.
b. Examine the statutes relating to corporations Acts to protect If a corporation is a CR, it may do such acts as
to see if the act is prohibited; and debts owing to may be necessary to protect its rights as such CR.
a corporation A corporation, may purchase property, act as 3. To have a corporate name
guarantor or sometimes even run a business 4. To purchase and hold real and personal property
temporarily to collect a debt, where otherwise it 5. To adopt and use a corporate seal
would have no power to do so; 6. To contract
Embarking in a. A corporation may not engage in a 7. To make by-laws
different business different from that for which it 8. To establish branch offices here or abroad as the need or
business was created as a regular and a exigency of the business of the corporation may require
permanent part of its business;
b. This applies especially to those “Stretching the Purpose Clause”
corporate activities which are governed
by special laws; Q: Discuss the so-called “stretching the purpose clause.”
c. A corporation not organized for that
purpose cannot go into banking or A: It is legal to stretch the meaning of the purpose clause to cover
insurance business but may do any new and unexpected situations. Situation and circumstances may
isolated act of banking or insurance in arise which can be accommodated by the “stretched interpretation”
connection with some express power. of the purpose clause. There is no more need to amend the AOI to
accommodate the new situations (Aquino, 2011).
Acts in part or A corporation can:
wholly to Construction
protect or aid i. Building homes;
EEs ii. Places of amusement; Q: How do you construe the powers of the corporation?
iii. Hospitals for EEs
Acts to A corporation may conduct contests or sponsor A: They are to be construed strictly. Any ambiguity in the terms of
increase radio or television programs, or promote fairs and the corporate charter must operate against the corporation and in
business other gatherings to advertise and increase its favor of the public.
business.
Q: Discuss the different rules of construction.
Q: Distinguish implied from express powers.
A:
A:
1. In the determination of what powers have been conferred,
EXPRESS POWERS IMPLIED POWERS the whole instrument is to be taken together, including
Have to do with the main Have to do with the means and provisos as expressing the final intention and purposes of
business, objects, and purposes methods of attaining those the parties
of the corporation objects and purposes 2. They should be so construed as not to defeat the purpose
Determined once and for all by May change according to time, of their creation. The intention of the legislature should
the language of the corporate place, and surrounding always control
charter and the applicable law circumstances 3. Charters should also be construed in view of the
TEST: Whether they are found in TEST: Whether they are fairly circumstances, usages, and practices existing at the time
they were granted.
the words of the charter or the incidental to the former and
law reasonably necessary to carry 4. If the charter is susceptible of 2 meanings, the one
restricting and the other extending the powers of the
them out in furtherance of the
corporation’s business corporation, the construction is to be adopted which works
the least harm to the State.
5. The provisions of the general incorporation law may apply
INCIDENTAL OR INHERENT POWERS
to corporations operating under special statutes with
respect to the conduct or government of such
Q: Explain the so-called “incidental powers of the corporation.”
corporations as to which no specific provision has been
made.
A: They are powers which a corporation can exercise by the mere
fact of its being a corporation or powers which are necessary to
Ratification of corporate acts
corporate existence and are, therefore, impliedly granted. As
powers inherent in the corporation as legal entity, they exist
Q: Who may ratify corporate acts?
independently of the express powers.
A:
NOTE: They are embodied under Sections 2 and 45. Some are also
enumerated Sections 36.
ACTS WHO MAY RATIFY
Q: What are these inherent powers? Board of Stockholders/members:
Directors or
A: trustees Q: What are the acts covered?
1. Power of succession A:
2. To sue and be sued
1. Acts beyond the powers of directors or
trustees 3. To increase or decrease the capital stock
2. Acts done or authorized by the directors 4. To incur or create bonded indebtedness
at an illegal meeting 5. To deny pre-emptive right
3. Unauthorized acts of others other than 6. To sell or dispose all or substantially all of the assets of the
the directors, provided such may be corporation
done or authorized by the stockholders 7. To acquire its own shares
Within the Board of directors or trustees, if it could be 8. To invest corporate funds in another corporation, business
powers of the authorized by them or for any other purpose
corporation 9. To declare dividends
NOTE: If the act is consented to or ratified with 10. To enter into a management contract
full knowledge of the facts, it is finally and
absolutely binding and neither the corporation Q: What are the general powers?
nor individual stockholders or members nor
strangers can afterwards sue to set it aside or A:
otherwise attack its validity.
1. Power to sue and be sued
Q: Give an example of an act which cannot be 2. Power of succession
ratified. 3. Power to adopt and use a corporate seal
4. Power to amend AOI
A: Donations for political purposes 5. Power to adopt by-laws
6. Powers regarding shares and membership
Q: What is the effect of ratification? 7. To acquire, sell, lease, or otherwise deal with real and
personal property
A: 8. Power to enter into merger or consolidation
9. To make reasonable donations
GR: It has retroactive application. 10. To establish pension, retirement and other plans
11. Other powers
XPN: Intervening rights of strangers a. To enter into a partnership
b. To enter into a joint venture
Q: Is there a particular mode of exercising powers? c. To borrow funds
d. To act as surety or guarantor
A: None. If the charter of a corporation prescribes no particular e. To mortgage
mode for the exercise of its powers, they may be exercised in any f. Practice of profession
mode, provided it is not contrary to law, which the stockholders or
officers may deem best. Power to sue and be sued
Q: What if the charter prescribes a particular mode? Q: Under what name should the suit be made?
A: If the charter requires its powers to be exercised in any particular A: As a rule, suits are to be brought by or against the corporation in
way by officers or agents, they cannot be properly exercised in any its own name.
other way, for the powers of a corporation are measured by its
charter, not only as to things which it may lawfully do, but also as to Q: State the rules:
the mode of doing them.
A:
NOTE: The fact that a corporation exercises a power in a mode
different from that prescribed by its charter will not necessarily Dissolved Corporations de facto may sue and be sued but a
prevent it from acquiring rights or incurring liabilities by reason corporation corporation which has been dissolved after the
thereof. expiration of the 3 year winding up period ceases
to exist de jure or de facto
Q: What is the rule in case of corporation organized under a special Unregistered No legal capacity to sue as such
law? corporation
Foreign Neither can a foreign corporation which transacts
A: The rules governing corporations organized under the general law corporation business in the Philippines without the necessary
have no application where the special statutes provide methods for license from SEC sue in Philippine courts
the regulation and control of said corporation. Right to claim GR: An artificial person like a corporation cannot
for moral experience physical suffering, mental anguish,
Specific Powers and General Powers damages besmirched reputation, wounded feelings, moral
shock, social humiliation and similar injury.
Q: What are the specific powers of the corporation?
XPN: A corporation may have a good reputation
A: or business standing which, if besmirched or
debased, may be a ground for the award of moral
1. To extend or shorten the corporate term damages under the Civil Code
2. To amend the AOI
Q: Under the exception, what is the requirement
in order to claim moral damages? A resolution of the board of directors may
authorize a particular officer to represent the
A: It is imperative for the claimant to present corporation in all suits brought for or against it.
proof to justify the award by showing the
existence of the factual basis of the damage and Where piercing the veil of corporate entity is
its casual relation to the defendant’s acts. justified, a stockholder or corporate officer may
Real party in GR: The right and power of a corporation to sue be sued along with the corporation.
interest in any court must be brought by the board of Right of Shareholders are the owners of corporate
directors or trustees that exercises its corporate shareholders property which is owned by the corporation as a
powers on behalf of the corporation or by any of to intervene distinct legal person, their interest being inchoate
its duly authorized officer or agent or beneficial in nature, not direct and immediate
in character; hence, they have no right to
Q: Does a minority stockholder and member of intervene in an action for or against the
the board of director have a power or authority corporation.
to sue on the corporations behalf?
Service of Such service must be to an agent or
A: No. summons representative so integrated with the corporation
sues as to make it, a priori supposable that he will
NOTE: A petitioner is required to submit a sworn realize his responsibilities and know that he
certification of non-forum shopping and failure to should do so with any legal papers served on him.
comply with the requirement is sufficient ground
for dismissal of the petition. This is so because the The rules on service of process make service on
Rules of Court does not make a distinction an agent sufficient whether the agent be general
or special. As such, it does not necessarily
There must be a specific authorization to sign the connote an officer of the corporation and may
verification and certification in behalf of the include EEs but not those whose duties are not so
corporation. integrated to the business that their absence or
presence will not toll the entire operation of the
Q: According to the SC, who may file or sign the business.
verification and certification without need of a
board resolution? Summons was held properly served on a
corporation through a claim EE who does not
A: belong to the managerial staff; but whose role in
the corporation is that of a representative in
1. Chairperson of the Board of Directors relation to cases involving it—regularly indorsing
2. President of the corporation summons and complaints against the corporation,
3. General manager or Acting General following-up, and attending cases filed by and
manager against it.
4. Personnel officer
5. Employment specialist Q: How should the certificate of non-forum shopping be signed and
submitted in case of corporations?
Q: What is the basis of their authority?
A: SC Circular 28-91 require the parties themselves to sign and
A: The rationale for justifying the authority of the submit a certificate of non forum-shopping. Such requirement
above corporate officers or representatives to cannot be imposed directly on artificial persons, like corporations,
sign the verification or certification against forum for the simple reason that they cannot personally do the task
shopping is that they are in a position to verify themselves. corporations act only through their officers and
the truthfulness and correctness of the authorized agents.
allegations of the petition
NOTE: The law does not require corporate officers to sign the
NOTE: Where the corporate officer’s power as an certificate. Moreover, there is no prohibition against authorizing
agent of the corporation did not derive from such agents to do so. What is important is that there is a board resolution
a resolution, it would nonetheless be necessary to giving such authority (Aquino, 2011).
show a clear source of authority from the charter,
the by-laws, or the implied acts of the governing Q: What are required to be attached in the complaint or petition?
body.
A:
Minority right
1. Power of attorney
The minority stockholders may bring an action 2. Secretary’s certificate
against erring corporate officers in the name of 3. Board resolution
the corporation with the corporation as the real
party in interest.
NOTE: In certain cases, the SC relaxed the rule by ruling that in limitations alienable lands of public domain except by
exceptional cases, certain officers have implied authority to sign the or lease for a period of not exceeding 25
certification against forum-shopping. In those exceptional cases, the restrictions years, renewable for not more than 25
SC dispensed with the requirement of submission of a Board years, and not to exceed 1000 hectares in
resolution (Aquino, 2011). area;
b. Natural resources such as coal, petroleum
Power to adopt and use a corporate seal and other mineral oils belong to the state
and cannot be alienated;
Q: What is a seal? c. Under the General Banking Law, any real
property acquired by a bank by way of
A: It is a device used to identify or replace the signature of an satisfaction of claims under the
individual or organization and to authenticate written matter circumstances enumerated in the law shall
purportedly emanating from such individual or organization. be disposed of by it within 5 years or as
may be prescribed by the Monetary Board.
a. It may be altered by it at pleasure;
b. A seal is not required for the validity of any corporate Q: What are the basic requirements in order that a corporation can
act; deal with real or personal property?
c. Use of the corporate seal in certificate of stock must be
deemed merely directory rather than mandatory; A:
d. A corporation may exists without a corporate seal;
e. The presence of such seal, nonetheless, establishes, prima 1. It must be reasonably and necessarily required by the
facie that the instrument to which it is affixed is the act of transaction of the lawful business of the corporation
the corporation. 2. It is subject to limitations prescribed by the law and the
Constitution (Aquino, 2011)
Powers regarding shares and membership
Q: What are the requirements for the temporary lease of corporate
Q: What are the powers of a corporation regarding shares and property even if the corporation is not engaged in the business of
membership? leasing properties?
A: A:
1. The power to issue previously unsubscribed shares 1. The property is not presently used by the corporation and
2. The power to sell treasury shares 2. leasing of the property is not made on a regular basis
3. The power to sell delinquent shares 3. leasing of the property will make it productive instead of
4. The power to acquire its own shares in proper cases allowing them to remain idle
5. The power to redeem redeemable shares 4. there is no express restrictions in the AOI and by-laws
6. The power to increase or decrease the par value of shares leasing the property is not used as a scheme to prejudice
7. The power to resort to stock split (Aquino, 2011) corporate creditors or result in the infringement of the
trust fund doctrine (Aquino, 2011).
Power to acquire and convey property
Power to enter into merger or consolidation
As an a. This is a power incident to every
incident to corporation; Q: Differentiate merger from consolidation.
every b. It is necessary to carry on its business;
corporation c. While a corporation may appoint agents to A:
negotiate for the purchase of real property
needed by the corporation, the final say will MERGER CONSOLIDATION
have to be with the BOD whose approval Occurs when 2 or more Occurs when 2 or more
will finalize the transaction. corporations merge into a single corporations form a new single
As a. Property obtained by a corporation which is corporation which shall be one corporation (Aquino, 2011)
necessary foreign to the purposes for which it was of the constituent corporations
to the organized is an unlawful acquisition;
transaction b. A corporation may not validly purchase, Power to acquire shares or securities
of its lawful sell, mortgage, etc. assets if it is not in the
business legitimate furtherance of its purposes; Shares of a. Such act does not need the approval of
c. A corporation can legally enter into or form other the stockholders if done in pursuance of
a joint venture corporation to be owned by corporations the purpose or purposes of the
it and others as stockholders; corporation as stated in the AOI but when
d. Transfer or sale of shares owned by a the purpose is done solely for investment,
corporation in another corporation requires the approval of stockholders as required
approval by the BOD of the seller by Sec. 42 is necessary;
corporation. b. GR: A corporation has no power to
As subject a. Under the constitution, no private purchase or hold stock in another
to corporation or association may hold
corporation unless it is one of the
activities permitted by its AOI; A: It considers the corporation’s financial
c. When a corporation subscribes to the condition.
capital stock of another corporation, it is
required to pay its subscription in full; NOTE: Yet, stockholders and creditors who may feel
d. While a corporation has an unlimited aggrieved are not denied the right to question the
capacity to contract obligations, it has only exercise of the power and if found excessive, to seek
a limited capacity to pay. adequate relief therefrom.
Shares of Corporations may acquire its own stocks only when
the it has unrestricted retained earnings to cover the
acquiring shares to be purchased or acquired. Power to establish pension, retirement and other plans
corporation
Such a. Sec.36(10) is a statutory recognition that
Corporation as stockholder or member plans disbursement of corporate funds in
promote pursuance of such plans likewise promotes
A private corporation may become a stockholder and member of corporate the purpose or purposes for which the
another corporation with all the rights and liabilities attaching to purpose corporation was formed. Court has been
such relation, either when it is expressly authorized by statute or its or liberal in finding as a responsibility of business
charter to do so, or when such subscription purchase is within its purposes the comfort, health, and well-being of its EEs;
implied powers as a necessary or proper means of exercising the b. It is within the implied powers of the
other powers conferred on it. corporation and is a well-established practice
of corporations.
Power to contribute to charity (reasonable donations) Such a. Other benefits that a corporation may extend
plans to its EEs:
Existence of Sec.36 9) expressly vests in business corporations the promote i. Vacations
power authority to contribute for purely charitable better ii. Sick benefits
formerly purposes. relations iii. Medical treatment
unsettled with iv. Pensions which are not necessarily
NOTE: This rule is not settled before as a business corporate charitable acts but actually part of
corporation is organized and carried on primarily for EEs the employment contract;
the profit of stockholders. The powers of the b. Under the NIRC, such contributions are
directors are to be employed for that end. deductible from gross income and all income
Basis of Ratio: “Social Responsibility Theory” of the funds of such trusts are exempt from
power now income tax, including retirement benefits
expressly Today, there is a view that business corporations are granted thereunder.
granted not organized solely as profit-making enterprises but
also as economic and social institutions with Other powers
corresponding public responsibility to aid in the
betterment of economic and social conditions in the Q: What are the other powers under Section 36?
community in which such corporations are doing
business. A:
Limited on Q: What are the requisites under this power to
power make reasonable donations? 1. Power to hire employees
2. Engage the services of contractors
A: The following are the limitations imposed on the 3. Open bank accounts
authority of a corporation to make donations: 4. Other matters that are necessary for its operations
(Aquino, 2011)
a. Amount therof must be reasonable;
b. Donation must be for valid purposes Power to grant as guarantor
including:
i. Public welfare Power generally GR: No corporation has the power to become a
ii. Hospital withheld guarantor or surety or otherwise led its credit
iii. Charitable to another person or corporation. it is without
iv. Cultural implied power to guarantee for
v. Scientific accommodation the contract of its customers
vi. Civic with third persons on the ground that it may
vii. Similar purposes thus stimulate its own business.
c. Donations must not be inn aid of any Where corporate XPNs: Court will allow an accommodation
political party or candidate or for purposes business will be indorsement under an implied authorization
of partisan political activity; advanced where the guarantee tends directly to promote
the business authorized by its articles or is an
Q: What is reasonable under the appropriate means by which it may reasonably
circumstances? be expected that the business in which the

corporation is engaged will be advanced. available to a dissenting stockholder if the corporate term
Where risk XPN to the XPN: Even when there is a possible is shortened as it is expressly recognized in Sec.81;
considerable and benefit to the corporation the risk can be b. Appraisal right applies only to a stockholder of a stock
benefit remote or considerable and the benefit can be remote, corporation.
disproportionate intangible, and difficult to evaluate. Where thy
been sufficiently remote and incidental or Power to increase or decrease capital stock; incur, create or
disproportionate to the risks, courts have held increase bonded indebtedness (Sec. 38)
the guarantee unenforceable.
Power to increase or decrease capital stock
Power to extend or shorten corporate term (Sec. 37)
NOTE: An increase or reduction in the capital stock is a fundamental
Q: Is this power an inherent right? change in the corporation. Thus, it results in the amendment of the
AOI.
A: No since the life of the corporation is just a concession of the
State. Q: Is the power to increase or decrease capital stock the same as
mere increase of subscribed capital stock or paid up capital?
a. Corporate term may be extended or shortened by an
amendment of the AOI approved by: A: No, the latter does not necessarily require amendment of the AOI
i. the majority vote of the BOD or BOT and (Aquino, 2011).
ii. ratified at a meeting of the stockholders
representing at least 2/3 of the outstanding Q: What are the ways to increase capital stock?
capital stock or by at least 2/3 of the members in
case of non-stock corporations; A:
b. It must be taken at a meeting of the stockholders or
members and upon a vote. Mere written assent would not 1. By increasing the number of shares and retaining the par
be sufficient. Yet, the formal requirements under Sec. 16 value
must be complied with; 2. By increasing the par value of existing shares without
c. Provision on the taking effect of the amendment upon its changing the number of shares
approval by the SEC is not applicable because the date of 3. By increasing the number of shares and increasing the par
the approval by the Commission may be before the value (Aquino, 2011)
effectivity date of the extension or reduction of the
corporate term; Q: How can it be decreased?
d. The effictivity of the amendment relates back to the date
of its filing with the SEC in case the latter fails to act within A:
6 months from such date for cause not attributable to the
corporation; 1. By decreasing the number of shares and retaining the par
e. Voluntary dissolution of a corporation may be effected by value
amending the AOI to shorten the corporate term; 2. By decreasing the par value of existing shares without
f. Limitation: Sec. 11 changing the number of shares
3. By decreasing the number of shares and increasing the par
Q: What are the requirements under this section? value (Aquino, 2011)
A: NOTE:
1. The action must be approved by a majority vote of the a. Sec.38 prescribes the procedure to be complied with to
board of directors or trustees effect a legal increase or decrease of the capital stock (not
2. The action must be ratified at a meeting by the capital) which is now subject to prior approval of the SEC.
stockholders representing at least 2/3 of the outstanding Even holders of non-voting shares are entitled to vote on
capital stock or by at least 2/3 of the members in case of the matter;
non-stock corporations b. Notice requirement under par. 1 is mandatory and is
3. Written notice of the proposed action and of the time and designed to protect the interests of minority stockholders;
place of the meeting shall be addressed to each c. There is no prohibition for a corporation to increase its
stockholder or member at his place of residences as shown authorized capital stock even if the same has not yet been
on the books of the corporation and deposited to the fully subscribed.
addressee in the post office with postage, prepaid, or
served personally Stock split
4. A copy of the amended articles of incorporation shall be
submitted to the SEC for approval (Aquino, 2011) Q: What is stock-split?
Appraisal right of dissenting stockholders A: The increase or decrease of capital will not necessarily result if
there is a stock split. In stock split, a share is divided or converted
a. Sec. 37 grants appraisal right to a dissenting stockholder in into 2 or more shares but the amount of the outstanding capital
case of extension of corporate term. Such right should be remains the same because the par value is also divided as many
shares (Aquino, 2011).
number of no-par stock subscribed by each, and
Reverse stock-split the amount paid by each on his subscription in
cash or property, or the amount of capital stock
Q: What is reverse stock-split? or number of shares of no-par stock allotted to
each stock-holder if such increase is for the
A: It is pro-rata combination of all the outstanding shares or a purpose of making effective stock dividend
specified class into smaller number of shares of that class. A reverse therefor authorized;
stock-split may be required to increase the market value per share iv. Any bonded indebtedness to be incurred,
or it may be designed to eliminate minority stockholders (Aquino, created or increased;
2011). v. The actual indebtedness of the corporation on
the day of the meeting;
Limitations on the power vi. The amount of stock represented at the
meeting; and
a. GR: A corporation cannot lawful decrease its capital stock vii. The vote authorizing the increase or diminution
if such decrease will have the effect of relieving existing of the capital stock, or the incurring, creating or
subscribers from the obligation of paying for their unpaid increasing of any bonded indebtedness.
subscriptions without a valuable consideration for such 6. For increase of capital stock, the application to be filed
release, as such an act constitutes an attempted with the SEC shall be accompanied by:
withdrawal of so much capital upon which corporate a. Sworn statement of the treasurer lawfully holding
creditors are entitled to rely; office at the time of the filing of the certificate,
b. A corporation cannot issue stock in excess of the amount showing that at least twenty-five (25%) percent of
limited by its AOI; such issue is ultra vires and the stock so such increased capital stock has been subscribed and
issued is void even in the hands of a bona fide purchaser that at least twenty-five (25%) percent of the amount
for value; subscribed has been paid either in actual cash to the
c. There is no prohibition for a corporation to increase its corporation or that there has been transferred to the
authorized capital stocks even if the same has not yet corporation property the valuation of which is equal
been fully subscribed. to twenty-five (25%) percent of the subscription
7. For decrease of capital stock, no decrease of the capital
Q: What are the requirements for the increase or decrease of stock shall be approved by the Commission if its effect
authorized capital stock? shall prejudice the rights of corporate creditors.
A: Q: What are the basic documentary requirements prescribed by

the SEC for the approval of the application for the increase of the
1. It must be approved by a majority vote of the board of authorized capital stock?
directors
2. At a stockholder’s meeting duly called for that purpose, A:
2/3 of the outstanding capital stock must favor the
increase or diminution of the capital stock 1. Certificate of Increase of capital stock
3. In connection with the stockholder’s meeting, Written 2. Treasurer’s affidavit
notice of the proposed increase or diminution of the 3. List of stockholders as of date of meeting approving the
capital stock or of the incurring, creating, or increasing of increase, including their nationalities and their respective
any bonded indebtedness and of the time and place of the subscribed and paid-up capital on the present authorized
stockholder's meeting at which the proposed increase or capital stock certified by the corporate secretary
diminution of the capital stock or the incurring or 4. Amended AOI
increasing of any bonded indebtedness is to be 5. Director’s Certificate
considered, must be addressed to each stockholder at his 6. Company Data Maintenance Form (CDMF)
place of residence as shown on the books of the 7. Audited financial statements as of the last fiscal year
corporation and deposited to the addressee in the post stamped received by BIR and SEC (Aquino, 2011)
office with postage prepaid, or served personally
4. A certificate in duplicate must be: Necessity of increasing capital stock
a. Signed by a majority of the directors of the
corporation Increase of An increase of the amount of capital stock may be for
b. Countersigned by the chairman and the secretary corporate the purpose of effecting an increase in the corporate
assets assets by authorizing:
5. The certificate should contain the following:
i. That the requirements of this section have been a. Creation of new shares to be offered and
complied with; issued at a fixed valuation; or
ii. The amount of the increase or diminution of the b. Increase of the par value shares authorized
capital stock; to be issued.
iii. If an increase of the capital stock, the amount of Issuance of Capital stock may also be increased without the
capital stock or number of shares of no-par stock stock corresponding increase in the corporate assets by the
thereof actually subscribed, the names, dividends issuance of stock dividends.
nationalities and residences of the persons
subscribing, the amount of capital stock or Necessity of new subscription for increase
NOTE:
GR: An increase in the authorized capital stock cannot be lawfully
accomplished without an actual increase in the assets of the 1. Subscriptions for such stock are likewise void both on the
corporation and additional subscriptions. ground of illegality and for want of consideration
2. Subscribers for or purchasers of such stock acquire none of
XPN: When such increase is for the purpose of effecting a stock the rights of stockholders, although bona fide purchasers
dividend. of certificates therefor may have a right of action against
the corporation for damages
If the in increase of the authorized capital stock is not for the 3. Subscribers for or purchasers of such shares do not
purpose of making effective stock dividends previously authorized, become liable to creditors of the corporation or on a
the law requires to be stated in the certificate matters mentioned in winding up as stockholders for unpaid subscriptions, and
par. 2(3). are not subject to a statutory liability to creditors imposed
upon stockholders
Effectivity of increase or decrease 4. Subscribers for or purchasers of such shares from the
corporation may recover from it money paid it to under
From and a. Capital stock of a corporations stands their subscription or purchase as upon a failure of
after the increased or decreased only from and consideration, or breach of warranty of the existence of
approval of after approval and issuance by the SEC of the thing sold, unless they are precluded from such relief
the SEC its certificate of filing of increase or as parties in pari delicto
decrease of capital stock;
b. Before the issuance of certificate of filing Q: What is the effect of the corporation’s cancellation of the illegal
of increase of capital stock, the shares and repays to the subscribers the money paid by them?
subscribers to the proposed increase
cannot be considered as stockholders and A: The corporation is not liable to or for creditors for the amount so
be accorded the rights as such for the repaid.
shares subscribed by each.
Use of a. Where the corporation is already a going Subscription requirement in case of increase of capital stock
amount of concern in need of steady supply of funds
increase for its business operations, it is the policy Subscriptions and payments based on capital stock as increased
during the of the SEC to allow the use of the amount 1. New subscriptions necessary- if the corporation has an
pendency of representing the paid-up capital received unauthorized capital stock of P20,000 and it is proposed to
application on account of the proposed increase of increase it to P50,000, an increase of P30,000
capital stock so as not to disrupt its subscriptions must be obtained for not less than P6,000
operations during the pendency of the and payments in cash or in property amounting to less
application for increase of the capital than P1, 500 must be made on account of such
stock with the Commission. subscriptions. This assumes that the total subscriptions
and payments to the original capital stock are in the same
Over-issue of shares proportion
2. No new subscriptions necessary- where at the time of the
Q: What is the other term for “over-issued stock”? increase, at least P12,500 worth of shares, which
represent 25% of P50,000, the amount of the capital stock
A: It is also known as spurious stock. An issue of stock by a as increased, had already been subscribed and P3,125 or
corporation in excess of the amount prescribed or limited by its AOI 25% therefor paid, it would seem that no new
is ultra vires and the stock so issued is void even in the hands of a subscriptions are necessary. In such case, the reason for
bona fide purchaser for value. requiring new subscriptions no longer exists.
Subscriptions and payments based on additional amount by which
NOTE: Where the corporation is permitted by law to increase its capital stock is increased
capital stock, mere irregularities in effecting such increase will not The SEC has construed the phrase to mean the additional amount by
necessarily invalidate the increase issue. which the capital stock is increased. A contrary rule may defeat the
intention to infuse capital. Thus, when the corporation has several
Q: Is there an over-issued share where shares have been classes of shares, the 25% subscription requirement may be applied
surrendered have been issued in their stead? only to one class of shares or it may distribute it to all classes of
shares, equally or evenly.
A: No. The new issue in such case merely takes the place of the
shares surrendered. Q: Is there a need to attach a treasurer’s affidavit in case of
decrease of capital stock?
Unauthorized increases of capital stock
A: No.
Q: What is the effect of an attempted unauthorized increase of
capital stock? Ways of increasing or decreasing authorized capital stock
A: The same is null and void and it cannot be validated by Q: What are the ways of increasing or decreasing authorized
application of the doctrine of estoppel. capital stock?

A: Distribution of surplus on reduction
1. By increasing (decreasing) the number of shares Where Unless the rights of CRs will be affected or the capital
authorized to be issued without increasing (decreasing) there is no impaired, the directors may make an equitable
the par value thereof impairment distribution of such surplus or so much as may be
2. By increasing (decreasing) the par value of each share of capital required in carrying on the business for the interests
without increasing (decreasing) the number thereof of the stockholders.
3. By increasing (decreasing) both the number of shares Where GR: Where the capital stock is impaired and a
authorized to be issued and the par value thereof. reduction is reduction is made merely to meet that impairment,
made to there will be no distribution of assets among the
Increase by way of stock dividends meet the shareholders.
impairment
Stock dividends are ordinarily declared out of the authorized but Distribution Distribution cannot be compelled. The funds resulting
unissued shares of the corporation. not from such reduction represent capital and not profits.
mandatory
A corporation may also increase its capital stock by way of stock
dividends without touching its unissued shared as long as there are Q: Who are the persons entitled to question increase or decrease
sufficient retained earnings to cover the increase. of capital stock?
If the proposes stock dividend would result in the issuance of stock A: The unauthorized increase or reduction of capital stock may be
in excess of the corporation’s authorized capital stock, the over- attacked and avoided by:
issue is null and void.
1. the corporation itself;
Reduction of capital stock 2. dissenting stockholders, in the absence of estoppel;
3. creditors of the corporation;
By a. Upon reduction of its capital stock, a 4. receiver or assignee representing them.
decrease corporation may also do so by redeeming
of number redeemable shares or purchasing its shares Power to incur, create or increase bonded indebtedness
of and cancelling or retiring the same, including
authorized treasury shares; or Q: What is a corporate bond?
shares b. It may accept a surrender of shares and give
the shareholders in exchange therefor a A: It is an obligation to pay a definite sum of money at a future time
proportionate amount of its shares of its at a fixed rate of interest.
assets, provided that no creditors are
involved or Issue bonds for that purpose or A business corporation may barrow money whenever the necessity
exchange another class of stock for that of its business so requires and issue security or customary evidence
retired, or exchange its outstanding shares of debt such as bonds, notes or mortgages.
for a smaller number of shares.
By a. Shares which are retired or reduced no The bond issues are usually secured by the transfer to a trustee of
decrease longer exist for any purpose. specific property to secure payment of the debt.
of par b. If the shares acquired are not retired or
value of cancelled, no decrease in capital stock is Bonds are usually run to bearer and are transferable by delivery.
authorized effected, for the shares exists as treasury
shares shares. Q: What is “bonded indebtedness”?
c. Par value shares may be reduced for the
purpose of eliminating its deficit. A: It refers to secured indebtedness or those secured by real or
personal property.
Effect of reduction on liability for unpaid subscription
Procedure and formalities
As against A corporation has no power to release an original
corporate subscriber to its capital stock from obligation of Procedure for incurring bonded indebtedness is the same as the
creditors paying for his shares without a valuable procedure for increasing or decreasing the capital stock except that
consideration for such release, and as against the certificate need not state matters set forth in Nos. 2 and 3 and is
creditors, a reduction of the capital stock can take not required to be accompanied by the sworn statement of the
place only in the manner and under the conditions treasurer of the corporation concerning the amount of the increased
prescribed by the statute. capital stock subscribed and paid.
As between Q: What is the effect of the failure to give the
the prescribed notice? Q: Who are entitled to vote?
corporation
and the A: It will not invalidate the reduction, if it is A: Even holders of non-voting shares or non-voting members are
stockholders otherwise valid as between the corporation and the entitled to vote on the matter.
stockholders where all the stockholders consent,
subject to the rights of the corporate creditors. Prior approval of, and registration of bonds with SEC

Any incurring, creating or increasing by the corporation of any Q: What are the usual provisions of a bond indenture?
bonded indebtedness is subject to prior approval of the SEC.
A:
WHEN OBLIGATIONS CONSTITUTE BONDED INDEBTEDNESS
1. Total amount of the bonds authorized to be issued under
Q: Distinguish between notes and bonds. the indenture or a statement that the amount is unlimited;
2. A statement that additional bonds may be issued in the
A: future (open indenture) or that the first issue will be the
only one permitted (closed indenture);
Notes Bonds 3. Statement of the purposes for which additional bonds may
When a corporation borrows money, its indebtedness may be be issued, such as for construction or acquisition of
evidenced by notes or bonds as its primary security. property;
REQUIREMENTS: REQUIREMENTS: 4. Stipulation that all bonds must be identical in terms or that
a series of issues, possibly having different interest rates,
1. If the amount 1. Amount is large and maturity dates, and call prices, may be sold under the
borrowed is small and obtained from a basic indenture;
if it is borrowed in a number of people; 5. Details of the collateral or mortgage security to be
single sum; 2. Extends over a period provided;
2. From few persons; and of years. 6. Mechanics of interest payments, registration of bonds,
3. For a short time and principal repayments; and
7. Terns of special features such as sinking funds, call
Phrasing is usually more formal provisions and conversion options.
Payment of bonds is usually
secured as to both principal and Q: What are the types of bonds?
interest by certain specified
property held for the purpose A:
under a formal deed or trust.
1. Common; and
Q: What are the 2 principal distinctions between bonds and notes? 2. Special
A: Common types of bonds
1. Time duration; and Q: What are the common types of bonds?

2. Division of the whole debt into like aliquot part units of
round number denominations, represented by negotiable A:
or assignable certificates of indebtedness.
1. Secured; and
Corporate bond contract 2. Unsecured.
Q: Who are the 3 parties to a corporation bond contract? Q: What are the types of secured bonds?
A: A:
1. Borrowing corporation; Mortgage Debt instruments of financing secured by a lien

2. Bondholders bonds on specifically named property—land, building,
3. Trustee—a bank or trust company which is chosen and equipment and other fixed assets pledged as
paid by the corporation but serves mainly to protect the security.
bondholders. Collateral trust Debt instruments secured by a pledge of either
bonds stocks or bonds, or both which are deposited with
Q: What are the functions of the trustee? a trustee.
Equipment Debt instruments to secure financing loans on
A: obligations locomotives, railway cars, buses, large trucks, and
similar equipment.
1. Countersigning the bonds to assure authenticity;
2. Collecting interest and principal payments from the Q: What are the examples of unsecured bonds?
debtor-corporation and distributing them to those
entitled; A:
3. Acting as mortgagee or collateral holder if the bonds are
secured; Straight General credit bonds not secured by any specific
4. Verifying the performance of the debtor corporation’s debenture property. The earning of the issuing corporation
promises on behalf of the bondholders; and bonds provides the protection to the debenture
5. Taking legal action on behalf of the bondholders if bondholders.
necessary. Guaranteed Type for which one or more individuals or

bonds corporations other than the issuer guarantees the exceptions
payment of interest or principal or both; and
Subordinated Debt instruments specifying that the holder’s Q: What is the reason for the grant of right?
debenture rights are inferior in the event of liquidation or
reorganization to any existing and future debt A: It aims to safeguard the right of a stockholder to preserve
defined in the indenture as senior debt. unaltered and unimpaired his proportionate influence and interest
in the corporation and the relative value of his holdings.
Special types of bonds It is to protect from impairment and dilution the basic rights of the
existing stockholders in the corporation—to voting control, to
Convertible Bonds which may be exchanged for the common dividend payments, and to the net assets of the corporation.
debentures stock of the issuing corporation at a fixed price by
a predetermined redemption rate at the option of Q: Who can make the waiver of such right?
the bondholder;
Income binds Debts instruments with a fixed rate of interest A: Being a personal right, the waiver should be given individually by
or adjustment payable only if earned and declared by the BOD. the stockholder concerned or by another by way of a special power
bonds of attorney. It cannot be made by the corporation itself through a
Bonds with Option or a right, exercisable by its holder, to stockholder’s resolution.
warrant or purchase stock at a stated price during a
stock purchase stipulated period of time. Bond warrant issues are Power to deny pre-emptive right
warrant usually debentures and the warrants are
detachable or non-detachable. The right may be denied by:
Q: What are detachable warrants? 1. The articles of incorporation or an amendment thereto;

2. Exceptions under Sec. 39.
A: They are usually preferred by investors
because such warrants may be sold or exercised Q: Shares to which the right is not available?
apart from the bond whereas non-detachable
warrants cannot be sold or exercised separately A:
from the bond.
1. Shares to be issued in compliance with laws requiring
stock offerings or minimum stock ownership by the public;
Power to deny pre-emptive right (Sec. 39) 2. Shares to be issued in good faith with the approval of
stockholders representing 2/3 of the outstanding capital
Right of pre-emption of stockholders stock in exchange of property needed for corporate
purposes; and
Q: What is “pre-emptive right”? 3. Shares to be issued in good faith with the approval of the
stockholders representing 2/3 of the outstanding capital
A: Whenever the capital stock of a corporation is increased and new stock in payment of previously contracted debt.
shares of stock are issued, the new issue must be offered first to the
stockholders who are at the time the increase was made in RATIO:
proportion to their existing shareholdings and on equal terms with
other holders of the original stocks before subscriptions are received 1. Practical convenience and necessity;
from the general public. 2. Exercise of discretion of the BOD in making new issues of
shares to enable the corporation to carry on the corporate
Availability 1. Right extends only to new issues of shares business.
of right to arising from any increase of capital stock
new issues effected under Sec. 38; Offering of remaining unsubscribed shares
of shares 2. May also be available with respect to issues
and or disposition of unissued shares belonging To public or a. If the unissued shares corresponding to
unissued to the original stock of the corporation; any person one stockholder are not subscribed or
shares 3. It also extends therefore to unsubscribed acceptable purchased by him within the period fixed
portion of the capital stock and even to to for the exercise of his pre-emptive right,
treasury shares. corporation he is deemed to have impliedly waived his
Acquisition When shares of stock are sold by the holder after an right to subscribe to the same or to the
by increase of the capital stock has been voted, the balance if he subscribes only to a portion.;
transferor purchaser acquires, the same right of preference in b. The unsubscribed shares may be offered
of right subscribing for or purchasing the new stock as was to the public on first-come, first-served
possessed by the transferor. basis or to any person acceptable to the
corporation without violating the pre-
XPN: Where the assignors have previously exercised emptive right of such stockholders.
their pre-emptive rights to subscribe new issues. To As a matter of policy, SEC considers it sound
Right Right is not absolute as it admits of certain stockholders corporate practice to offer always the remaining
subject to exceptions. of record shares to stockholders of record whenever practical
and feasible before offering them to the public.
It does not apply where the shares belong to the original capital
Q: What is the time within which the right may be exercised? stock of the corporation unsubscribed or indisposed of, inasmuch as
such shares constitute a part of the assets, and may be sold either to
A: stockholders or to strangers as the stockholder may deem best even
without notice to stockholders.
GR: Fixed in the resolution authorizing the increase of capital stock.
Q: What is the underlying basis of this right to pre-emptive right?
Majority of the stockholders have a right to fix the time to suit
themselves and the interests of the corporation. The only limitation A: To maintain the relative and proportionate voting strength and
upon the exercise of the prerogative is that every stockholder shall control of existing shareholders. It is aimed to maintain the existing
be treated alike and shall be afforded a reasonable opportunity to ratio of the shareholder’s interest and voting power in the
subscribe. corporation (Aquino, 2011).
Pre-emptive right as to treasury shares Q: What does this right cover?
1. In close corporations, the pre-emptive right of A:

stockholders extends to all stock to be issued including the
reissuance of treasury shares unless the AOI provide 3. All issues and disposition
otherwise; and 4. Issuance of the unsubscribed shares which are part of the
2. Existing stockholders have also the right as to treasury original capital stock and the increase of capital stock
shares. 5. Disposition of Treasury shares (Aquino, 2011)
Price of new stock offerings NOTE:
Interests of 1. Protection against dilution of their equity a. If the shares are offered and are not subscribed or
the in the corporation; purchased by shareholders and later the shares are being
corporation 2. Protection of their proportionate voting offered the same, there is no pre-emptive right with
and all control; respect to the latter offer of shares.
stockholders 3. Power to determine the price must be b. The pre-emptive right is not available when shares are
to be exercised for the benefit of the issued in exchange for shares in another corporation if the
considered corporation and in the interests of all same is the result of a merger to which the corporations
stockholders are parties.
Where price When new shares are issued at prices far below
far below their fair value in a corporation with only a limited Q: Can this pre-emptive right be waived?
fair market market for its shares, existing stockholders who do
value not have the capacity to invest additional funds A: A stockholder who neither desires nor intends to buy any of the
have their equity interest in the corporation diluted stocks being offered may waive such right. In which event, the
to the vanishing point. shares may be offered to any interested persons acceptable to the
Right of One part of the stockholder’s right to maintain corporation (Aquino, 2011).
stockholders proportionate equity by purchasing additional
to maintain shares is the right not to acquire additional shares Q: Describe the nature of this pre-emptive right.
equity and without being confronted with dilution of his
at the same existing equity if there is not valid business A: It is only a personal right, hence, such waiver should be given
time not to justification for the dilution. individually by the stockholders concerned or he can authorize
acquire somebody to execute the same for and in his behalf by way of a
additional special power attorney.
shares
Right of A corporation is not permitted to dispose its stock Q: Can this right be transferred?
stockholders for a legally inadequate price at least where is
to insist on objection. A: The right to subscribe to new issues and disposition may be
legally transferred by the shareholder.
adequate
rpice. GR: The pre-emptive right is transferable.
Availability of right to additional issue originally authorized shares XPN: Unless there is an express restriction in the AOI.
A shareholder’s pre-emptive right is his option to allotment shares Sale and other disposition of assets (Sec. 40)
before new shares are offered to others.
Power to sell, lease, etc, all or substantially all corporate assets
Q: When does this doctrine apply?
Q: What are the requisites for the validity of such sale, etc.?
A: It applies when a corporation increases its capital stock by
declaring a stock dividend. A:

1. Sale, etc. must be approved by the BOD or BOT; part of the assets of the corporation,
2. The action of the BOD/BOT must be authorized by the vote even if substantial, and the sale thereof
of stockholders representing at least 2/3 of the will nit render the corporation
outstanding capital stock including holders of non-voting incapable of continuing its business, the
shares or 2/3 of members, as the case may be; BOD or BOT may dispose of the same
3. The authorization must be at a stockholder’s or members’ as it may deem convenient without
meeting duly called for that purpose after written notice. need of approval of the stockholders or
members of the corporation.
Limitations Non-stock The vote of the majority of the trustees will be
corporations sufficient authorization for the corporation to
1. It shall be subject to the provisions of existing laws on enter into any transaction authorized by Sec. 40
illegal combinations and monopolies;
2. Under Bulk Sales law, the sale, etc. of all or nay portion of Appraisal right of dissenting stockholder
a stock of goods, merchandise, provisions or materials
otherwise than in the ordinary course of business is Any disposition which does not involve all or substantially all of the
declared fraudulent and void as to CRs of the vendor corporate assets does not require the approval of the stockholders
unless specified formalities are observed such as the giving and members and would not entitle any dissenting stockholder to
of a list of CRs to whom said vendor may be indebted. exercise his appraisal right.
Sale of all assets without dissolution To determine if the sale is made in the ordinary course of business,
the test is not the amount involved but the nature of the
A corporation may sell all its assets without necessarily dissolving or transaction.
terminating its existence.
Power to acquire own shares (Sec. 41)
The only way the transfer can proceed without prejudice to the
creditor is to make the assignee assume liabilities of the assignor, Q: What is the limitation of this power?
unless the CRs who did not consent to the transfer choose to rescind
the transfer on the ground of fraud. A: The acquisition is for the legitimate corporate purpose or
purposes and that there be unrestricted retained earnings in its
Q: What is the liability of the purchasing corporation? books to cover shares acquired.
A: Elimination of Q: What is a fractional share?

fractional
GR: The purchasing corporation is not liable for the debts and shares A: It is a share which is less than 1 corporate
liabilities of the transferor provided that the latter acted in good share.
faith and paid adequate consideration for such assets.
Inasmuch as the fractional shares cannot be
XPN: represented at corporate meetings, the
corporation may purchase the same from the
1. Where the purchaser expressly or impliedly agrees to stockholder concerned or issue fractional scrip
assume such debts; certificates to such stockholder who may
2. Where the transaction amounts to a consolidation or negotiate for the sale thereof with other
merger of the corporations; stockholders also owing fractional shares so as
3. Where the purchasing corporation is merely continuation to convert them into full shares.
of the selling corporation;
4. Where the transaction is entered into fraudulently in order Satisfaction of Does not authorize a corporation to arbitrarily
to escape for such debts. indebtedness to purchase the shares issued to any of its
corporations stockholders indebted to it.
Authority of the board Payment of Instances when a dissenting stockholder is given
shares of appraisal right and the right to withdraw from
Stock a. Board is given the right to decide upon dissenting or the corporation as provided in Sec. 16, 37, 40,
corporations the terms and conditions of the withdrawing 42, 68, 77, and 105.
transaction: stockholders
-consideration Other cases 1. Sec. 9 with respect to treasury shares;
-rate 2. With respect to redeemable shares,
they may be purchased by the
b. Subject to the approval of the corporation regardless of the existence
stockholders or members; of unrestricted retained earnings in
c. After the approval, the Board may the books of the corporation;
nevertheless, abandon the transaction 3. To effect decrease in the capital stock
without further action or approval of of the corporation;
the stockholders or members but 4. In close corporation, where there is a
subject to the rights of third parties; deadlock respecting the management
d. If the property sold constitutes merely a
of its business of its business, the SEC purposes AOI without amending the purpose clause of said
may order the purchase at their value articles to include the desired business activity
of shares of any stockholder by the among its secondary purposes.
corporation regardless of the Incident to A corporation may invest in another business
availability of unrestricted retained primary which is incident or auxiliary to its primary
earnings. purpose purpose as stated in the AOI without the approval
of the stockholders or members.
Q: What are the conditions for the exercise of the power?
1. Even holders of non-voting shares or
A: no-voting members are entitled to vote
on the matter;
1. That its capital is not thereby impaired; 2. Dissenting stockholder shall have no
2. That it be for a legitimate and proper corporate purpose; right of appraisal;
3. That there be unrestricted retained earnings to purchase
the same and its capital is not thereby impaired; Ratification of defective investment
4. That the corporation acts in good faith and without
prejudice to the rights of creditors and stockholders; and A corporate transaction or contract which is within the corporate
5. That the conditions of corporate affairs warrant it. powers but which is defective for failure to observe in its execution
the requirement of Sec. 42 that the investment must be authorized
SEC has the exclusive supervision, control, and regulatory by the affirmative vote of the stockholders, may be ratified.
jurisdiction to investigate whether the corporation has unrestricted
retained earnings to cover the payment of shares, and whether the Mere ultra vires acts or those which are not illegal and void ab
purchase is for a legitimate corporate purpose. initio, but are not merely within the scope of the articles of
incorporation are merely voidable and may become binding and
Trust fund doctrine enforceable when ratified by the stockholders.
It holds that the assets of the corporation as represented by its Power to declare dividends (Sec. 43)
capital stock are “trust funds” to be maintained unimpaired and to
used to pay corporate creditors in the sense that there can no Q: What are dividends?
distribution of such assets among the stockholders without
provision being first made for the payment of corporate debts and A: It is that part or portion of the profits of a corporation set aside,
that any such disposition of its fraud on the creditors of the declared and ordered by the directors to be paid ratably to the
corporation who extend credit to the corporation on the faith of its stockholders on demand or at a fixed time.
outstanding capital stock and thus, void.
a. All stockholders of the same class share in it in proportion
GR: A corporation has generally no power to purchase its own to the respective amounts of stock which they hold;
shares of stock except otherwise provided in the Code. b. There must be a surplus or profits to be divided;
c. Dividends, regardless of form—cash, property, or stocks
RATIO: Necessity of protecting the interests of existing creditors are valued at the amount of the declared dividend taken
who may be adversely affected by the stock purchase which may from the unrestricted retained earnings of the
operate to reduce its capital stock to the extent of the shares corporation.
purchased without complying with the formalities required.
Q: What are profits?
Power to invest corporate funds in another corporation or business
or for any other purpose (Sec. 42) A:
Where the purpose clause of the articles of incorporation of a a. It is the return to capital rather than earnings from labor
company embodies different related purposes, the corporation may performed or services rendered;
intend to carry them out simultaneously or to prosecute first the b. The excess of return over expenditure in a transaction or
primary business in which it is most interested and them embark series of transactions or the excess of an amount received
later in any one of the purposes, as the need for expansion of the over the amount paid for goods and services.
enterprise may warrant or the necessity of a change of business may
demand. Q: Distinguish profits or earnings and dividends?
A non-stock, non-profit foundation may invest its funds in or A:

subscribe to shares of another corporation.
Dividend Profits
Purpose other than the primary purpose Portion of the profit or net Source of dividends
earnings which the corporation
Secondary The other purposes for which the funds may be has set aside for ratable
purpose invested without amending the AOI must be distribution among the
among those enumerated in the AOI. stockholders
Not among the A corporation is not allowed to engage in Dividends come from profits Are not dividends until so
secondary business distinct from those enumerated in the
declared or set aside by the
corporation. Q: Explain the wasting assets/business doctrine.
Dividends received by a All profits are part of the assets
company which is a stockholder of the corporation and do not A: When a corporation is created for the purpose of investing capital
in another corporation are belong to the stockholders in property which will necessarily be consumed or exhausted
corporate earnings arising from individually. (mining or timber-cutting treated as earnings) in the course of its
corporate investment. operations, so that the depreciation in the value of the property
cannot be repaired, it is not subject to the same rules as other
Right to a share in such corporations.
dividends, by way of salary
increases, may not be denied its The same is true of a corporation created for the purpose of utilizing
EEs when they are entitled a lease for a term of years, or patent.
thereto.
Unrestricted retained earnings
Power to declare dividends
Q: What are unrestricted retained earnings?
BOD of a corporation has the power to declare dividends out of the
“unrestricted retained earnings” which shall be payable in cash, A: It is the difference between the total present value of its assets
property, or in stock to all stockholders on the basis of the after deducting loses and liabilities and the amount of its capital
outstanding shares held by them. stock. It refers to outstanding stock and not the stated or nominal
(authorized) capital stock.
Stock a. It shall not be issued without the approval
dividends of stockholders representing at least 2/3 FORMULA:
of the capital stock then outstanding at a
regular meeting of the corporation or at a Retained earnings= Assets-liabilities and legal capital
special meeting duly called for the
purpose; The difference between the total assets and liabilities of a
b. Stockholder who oppose cannot legally corporation represents its net worth or net assets or the
refuse to receive their participation in the stockholder’s equity consisting of the capital invested and the
stock dividends retained earnings. Retained earnings are the balance of the net
Other a. Mere majority of the quorum of the BOD worth or net assets after deducting the value of the corporation’s
dividends is sufficient to declare other dividends; outstanding capital stock.
b. Board may declare other dividends other
than stock without need of stockholder’s Q: What do you mean by unrestricted?
approval;
A: It is means that the retained earnings are free for dividend
Dividends payable out of unrestricted retained earnings distribution to stockholders, if they have not been reserved or set
aside by the BOD for some corporate purpose or for some other
A corporation cannot make a valid contract to pay dividends other purpose in accordance with managerial, legal or contractual
than from retained earnings or profits and an agreement to pay such requirements.
dividends out of capital is unlawful and void.
Existence of actual profits or earnings
NOTE: The capital or capital stock which may not be impaired or
depleted by the dividends is not the entire assets of the corporation; To justify the declaration of dividends, there must be bona fide
rather it is the legal capital—referring to that portion of the net surplus profits or earned surplus over and above all debts and
assets directly or indirectly contributed by the stockholders as liabilities of the corporation.
consideration for the stocks issued to them upon the basis of their
par or issued value. a. Earnings of the corporation which have not yet been
received even though they consist in money cannot be
RATIO: included in the profits out of which dividends may be paid;
b. Dividends cannot be declared out of borrowed money, for
a. Outstanding capital stock is a trust fund for the borrowed money is not profit;
security of CRs and cannot be distributed to their c. A corporation may pay dividends from accumulated
prejudice to the stockholders as dividends; surplus out of previous years although realizing no profit
b. In order to carry out the purpose for which the from current earnings;
corporation has been created; d. Treasury shares are not distributable as dividends but if
there are retained earnings previously held to support
Q: What is the rule as to no par value stock? their acquisition, they may be declared as property
dividend out of said earnings.
A: With regard to no par value shares, the entire consideration
received from the same shall be treated as capital and shall not be Deduction of expenses
available for distribution as dividends.
Net earnings are what remain of gross receipts after deducting the
Wasting assets/business doctrine expenses of producing them.
capital stock as corporate assets or property prior to
Only such expenditures as have actually been made can properly be referring to dissolution;
claimed as a deduction from earnings. legal capital b. RATIO: Capital stock of a corporation
constitutes a trust fund for the benefit
Distribution of paid-in surplus as cash dividends of corporate CRs
c. Trust Fund Doctrine- refers to the
Q: What are paid-in surplus? assets of the corporation that
constitute a fund to which CRs have a
A: It is the difference between the par value and the higher price for right to look for the satisfaction of
which stock is sold by the corporation. their claims and which the corporation
is not allowed to impair to their
They cannot be declared as cash dividends or even as stock prejudice;
dividends because Sec. 43 provides that dividends can be declared d. Capital stock which must not be
only from the unrestricted retained earnings. Accordingly, the entire reduced by the payment of the
proceeds of sales of the corporation of its own stock, even when dividends means the legal capital of
sold for more than par value, are part of its capital stock and the corporation.
therefore, cannot be profits earned through the conduct of its Increase of a. It depends on the BOD whether or not
business out of which dividends may be paid. capital account to create premium surplus, and thus,
without whether or not the increase in the
Dividends from Unrestricted retained earnings are not limited to issuance of value of the stock is to be treated as
other gains not the accumulated earned surplus of the additional part of the corporation’s capital stock;
arising from corporation, but may also include other gains shares b. Corporation may declare stock
business not arising from its business. dividends from the premium surplus
Absence of a. There is no provision which specifically but the same is valid only when
provision on treats paid-in surplus from the issue of corresponding shares are issued to the
treatment of par value shares as part of the capital stockholders for the amount
paid-in-surplus stock; transferred as stock dividend involves
from issue of b. Yet, Sec. 16 already restricted the transfer of surplus to capital amount.
par value shares distribution by a corporation of Issuance of Sec. 62 prohibits a corporation from issuing
dividends only to surplus profits stock at par stock for a consideration less than the par value
arising from its business. value but less but it is not required by law to issue stock which
Credit of paid- a. At the start of the operation of a than market has increased in value.
in-surplus to corporation, the actual value of its value
profit and loss shares is the same as their par value;
b. Premium on stock issued after the Distribution of revaluation surplus as dividends
corporation has accumulated profits is
justified by the need to equalize as Q: What is revaluation or appraisal surplus?
between the new and the old
stockholders their respective rights in A: It is the excess increment on the property over stated cost. It is
such profits which are distributable in the result of an estimated increase in the value of the property.
cash dividends.
c. Premium should be credited to profit GR: An increase in the value of fixed assets such as land as a result of
and loss and not to capital. mere valuation cannot be counted in the computation of a surplus
Treatment of a. Amount which the corporation is as a basis for a dividend declaration.
paid-in surplus authorized to raise by the issue of
as premium for shares should not exceed the RATIO: Such increase in valuation cannot be considered for
privilege of authorized capital stock which can purposes of dividend declaration is merely anticipatory of future
subscribing only be increased by complying with profits and may never be actually realized as an asset of the
the formalities prescribed by Sec. 38; corporation by the sale of the property at the value it was appraised.
b. When shares are issued above par, the
excess is not to be treated as capital, XPNs: Where a fixed asset is being depreciated based on its
but merely as premium given for the appraisal value, and depreciation on the appraisal is charged against
privilege of subscribing to such shares, operations, the earnings from operations in that period are
and hence not part of the trust fund diminished by the amount of such depreciation which amount is
for the benefit of CRs who have no actual income shifted to and lodged in another account. In such
cause for complaint; event the portion of increase in the value of fixed assets as a result
c. It is significant to note that holders of of revaluation thereof may declared as dividends:
par value shares participates in
dividends on the basis of the par value a. The corporation has sufficient income from operations
of their shares indicating that any from which the depreciation on the appraisal increase was
excess is not to be considered part of charged;
their invested capital for purposes of b. It has no deficit at the time the depreciation on the
dividend considerations. appraisal increase was charged to operations;
Treatment of a. GR: Code prohibits the distribution of
c. Such depreciation on appraisal increase previously Before an action to compel can be maintained, it must appear that
charged to operations has not been erased or impaired by the complaining stockholder has made application to the directors
subsequent losses. of the corporation for the relief sought.
Declaration of dividends XPN: If it appears that the directors of the corporation have
wantonly violated their duty, and that an application by a
Q: What are the conditions for the declaration of dividends? stockholder to them would be inefficacious, such application need
not be made.
A:
Time to declare dividends
1. Existence of unrestricted retained earnings out of which the
dividends may be declared and paid; and At the end A corporation has a fiscal year to determine the
2. Corporate resolution of the BOD declaring the payment of a of the year results of its operation during the year.
portion or all such earnings to the stockholders.
a. If the company earned profits during the
i. Cash dividends require only the approval of the BOD; past year, it may declare the same as
ii. Stock dividends are issued by the resolution of the BOD dividends. Otherwise, the profits are
and approval of the resolution by the stockholders; carried over to the next fiscal year;
iii. Distribution of dividends will reduce the retained earnings b. What is material is the existence of earned
of the corporation by exactly the amount paid out to profits on the date of the declaration,
stockholders in the case of cash dividend or transferred to taking into account the results of the entire
capital amount in the case of stock dividend. operations of the company.
c. Since the financial statements are generally
Discretion of the BOD to declare dividends prepared after the end of the fiscal year,
dividends are declared after the fiscal
The fact that profits or earnings have accrued in the prosecution of period has ended, when retained earnings
the corporate business does not necessarily impose upon the are shown to exist.
directors the duty to declare them as dividends; Before the A corporation may declare dividends even before the
end of the end of the fiscal year, provided it has sufficiently
If in their honest judgment the directors reasonably determine that year earned surplus for the purpose which will not be
the profits should be kept in business, no court has the power to impaired by losses, whether expected or not, during
compel them to make the distribution in the absence of bad faith or the remaining period of the fiscal year.
clear abuse of discretion or such arbitrary or unreasonable conduct
as amounts to a breach of trust. Validity of dividend determined at time of declaration
So long as the BOD acts in good faith, it is at liberty to distribute or Q: What is the effect of subsequent insolvency of the
not to distribute at all any dividend subject to the prohibition in Sec. corporation?S
43.
A: If net surplus or profits exist, the payment of the dividend is not
Limit on retained earnings rendered unlawful by the subsequent insolvency of the corporation
and if the assets are valued honestly and fairly, a dividend is not
Under the a. Stock corporations are prohibited from rendered unlawful by the fact that such assets subsequently prove
Corporation retaining surplus profits in excess of 100% to be worthless than the valuation placed upon them.
Code of their paid-in capital stock
XPN: When justified Q: What is the effect of good faith in making payment out capital?
b. Otherwise, it may be compelled by the
SEC to declare dividends to its A: Mere ignorance of the facts showing the true condition of the
stockholders. assets of the corporation is not sufficient to validate a dividend
c. This is applicable to all stock corporations which has been paid out of capital. A finding of the BOD that certain
including wholly owned subsidiaries dividends were declared fairly and in good faith, do not validate the
Under the Sec. 43 of the tax code imposes 10% surtax on payment of such dividends.
NIRC corporations improperly accumulating profits or
surplus, in addition to other income taxes imposed Payment of subscriptions from dividends
on corporations.
From A stipulation that the subscription shall be payable
dividends from the first dividends declared and all shares until
Action to enforce declaration of dividends to be the full amount of the subscription is paid is illegal for
declared it obligates the subscriber to pay nothing for the
GR: Prior to the declaration of dividend, a stockholder cannot shares except as dividends may accrue upon the
maintain an action at law to recover his share of the accumulated stock.
profits. Thus, mandamus cannot be a proper remedy in such case. From a. Stockholder is still entitled to receive cash
cash dividends due on delinquent stock but the
dividends dividend’s shall first be applied to the unpaid
balance on the subscription plus costs and
expenses;
b. Cash dividends may be applied as payment Classes of dividends
for unpaid subscription of all delinquent
shares;
c. It cannot be lawfully withheld from a Cash dividend a. Dividend payable in cash;
subscriber who has not fully paid their b. Dividends on par value shares are
subscriptions unless they are delinquent on made at a stated percentage of the par
their unpaid subscriptions. value;
From Stockholder’s indebtedness to a corporation under a c. As to no par value shares, dividends
stock subscription agreement cannot be compensated with are payable in terms of so many pesos
dividends the amount of his shares in the same corporation, or centavos per share since there is no
there being no relation of CR-DR with regard to such basis on which a percentage can be
shares. stated.
Property a. Dividend distributed to the
NOTE: Instead of stock dividends, the corporation may dividend stockholders in the form of property;
declare cash dividends to pay off the stockholder’s b. Real or personal property (warehouse
unpaid subscriptions. receipts or shares of stock of another
corporation).
Liability of stockholders for illegally received dividends
Stock dividend a. Dividend payable on unissued or
In case dividends are wrongfully or illegally declared and paid, increased or additional shares of the
stockholders who received them can held liable to refund them to corporation instead of cash or in
the corporation or its CRs. It is immaterial whether they were property;
mistakenly paid out or received in good faith. b. The declaration involves the issuance
of new shares to be distributed pro
Q: What is the right of stockholders after declaration of dividends? rata to the stockholders.
Optional Dividend which gives the stockholder the option
A: dividend to receive cash or stock dividend.
Composite Dividend which is partly in cash and partly in
Cash As soon as dividends are publicly declared, dividend stocks. Here, there is no option involved.
dividends stockholders have the right to their pro rata shares. Scrip dividend a. Writing or certificate issued to a
In the absence of a record date, dividend belongs to stockholder entitling him to the
the person who is the owner of the shares of stock payment of money or the like at some
at the time of declaration and not to the owner of future time as the corporation at the
the shares at the time of payment. time such dividends are declared has
profits not in cash, or has no sufficient
RATIO: When a dividend declaration is made, the cash or has the cash but wishes to
corporation becomes a debtor and the right of the reserve it for some corporate
shareholder to distribution is fixed. purposes;
Stock Stock dividends however requires more than mere b. Can be in promissory note or promise
dividends declaration to make it effective. The vote to to pay and may be issued to bear
increase stock is not per se an increase, and until interest.
the stock is actually issued, or at least in some Bond dividend Dividend distributed in bonds of the corporation
manner especially set apart to the stockholder, its to the stockholders
effect is not complete. Liquidating Distributions of the assets of the corporation
dividends upon dissolution or winding up of the same.
Total subscription basis of share in dividends
NOTE: Dividends may also be participating or non-participating.
GR: The participation of each stockholder in the earnings of the
corporation is based on his total subscription represents his Q: What is the effect of cash dividend?
holdings in the company for which he pays interest on any unpaid
portion. A: It converts the surplus or profits of the corporation covered by
such dividend into the permanent account thereby placing it
Q: When are subscribers considered stockholders? beyond the power of the board to withdraw from corporate use
and to distribute to the stockholders.
A: Subscribers are considered stockholders not from the time they
are issued stock certificates but from the time their subscriptions Q: What is the effect of declaration of bond or scrip dividend?
are accepted by the corporation.
A: It makes the stockholder a creditor of the corporation for the
NOTE: Only in cases where a stockholder is delinquent in the amount of the bond or scrip issued as dividends but the assets of
payment of his unpaid subscription that he loses his privilege in a the corporation remain the same.
corporation where he has holdings except his right to receive cash
dividends which however, shall first be applied to his unpaid Q: Distinguish between cash dividend and stock dividend.
balance on the subscription plus cost and expenses.
owning at least 2/3 of the total outstanding capital stock
CASH DIVIDEND STOCK DIVIDEND entitled to vote, or in case of the managed corporation is a
Involves a disbursement to the Does not involve any non-stock corporation, by at least 2/3 of the members.
stockholder of accumulated disbursement
earnings Ultra vires acts of the Corporations (Sec. 45)
When declared and paid Being still part of the corporate
becomes the absolute property property may be reached by Q: What is an ultra vires act?
of the stockholder and cannot corporate creditors
be reached by the creditors of A: It is an act that is not within the express, implied, and incidental
the corporation in the absence powers of the corporation. It is an act which is impliedly forbidden,
of fraud because it is not expressly or impliedly authorized or necessary or
Declared only by the BOD Declared by the board with the incidental in the exercise of the powers so conferred.
concurrence of the stockholders
representing at least 2/3 of the Q: Distinguish between ultra vires act and illegal act.
outstanding capital stock at a
regular or special meeting called A:
for the purpose.
Does not increase the corporate Increase the corporate capital ULTRA VIRES ACT ILLEGAL CORPORATE ACT
capital Act which is beyond the An act contrary to law, morals,
Declaration creates a debt from No such debt is created by the conferred powers of the good customs, public order or
the corporation in favor of the declaration of stock dividend corporation or purposes for public policy and thus, per se
stockholder which it is created. illicit.
Taxable as income to the Not subject to income tax Not necessarily illegal. It may be
stockholder lawful or moral
Q: Distinguish between distribution in liquidation and ordinary Ratification of ultra vires acts
dividend.
1. Where the contract is illegal per se, it is wholly void or
A: inexistent. It cannot be ratified or validated;
2. In case of ultra vires acts, the same is merely voidable and
a. If the distribution is in the nature of a recurring return on may be enforced by performance, ratification, or estoppels
stock, it is an ordinary dividend; or on equitable ground.
b. But if it is really winding up its business or decreasing its capital
stock and narrowing its activities, the distribution may properly Q: What are the effects of ultra vires acts which are not illegal?
treated as in complete or partial liquidation and as payment by
the corporation to the stockholder for his stock or as return of A:
the capital invested by him.
1. It cannot be enforced by either party thereto;
Power to enter into management contract (Sec. 44) RATIO: Public interest so that corporations do not
transcend the powers granted to them and their assets be
Q: What is a management contract? not subjected to risks created by forbidden acts.
2. If the same has been fully performed on both sides,
A: It is any contract whereby a corporation undertakes to manage or neither party thereto can lawfully set aside the same or to
operate all or substantially all of the business of another recover what has been given;
corporation, whether such contracts are called service contracts, 3. When performed by one side and other has received
operating agreements or otherwise. benefits by reason of such performance, recovery is
permitted in most courts on behalf of the former on the
Q: What are the limitations for the exercise of the power? ground that it would be unjust to allow retention of
benefits by a party coupled with his refusal to perform.
A:
1. Contract must be approved by a majority of the quorum of

the BOD or BOT and ratified by the prescribed vote of the TITLE V
stockholders or members, as the case may be, of both the BY-LAWS
managing and the managed corporations, at a meeting
duly called for the purpose; Adoption of By-Laws (Sec. 46)
2. Period of contract must not be longer than 5 years for any
one term except that contracts which relate to the Q: What are by-laws?
exploration, development, exploitation or utilization of
natural resources may be entered into for such periods as A: They are the rules of action adopted by the corporation for its
may be provided by pertinent laws or regulations; internal regulations and for the government of its officers and its
3. In either of the 2 cases, the management contract must be stockholders or members.
approved by the stockholders of the managed corporation

Q: What is the function of by-laws? Place of a. Stockholders' or members' meetings,
meetings whether regular or special, shall be held
A: It is to prescribe the rights and duties of stockholders or members in the city or municipality where the
towards the corporation and among themselves with reference to principal office of the corporation is
the management of corporate affairs and to regulate the transaction located, and if practicable in the
of the business of the corporation in a particular way. principal office of the corporation.
b. Place of BOD/BOT’s meeting may be
Q: What is the necessity of adopting by-laws? held at the time determined in the by-
laws.
A: It is for the corporation to have the means or instrumentalities for
the accomplishment of its purposes. Quorum a. Corporations can determine in their by-
laws the required quorum in meetings
Time and procedure for the adoption of by-laws of stockholders or members;
b. But such by-laws cannot provide that a
Time a. It shall be adopted within 1 month after lesser number shall constitute a
receipt of official notice of the issuance of its quorum in those cases in which the law
certificate of incorporation by the SEC; requires for the validity of certain
b. Yet, by-laws may be adopted and filed prior corporate acts the approval of a
to the incorporation with the AOI; minimum number of votes.
c. Failure to file a code of by-laws within 1 Proxies By-laws may provide:
month from the date of its incorporation
shall render the corporation liable to a. The form of such proxies;
revocation of its registration. b. Manner of voting them subject to the
Procedure a. See sec. 46; provisions of Sec. 58;
b. With respect to special corporations, SEC c. By-laws may provide that proxies be
shall not accept their by-laws or any notarized and filed with the corporate
amendment thereto unless accompanied by secretary 2 days before the date of the
a Certificate the appropriate government meeting.
agency to the effect that such by-laws and
amendment thereto are in accordance with Qualifications a. May be fixed in the by-laws but such
the law. of directors by-laws cannot dispense with the
minimum requirement that a director
Validity of by-laws must be a registered owner of at least 1
share of stock and that at least 2 of the
Q: What are the elements of valid by-laws? directors must be residents of the
Philippines;
A: b. See limitation indicated in the case of
Gokongwei Jr. v. SEC
1. They must not be contrary to existing law and inconsistent Election and Neither can the corporation provide in the by-
with the Code; term of office laws for the manner of the election and the term
2. They must not be contrary to morals and public policy; of directors or of office of directors or trustees which are
3. They must not impair obligations of contract; trustees already regulated by law.
4. They must be general and uniform in their operation and Disqualification By-laws may provide for disqualification for the
not directed against particular individuals—not for position of position of directors (Gokongwei, Jr. v. SEC)
discriminatory; director
5. Must be reasonable. Compensation Stockholders or members as such do not render
to stockholders service for attendance at corporate meetings but
Operation and binding effect of by-laws or members exercise rights personal to themselves in the
corporation.
a. When valid, it has substantially the same force and effect
as the laws applicable to the corporation insofar as the Amendment to by-laws (Sec. 48)
corporation and the persons within it are concerned;
b. They become part of the fundamental law of the Amendment and repeal of by-laws and adoption of new by-laws
corporation;
c. The corporation and its directors and officers are bound by a. Power to make by-laws implies power to alter or repeal
and must comply with them; them;
d. Subordinate EEs without actual knowledge of by-laws are b. Power can only be exercised at a regular or special
not bound; meeting duly called for the purpose;
e. As to third persons, the weight of authority is that they are c. It can be exercised by the stockholders or members
not also bound by the by-laws of a corporation except directly or indirectly by delegating said power to the
when they have knowledge of its provisions. BOD/BOT;
d. Power to amend the AOI lies with the stockholders or
Contents of by-laws (Sec. 47) members and cannot be delegated to the BOD/BOT.

stockholders in the by-laws or if not so fixed, on any date in
Revocation of delegated power of board or directors or trustees or members April of every year as determined by the
BOD/BOT;
Lesser a. To revoke the delegated power to amend 2. Special or those held at any time deemed
number of or repeal the original by-laws or to adopt necessary or as provided in the by-laws
votes new by-laws: Members of 1. Regular or those held by the board
required VOTE REQUIRED: vote of the stockholders directors or monthly, unless otherwise provided by the
representing a majority of the outstanding trustees by-laws;
capital stock or a majority of the members, 2. Special or those held by the board at any
as the case may be. time upon call of the president or as
b. Vote for the delegation is 2/3. provided in the by-laws
RATIO: To make it easier to revoke the NOTE: President shall preside at all meetings of directors or trustees
delegated power as a safeguard against and of stockholders or members unless otherwise provided in the
possible abuse of power by the BOD/BOT by-laws.
c. The basis of the vote was the number of
stockholders themselves and not the shares Necessity of meetings
held which is normally the mode of voting
in stock corporations. Meetings of Protection to the stockholders accorded by giving of
Previous Revocation is valid notwithstanding that no previous stockholders notice and the opportunity to attend, discuss and
notice of notice was given to stockholders or members of the or members vote at a meeting.
proposed intention to propose such revocation. Members of Theory that directors or trustees shall meet and
revocation directors or counsel with each other, and that any
at meeting trustees determination affecting the corporation shall only
not be arrived at after a consultation at a meeting of the
necessary board upon notice to all, attended by at least a
quorum of its members.
Q: Distinguish between AOI and by-laws.
XPNs to the GR:
A:
1. By a majority vote of the board of directors or trustees and
AOI BY-LAWS the vote or written assent of the stockholders
Charter or fundamental law of Rules and regulations adopted representing at least two-thirds (2/3) of the outstanding
the corporation by the corporation capital stock, without prejudice to the appraisal right of
Executed before incorporation Executed after the incorporation dissenting stockholders in accordance with the provisions
by the incorporators by the stockholders or members of this Code, or the vote or written assent of at least two-
Filing is a condition precedent to A condition subsequent thirds (2/3) of the members if it be a non-stock
corporate existence corporation (Sec. 16);
2. Corporation will be bound by the unanimous act or
Filing and effectivity of amended or new by-laws agreement of its stockholders or members although
expressed elsewhere than at a meeting;
Certificate of the appropriate government agency to the effect that 3. Any action taken by the directors of a close corporation
such by-laws and amendment thereto are in accordance with the without a meeting shall nevertheless be deemed valid,
law is required. Without it, the SEC shall not accept them for filing. unless otherwise provided in the by-laws (Sec. 101).
The amended or new by-laws shall only be effective upon the Q: What are the requisites for a valid meeting of stockholders or
issuance of a certificate by the SEC that the same are not members?
inconsistent with the Code.
A:
1. It must be held at the proper place;

TITLE VI 2. Must be held at the stated date and at the appointed time
MEETINGS or at a reasonable time thereafter;
3. It must be called by the proper person;
Kinds of Meetings (Sec. 49) 4. There must be previous notice; and
5. There must be a quorum.
Regular and special meetings of stockholders or members (Sec. 50)
Place and time of meetings of stockholders or members (Sec. 51)
Q: What are the kinds of meetings?
1. Proper place for the holding of meeting of stockholders or
A: members under Sec. 51 is mandatory:
Meetings of 1. Regular or those held annually on a date fixed Stockholders' or members' meetings, whether regular or
special, shall be held in the city or municipality where the
principal office of the corporation is located, and if Q: When should such notice be given?
practicable in the principal office of the corporation:
Provided, That Metro Manila shall, for purposes of this A: Written notice of even regular meetings must be sent to
section, be considered a city or municipality. stockholders or members at least 2 weeks before the meeting, or at
least 1 week for special meetings, unless a different period is
2. By-laws cannot provide otherwise except allowed by Sec. required by the by-laws.
93 with respect to meetings of members of a non-stock
corporation. Q: Can such meeting be waived?
Sec. 93. Place of meetings. - The by-laws may provide that A: Yes. It can be waived, expressly or impliedly, by any stockholder
the members of a non-stock corporation may hold their or member.
regular or special meetings at any place even outside the
place where the principal office of the corporation is Statement of purpose of meeting
located: Provided, That proper notice is sent to all
members indicating the date, time and place of the Q: Why is the statement of purpose in the notice of the meeting
meeting: and Provided, further, That the place of meeting necessary?
shall be within the Philippines. (n)
A: There are certain matters of importance which the law requires
3. Director’s or trustees meetings may be held at any place to be taken up at meetings called expressly for the purpose.
fixed in the by-laws even beyond the bounds of the State
where the corporation exists. Q: What is the effect of failure to comply with the requisites for
the meeting?
Q: Who shall call the meeting?
A: All proceedings had and any business transacted at any meeting
A: The call for meeting is exercised by the person who has the power of stockholders or members shall be valid even if the meeting be
to call the meeting. It may consist of a direction to the secretary of improperly held or called provided that the following 2 requisites
the corporation to notify the stockholders or members of the are present:
meeting.
1. Proceedings had and the business transacted are within
1. Person designated in the by-laws have the authority to call the power or authority of the corporation—they must not
stockholder’s or member’s meetings. be ultra vires;
2. In the absence of such provision, the meeting shall be 2. All stockholders or members of the corporation are
called by the director or trustee or by an officer entrusted present or represented at the meeting.
with the management of the corporation.
3. Whenever, for any cause, there is no person authorized to Quorum in meetings (Sec. 52)
call a meeting, the Secretaries and Exchange Commission,
upon petition of a stockholder or member on a showing of Corporations can determine in their by-laws the required quorum in
good cause therefor, may issue an order to the petitioning meetings of stockholders or members for the transaction of business
stockholder or member directing him to call a meeting of at such meetings. In the absence of the meeting, no action can be
the corporation by giving proper notice required by this taken except to adjourn.
Code or by the by-laws. The petitioning stockholder or
member shall preside thereat until at least a majority of Less than In cases where the law determines the number of
the stockholders or members present have been chosen the number shareholders or members whose concurring votes
one of their number as presiding officer (Sec. 50, par. 3). required by are necessary to make their action binding on the
NOTE: Notice is necessary. law corporation, not less than such number is necessary
4. The special meeting for the removal of directors or to constitute a quorum at a meeting called to
trustees may be called by the secretary of the corporation transact such business.
or by a stockholder or members (Sec. 28). Any The by-laws may validly provide for the holding of
number but meetings with the presence of any number of
Q: What is notice? at least 2 stockholders provided that there are at least 2;
A: It is the writing informing the stockholders or members of the It is customary to provide in the by-laws that the
meeting. presence of the registered holders of a majority of
the outstanding shares is necessary to constitute a
Notice of every meeting required quorum, but that a smaller number may meet and
adjourn to a later date, and that at such adjourned
1. As to regular meetings, no notice need be given other than meeting, the shareholders attending shall constitute
contained in the by-laws when the time and place of such a quorum.
meetings are specially designated therein; A majority Majority of the outstanding capital stock or members
2. In case of special meetings, notice must be given; of the shall constitute a quorum unless otherwise provided
3. Yet, whether special or regular, notice must be given outstanding in this Code or in the by-laws.
when required by the law or by the by-laws of the capital
corporation. stock or
members
Where Once a quorum is present, a majority vote, unless the
withdrawal vote of a greater number is required by law, is To adopt by-laws A majority of the outstanding capital stock
leaves less sufficient to decide any question properly presented. or of the members
than a All stockholders are bound by the result of such a To amend or repeal A majority vote of the BOD or BOT and of
quorum vote, even notwithstanding the withdrawal of the by-laws or adopt outstanding capital stock or of the
previously enough stockholders to leave less than a quorum. new by-laws members
declared. To delegate to the 2/3 of the outstanding capital stock or of
A minority group cannot prevent corporate action by BOD/BOT the power the members
walking out. to amend or repeal
the by-laws or adopt
Q: What are the matters which the law requires specific number of new by-laws
votes? To revoke the Majority of the outstanding capital stock or
preceding power of the members
A: delegated to the
BOD/BOT
To amend the AOI Majority of the BOD/BOT and a vote or To fix the issued Majority of the quorum of the BOD if
written assent of 2/3 of the outstanding price of no par value authorized by the AOI or in the absence of
capital stock or of the members share such authority, by a majority of the
To elect directors or Majority of the outstanding capital stock or outstanding capital stock
trustees of the members entitled to vote To effect or amend a Majority vote of the BOD/BOT and 2/3 of
To remove directors 2/3 of the outstanding capital stock or of plan of merger or the outstanding capital stock or of the
or trustees the members entitled to vote consolidation members of the constituent corporations
To call a special A majority of the outstanding capital stock To dissolve the Majority vote of the BOD/BOT and 2/3 of
meeting to remove or of the members corporation the outstanding capital stock or of the
directors or trustees members
To ratify a contract 2/3 of the outstanding capital stock or of To adopt a plan of Majority vote of the BOD/BOT and 2/3 of
of a director/ trustee the members distribution of assets the outstanding capital stock or of the
or officer with the of a non-stock members having voting rights
corporation corporation
To extend or shorten Majority vote of the BOD or BOT and 2/3 of
corporate term the capital stock or of the members Regular and special meetings of directors or trustees (Sec. 53)
To increase or Majority vote of the BOD and 2/3 of the
decrease the capital capital stock Place and time of meetings of directors or trustees
stock
To incur, create or Majority vote of the BOD or BOT and 2/3 of Regular or Anywhere in or outside the Philippines, unless the
increase bonded the capital stock or of the members special by-laws provide otherwise
indebtedness meetings of
To sell, lease, Majority vote of the BOD or BOT and 2/3 of directors or
exchange, mortgage, the capital stock or of the members trustees
pledge or otherwise Regular Shall be held monthly, unless the by-laws provide
dispose of all or meetings otherwise
substantially all of Special Any time upon the call of the president or as
the corporate assets meetings provided in the by-laws
To invest corporate Majority vote of the BOD or BOT and 2/3 of
funds in another the capital stock or of the members RULES:
corporation or
business or for any QUORUM GR: Majority of the directors constitute a
purpose other than quorum to do business (1/2 plus 1 of the
the primary purpose total number of members of the board as
To issue stock Majority vote of quorum of the BOD and fixed in the AOI)
dividends 2/3 of the capital stock
XPN: The Articles of incorporation or the
NOTE: The approval of the stockholders is by-laws may require more than the
not required with respect to other majority.
dividends such as cash and bond dividends
To enter into Majority vote of quorum of the BOD or BOD If there is a quorum at the start of the
management and majority of the outstanding capital meeting, the meeting can still continue
contract stock or of members of both the managing even if some of the directors will leave
and the managed corporations, and in thereafter
some cases, 2/3 of the total outstanding PROXY NOT While voting by proxy is allowed in all
capital stock entitled to vote or of ALLOWED meetings of stockholders the same is not
members, with respect to the managed allowed with respect to directors.
corporation NOTICE Q: What should be included in the notice?

indispensable that the representative is appointed by the court,
A: otherwise, a proxy is necessary.
1. Date Escrow shares

2. Time
3. Place of meeting Q: Explain the concept of escrow shares.
The notice must be sent to every director A: When a stock certificate is deposited in escrow as security for a
or trustee at least 1 day prior to the promissory note with instructions to the holder to deliver the
scheduled meeting certificate to the payee of the note and the stock is so delivered and
transferred to the payee in the books of the corporation, the payee-
Q: What is the effect of lack of notice? transferee has the right to vote the same.
A: The meeting is invalid Voting in case of joint ownership of stock (Sec. 56)
AGENDA Q: Is the agenda required to be included in
the notice? Q: What is the concept of “unanimity”?
A: A: Under civil law, acts of ownership require ownership among co-

owners. Sec. 56 follows this rule by requiring the consent of all the
1. The notice need not indicate the co-owners in order to vote a share that is owned jointly by 2 or more
agenda during regular meeting persons.
2. The notice shall indicate the
agenda for a special meeting Q: When is unanimity not required?
TELECONFERENCING/ Valid in the Philippines under RA 8792.
VIDEO-CONFERENCE However, Memorandum Circular No. 15 A:
imposes electronic or tape recording of the
proceedings. There will be no violation of 1. If there is a written proxy signed by all the co-owners
the Anti-Wire Tapping Act (RA 4200) authorizing of any or some to vote
2. If the shares are owned in an “and/or” capacity
Who shall preside at meetings (Sec. 54)
Q: Who is the presiding officer? Voting right for treasury shares (Sec. 57)
A: Q: Why are treasury shares given NO voting rights?
GR: The President may serve such function A: Treasury shares are not part of the outstanding capital. Hence,
XPN: The by-laws may create the Office of the Chairman who may be they shall have no voting rights. Shares that are not part of the
designated as the presiding officer of the Board. outstanding capital are not entitled to any right or privilege of a
stockholder. Where a corporation reacquires its own shares, it does
Q: Can the presiding officer vote? not become a subscriber thereof and the only right which a
corporation has over the treasury shares is to reissue the same for a
A: Yes since he is also a member of the Board. valuable consideration.
Q: Can he be deprived by the by-laws or a Board Resolution that he Disqualified shares

can vote only in case of tie?
NOTE: When a general corporation law disqualifies shares from
A: No. voting on any matter, they are not considered outstanding for the
determination of the quorum at any meeting to act upon a matter.
Right to vote of pledgors, mortgagors, and administrators (Sec. 55)
Proxies (Sec. 57)
Q: What is the rule when the shares are pledged or mortgaged?
How is the right to vote determined
A: The stockholders whose stock certificates were used as collaterals
for a loan have the right to vote unless the stockholders authorized Q: How is the right to vote determined?
the bank in writing to vote the pledged or mortgaged shares.
A: Upon the ownership of the stock as disclosed by the Stock and
Q: What is the reason for this rule? Transfer Book of the corporation and a registered stockholder must
be allowed to vote irrespective of any question of bona fides.
A: He maintains the ownership over such shares.
Record date
Q: May executors and administrators vote even without proxy?
Q: Explain the concept of record date.
A: Yes. Such representatives become vested with legal title over the
shares upon their attainment by the court. However, it is
A: The corporation, through its by-laws, may provide that the Stock
and Transfer Book shall be closed 5 days before each meeting of the RULES:
stockholders. In which case, only stockholders of record before the
closing of the book shall have the right to vote. Number The by-laws may impose restrictions as to the person
who can be proxies and the manner of voting them.
NOTE: With respect to non-stock corporations, the member must A proxy can be given to 2 or more persons jointly. If
necessarily be a member of record three persons are appointed and all of the attended,
the three of them must agree upon the vote and in
Proxy case of conflict, the rule of majority governs
Quorum After the proper registration of proxies, the same
Q: What is proxy? shall be counted in determining the existence of the
quorum
A: Revocation GR: One who has given proxy may revoke the same at
anytime
1. It is the written authorization given by one person to
another so that the second person can act for the first XPN: unless said proxy is coupled with interest
such as that given by the shareholder to someone else to
represent him and vote his shares at a shareholder’s Q: How is it revoked?
meetings.
2. It may also refer to the person who was authorized. A:
1. Orally
Q: What are the requisites under Art. 58? 2. In writing
3. By conduct
A:
Voting by mail
1. Proxies shall be in writing
2. Shall be signed by the stockholder or member Q: Is voting by mail allowed?
3. Shall be filed before the scheduled meeting with the
corporate secretary A: SEC Memorandum Circular No. 4 (2004) expressly allows voting
4. Unless otherwise provided in the proxy, it shall be valid by mail.
only for the meeting for which it is intended
5. No proxy shall be valid and effective for a period longer Voting Trusts (Sec. 59)
than 5 years at any one time.
Q: What is a voting trust?
NOTE: The by-laws may provide for other formalities.
A: It is an agreement whereby a stockholder of a stock corporation
Q: Explain the authority of the proxy. confers upon a trustee/s the right to vote and other rights pertaining
to the shares for a period not exceeding 5 years at any one time.
A: He only has the power to vote. He does not have the legal title
over the shares. Q: What law will govern voting trust agreements?
NOTE: The power to appoint a proxy is purely a personal right. To be A: Not the law on agency since the same is not revocable at will.
valid, a proxy must have been given by the person who is the legal
owner of the stock and is entitled to vote. Q: What are the purposes of voting trust agreement?
Q: Explain the various kinds of proxy. A:
A: 1. It is a device to concentrate shareholder control in one or

few persons who can control corporate affairs
KIND DEFINITION 2. It is also used in corporate reorganization where it may be
Specific proxy Refers to one where the authority granted used to give control to former creditors reduced to
the proxy holder is merely for a particular stockholder status
meeting on a specific date. 3. It may also be used by founders or incorporators to retain
Continuing proxy Not limited to a specific meeting and it control
continues for a certain period. 4. It may be used to distribute voting power
disproportionately to share ownership.
The period for a continuing proxy is not
more than 5 years at any one time Limitations on voting trust agreements
The by-laws may The by-laws may provide for a restriction of
provide for a shorter 60 days. This restriction is a reasonable Q: What are the limitations on voting trust agreements?
duration of a restriction that is not in conflict with
continuing proxy existing laws. A:

1. Purchase
1. It must not exceed the period of 5 years at any time 2. Subscription
2. In the case of voting trust specifically required as a
condition in a loan agreement, said voting trust mat be for Q: Differentiate the 2 modes of acquisition.
a period exceeding 5 years but shall automatically expire
upon full payment of the loan A:
3. It must be in writing and notarized
4. It shall specify the terms and conditions therefor PURCHASE SUBSCRIPTION
Can only be made after Can be made before or after
Q: What are the procedural requirements? incorporation incorporation
Under a deed of absolute If there is no agreement as to
A: assignment or sale, must fully the time of payment, the
pay the purchase price at the subscriber need not pay unless
1. Execution and notarization of the voting trust agreement time the shares are transferred there is a call
stating the terms and conditions thereof The stockholder can condone Cannot be released from his
2. A certified copy of such agreement shall be filed with the the obligation to pay obligation to pay the
corporation and the SEC subscription price
3. The certificate of stock covered by the VTA shall be The Statute of Frauds applies if The Statute of Frauds does not
cancelled the price is not less than apply
4. A new certificate shall be issued in the name of the trustee P5,000.00
stating that they are issued pursuant to the VTA
5. The transfer shall be noted in the books of corporation NOTE: Mere inclusion in the General Information Sheet is not
6. The trustee shall execute and deliver to the transferors sufficient.
voting trust certificates
Subscription contract
Q: What are the rights granted to the trustee?
Q: What is a subscription contract?
A:
A: It is a contract by which the subscriber agrees to take a certain
1. Right to vote number of shares of the capital stock of a corporation, paying the
2. Rights pertaining to shares consideration therefor or expressly or impliedly promising to pay the
3. Right of inspection of all corporate books and records same.
4. Vote by proxy
5. He can be elected as director in the company It is any contract for the acquisition of unissued stocks in an existing
corporation or a corporation still to be formed.
VTA vs. PROXY
Q: Explain the various hybrid securities.
VTA PROXY
Irrevocable Generally revocable A:
Legal title is transferred to No transfer of title
trustee Stock option Warrant
The share certificate shall be No cancellation A privilege granted to a party to Security which entitles the
cancelled subscribe to a certain portion of holder the right to subscribe to
Must be notarized Need not be notarized the unissued capital stock of a the unissued capital stock of a
Trustor-shareholder cannot vote The shareholder retains the right corporation within a specified corporation or to purchase
to vote period and under the terms and issued shares in the future,
Cannot be for a specific meeting Can be for a specific meeting conditions of the grant, evidenced by a warrant
Trustee can vote by proxy Cannot exercisable by the grantee at certificate, whether detachable
Trustee votes in his own right Proxy is mere agent any time within the period or not, which may be sold or
Trustee can be elected as Cannot be elected granted offered for sale to the public but
director does not apply to a right granted
under an option plan duly
approved by the SEC for the
benefit of the employees,
TITLE VII officers and or directors of the
STOCKS AND STOCKHOLDERS issuing corporation. This period
to subscribe is not less than 1
Subscription contract (Sec. 60) year but not more than 5 years.
Q: How are shares acquired? Q: What are the kinds of warrants?
A: A:

KINDS
Subscription Warrant Entitles the holder to the right to Others:
subscribe to a pre-determined number of
shares out of the unissued capital stock of 1. Those which pertain to shares that are part of the original
the issuer authorized capital stock
Covered Warrant Entitles the holder to the right to purchase 2. Those which involve shares in the increase of capital stock
form the issuer a pre-determined number
of shares that are already issued Trust fund doctrine
Warrant certificate Means the certificate representing the
right to warrant, which may be detachable Q: What is the trust fund doctrine?
or not, duly issued by the issuer to the
warrantholder A: The capital stock, property and other assets of the corporation
Warrant instrument Means the written document or deed are regarded as equity in trust for the payment of the corporate
containing the terms and conditions of the creditors. The corporation may not dissipate this and the creditors
issue and exercise of a warrant, which may sue the stockholders directly for the unpaid subscription.
terms and conditions shall include:
a. The maximum underlying shares Examples of violations of the trust fund doctrine
which can be purchased upon
exercise 1. The corporation releases or condones payment of the
b. Exercise period unpaid subscription and the stockholder has no right to
c. Other terms and conditions demand the refund of his investment
Detachable Warrant A Warrant that may be sold, transferred or 2. Payment of dividends without unrestricted earnings
assigned to any person 3. Properties are transferred in fraud of creditors
Non-detachable A Warrant that may not be sold,
Warrant transferred or assigned to any person NOTE: A stockholder has no right to demand for the return of
Beneficiary securities Shares of stock and other securities of the investment. His investment is “locked-in” until the liquidation of the
issuer which form the basis of the corporation.
entitlement in a Warrant
Underlying shares Unissued shares of a corporation which Sources of capital
may be purchased by the warrantholder
upon the exercise of the right granted Q: What is “capital”?
under the Warrant
A: It includes all properties and assets of the corporation that are
Q: Who are the parties in subscription contract? used for its business or operation.
A: Q: What is “authorized capital stock”?
1. Subscriber A: It is the amount fixed in the AOI to be subscribed and paid by the
2. Corporation stockholders of the corporation.
RULES: Q: What is “subscribed capital”?
Number of May cover one or more shares, but even if it A: It is that portion of the ACS that is covered by subscription
shares covered covers 2 or more shares, the subscription agreements whether fully paid or not.
agreement is considered an indivisible contract
Q: What is “paid-up capital”?
Form Need not be in writing
A: Portion of the ACS which has been subscribed and actually paid.
Q: What are the kinds of subscription contract?
Creditors
A:
Q: What are the 2 kinds of creditors?
Pre-incorporation Post-incorporation
Entered into before the Entered into after the issuance
A:
incorporation of the certificate of
incorporation
Commercial creditors Investment creditors
Normally short-term creditors Those who acquire bonds or
Conditional Unconditional
including banks and other debentures issued by the
A subscription which does not
institutional leaders who extend corporation.
take effect so as to make the revolving lines of short term
subscriber a stockholder or
credit
confer rights until the condition
is satisfied
Pre-Incorporation subscription (Sec. 61)

NOTE: The concept of pre-incorporation subscription is a departure A: Labor performed for services actually rendered to the corporation
from the basic civil law on obligations and contracts. Here, not all are acceptable. However, future services are not accepted as
the parties can give their “consent” because one of the parties—the payment for subscription.
corporation—is still non-existent.
Q: May a previously incurred indebtedness of the corporation be
Q: Discuss the binding effect of the pre-incorporation subscription used as consideration?
agreement.
A: Yes.
A: They are valid for a period of 6 months. Even if such period had
already expired, the pre-incorporation subscription contract is also Conversion
irrevocable after the filing of the AOI with the SEC.
Q: What is conversion?
Q: Why is the pre-incorporation subscription contract irrevocable
for a limited period prior to the submission of the AOI? A: It includes conversion of a single proprietorship or partnership
into a corporation or a spin-off of one or more division of the
A: To prevent injustice that may be inflicted on subscribers who company. The consideration in these cases is actually the net assets
already exerted efforts to organize the corporation and who already of those enterprises or units.
committed financial resources therefor.
Issued price
NOTE: Subscription agreements are already covered by the trust
fund doctrine after incorporation. Q: How is the issued value fixed?
Q: When can the pre-incorporation subscription be revoked? A:
A: 1. In the AOI
2. In a resolution issued by the BOD pursuant to authority
1. If all the other subscribers consent to the revocation conferred upon it by the AOI or by-laws
before the expiration of the 6-month period 3. In the absence of provisions of the AOI or if the power is
2. Upon the expiration of the 6-month period but before the not delegated to the board, the stockholders representing
filing of the AOI with the SEC even without the consent of at least a majority of the outstanding capital stock at a
the other subscribers or within a longer period as may be meeting duly called for the purpose will fix the issued
stipulated in the subscription agreement. value.
Consideration for stocks (Sec. 62) NOTE: The issued value may be higher than its par value.
Q: What are the conditions under Sec. 62? Deposit on subscription
A:
Q: What is “deposit on subscription”?
1. Stocks shall not be issued for a consideration less than the
A: It is merely an amount of money received by a corporation with a
par or issued price thereof fixed in the AOI view of applying the same as payment for additional issuance of
2. Shares of stock shall not be issued in exchange for
shares in the future, an event which may or may not happen. The
Promissory notes or future services person who makes the deposit on subscription does not have the
3. Where the consideration is property, whether tangible or standing of a stockholder and he is not entitled to dividends, voting
intangible such as patents, copyrights, the valuation
rights, or other prerogatives and attributes of a stockholder.
thereof shall be initially determined by the incorporation
or the BOD subject to the approval of the SEC.
Certificate of stock and transfer of shares (Sec. 63)
Q: What are the requirements if the consideration is a property?
Q: Are stocks certificate negotiable?
A:
A: No, because there is no promise or order to pay money. They are
quasi-negotiable because they can be transferred by indorsement
1. The property is actually received by the corporation coupled with delivery. Nevertheless, the transferee of the stock
2. It is necessary or convenient for its use and lawful
certificate takes it subject to such rights or defenses as the
purposes registered owner or transferor’s creditors may have under the law
3. It must be subject to a fair valuation equal to the par or
except insofar as such rights or defenses are subject to limitations
issued price thereof fixed in the AOI imposed by the principles governing estoppel.
4. The valuation thereof shall be initially determined by the
incorporation or the BOD Q: How is voluntary transfer made?
5. The valuation thereof is subject to the approval of the SEC
A:
Q: Is labor acceptable?
1. Delivery of the certificate

2. Share must be indorsed by the owner or his agent Remedies
3. To be valid to the corporation and the third parties, the
transfer must be recorded in the books of the corporation 1. The right of the transferee or assignee to have the stocks
transferred to his name is an inherent right flowing from
Q: What is the effect of absence of certificate? his ownership of stocks
2. Mandamus will lie against the corporate officers who
A: If the certificates were never issued by the corporation, the unduly bar the registration of the transfer
transferee cannot demand for the issuance of the certificates of 3. Mandamus will not lie against the corporation where the
stock in his name. Without such recording, the transferee may not shares of stock in question are not indorsed by the
be regarded by the corporation as one of its stockholders and the registered owner.
corporation may legally refuse the issuance of stock certificates. 4. It is the corporate secretary’s obligation to register a valid
transfer
NOTE: The Stock and Transfer Book is the basis for ascertaining the
persons entitled to the rights of a stockholder. Q: What is the period within which the registration of transfer of
shares should be effected?
Q: What if there is no indorsement in favor of the transferee?
A: The law does not provide, hence the right does not accrue until
A: The transferee may file an action to compel the transferee to there has been a demand and a refusal concerning the transfer.
make such indorsement. However, the same cannot be considered
as an intra-corporate controversy because the transferee is not yet a Issuance of stock certificates (Sec. 64)
shareholder.
Q: What is a “stock certificate”?
Q: What is the rationale behind the registration requirement?
A: It is the paper representation or tangible evidence of share but it
A: is not the share itself. It is merely an evidence of the holder’s
interest and status in the corporation.
1. To enable the corporation to know at all times who its
actual stockholders are Q: What are the requirements for the issuance?
2. To afford the corporation an opportunity to object or
refuse its consent to the transfer in case it has any claim A:
against the stock sought to be transferred or for any other
valid reasons 1. The certificate must be signed by the president or vice-
3. To avoid fictitious or fraudulent shares president, countersigned by the secretary or assistant
secretary
NOTE: No shares of stock against which the corporation holds any 2. The certificate must be sealed with the seal of the
unpaid claim shall be transferrable in the books of the corporation. corporation
3. The certificate must be delivered
Q: What is an “unpaid claim”? 4. The par value as to par value shares or full subscription as
to no par value shares must be fully paid
A: It refers to any indebtedness which a subscriber may owe the 5. The original certificate must be surrendered where the
corporation arising from any other transactions. person requesting the issuance of a certificate is a
transferee from a stockholder.
Transfer by operation of law
NOTE: A stock certificate cannot be issued to “bearer.” Certificates
NOTE: Upon the death of the stockholder, the heirs do not must be issued only to registered owners of stock in a corporation.
automatically become stockholders of the corporation and acquire
the rights and privileges of the deceased as shareholders of the Q: What is the rule as to partial payment?
corporation. The stocks must first be distributed to the heirs in
estate proceedings, and the transfer of the stocks must be recorded A: Subscription is one, entire, and indivisible. It cannot be divided
in the books of the corporation. The transfer by succession shall not into portions, so that the shareholder shall not be entitled to a
be recognized until the transfer is recorded in the books of the certificate of stock until he has remitted the full payment of his
corporation. subscription together with any interests and expenses, if any is due.
Regulation of transfer Q: What are the remedies for the non-issuance of a certificate?
NOTE: A:
1. The corporation may regulate the transfer of its stocks by 1. Action for specific performance
providing certain formalities and procedure in the by-laws 2. Action for damages if specific performance is not available
2. Any restriction on right to transfer must be construed 3. Petition for mandamus for the issuance of the certificate
strictly. 4. Rescind the subscription agreement with the consequent
3. The restriction may be embodied in a separate agreement mutual restitution.
strictly
Q: What is the rule as to forged or spurious certificates?
3. Publication once a week for 2 consecutive weeks in a
A: They are void certificates. newspaper of general circulation
4. Sale at public auction to be held not less than 30 days nor
Liability of directors for watered stocks (Sec. 65) more than 60 days from the date the stocks become
delinquent
Q: What are watered stocks? 5. Transfer
6. Credit of remainder- the remaining shares, if any, shall be
A: They are stocks that are issued for a consideration less than the credited in favor of the delinquent stockholder who is
par or issued price thereof. entitled to the issuance of a certificate of stock covering
the same
Q: What are “bonus stocks”?
Q: What are the contents of the resolution?
A: They are stocks which are issued without any valuable
consideration. A:
Q: Why are watered stocks prohibited? 1. The amount due on each subscription
2. All accrued interest
A: It is consistent with the general rule that an agreement between 3. Date, time, and place of the sale
the corporation and a particular subscriber to which the subscription
is not to be payable or is to be payable in part only cannot be either Q: Who shall be the winning bidder?
enforced by the subscriber or interposed as a defense in an action
on the subscription. A: The bidder who shall:
Interest on unpaid subscriptions (Sec. 66) 1. Offer to pay the full amount of the balance on the
Payment of balance subscription (Sec. 67) subscription together with accrued interest, costs of
advertisement and expenses of sale
The BOD may at anytime declare due and payable to the corporation 2. For the smallest number of shares or a fraction of a share
unpaid subscriptions to the capital stock and may collect the same
or such percentage thereof, in either case with accrued interest, if Q: May the sale be cancelled?
any, as it may deem necessary.
A: Yes. The delinquent shareholder may actually stop the delinquent
Q: What is a “call”? sale if he pays the corporation, on or before the date specified for
the sale of the delinquent stock, the balance on the subscription
A: It is the resolution or formal declaration of the board that the together with accrued interest, costs of advertisement and expenses
unpaid subscriptions are due and payable. The unpaid subscription is of sale.
not due and payable without the call.
Action to recover
Q: When is a call not necessary?
Q: What are the requirements for action to recover?
A:
A:
1. When the date of payment is specified in the subscription
agreement 1. The action is filed on the ground of irregularity or defect in
2. When the corporation becomes insolvent the notice of sale, or in the sale itself of the delinquent
stock
No set-off 2. The party seeking to maintain such action pays first or
tenders to the party holding the stock the sum for which
A corporation cannot deduct from any amount due to an employee, the same was sold, with interest from the date of the sale
the latter’s unpaid subscription of shares. There can be no set-off if at the legal rate
there is no notice or call for the payment of unpaid subscription. 3. The complaint is filed within 6 months from date of sale
Delinquency sale (Art. 68) Effect of delinquency (Sec. 71)

When sale may be questioned (Art. 69)
Court action to recover unpaid subscription (Ar. 70) Q: What are the unavailable rights to delinquents?
Delinquency sale A:
Q: What are the steps to be taken in case of delinquency sale? 1. He cannot vote
2. His voting rights cannot be delegated/assigned
A: 3. He is not entitled to representation during meetings
4. He cannot be elected as a director
1. BOD Resolution 5. He cannot continue serving as director
2. Notice to every delinquent stockholder (personally or
registered mail) NOTE: He is only entitled to his right to dividends
GR: Where a corporation is an injured party, its power to sue is
Q: Are they included in quorum? lodged with its board of directors or trustees
A: No. XPN: Derivative suit
Rights of unpaid shares (Sec. 72) Q: What are the requirements?
NOTE: A pre-incorporation subscriber becomes a shareholder from A:

the moment the Certificate of Incorporation is issued. He is a
shareholder from the inception of the corporation. 1. He was a stockholder or member at the time the acts or
transactions subject of the action occurred and the time
Q: What are the rights of a shareholder who has not fully paid his the action was filed
shares? XPN: The transactions continue and are injurious to the
stockholder or affect him especially and specifically in
A: some other way.
2. He exerted all reasonable efforts, and alleges the same
1. Voting rights with particularly in the complaint, to exhaust all remedies
2. Right to remove directors available under the AOI, By-laws
3. Right to dividends 3. No appraisal rights are available for the acts complained of
4. Appraisal right 4. The suit is not a nuisance or harassment suit
5. Right to issuance of a stock certificate for fully paid shares
6. Proportionate participation in the distribution of assets in NOTE: During the pendency of the action, any sale of shares of the
liquidation complaining stockholders or members will be substantially affected
7. Right to transfer of stocks in corporate books by the discontinuance, compromise, settlement, the court may
8. Pre-emptive right direct that notice, by publication or otherwise, be given to the
9. Right to inspect books and records stockholders or members whose interest it determines will be so
10. Right to be furnished of the most recent financial report affected.
11. Right to recover stocks unlawfully sold for delinquent
payment of subscription Q: What is the status of the stockholder in a derivative suit?
12. Right to file individual suit, representative suit, and
derivative suits A: He is a mere nominal party.
Q: What are the obligations of a stockholder? Q: What is the rationale behind the derivative suit right of the
shareholder?
A:
A: It is always one in equity. However, it cannot prosper without first
1. Liability to the corporation for unpaid subscription complying with the legal requisites for its institution.
2. Liability to the corporation for interest on unpaid
subscription if so required by the by-laws Exhaustion of intra-corporate remedies
3. Liability to the creditors of the corporation for unpaid
subscription NOTE: A general allegation in the complaint that intra-corporate
4. Liability for watered stock remedies were exhausted is not sufficient.
5. Liability for dividends unlawfully paid
Exhaustion of intra-corporate remedy is typically deemed futile
Right to file action when a majority of the directors have participated or approved the
alleged wrongdoing or are otherwise financially interested in the
Q: What are the 3 kinds of action? challenged transaction.
A: Individual actions
1. Derivative actions Q: What are individual actions?

2. Individual actions
3. Representative actions A: These are actions brought by the shareholder in his own name
against the corporation when a wrong is directly inflicted against
Derivative suits them. The cause of action pertains to him and the action is meant
directly to protect his interest.
Q: What are derivative suits?
NOTE: Derivative suits and individual suits are mutually exclusive.
A: These suits are brought by one or more stockholders or members The right of action and recovery belongs to either shareholders or
in the name and on behalf of the corporation to redress wrongs the corporation (Cua, Jr., v. Ocampo).
committed against it, or to protect, or vindicate corporate rights
whenever the officials of the corporation refuse to sue, or the ones Representative actions
to be sued, or has control of the corporation.
Q: What are representative actions?
A: These are actions brought by the stockholder in behalf of himself Q: What are the books required to be kept by the corporation?
and all other stockholders similarly situated when a wrong is
committed against a group of stockholders. A:
Code of Corporate Governance 1. Book of minutes of stockholders meetings

2. Book of minutes of board meetings
Stockholder’s rights and protection of the minority shareholders are 3. Record or book of all business transactions
given ample attention under the 2009 Code of Corporate 4. Stock and Transfer book
Governance.
Book of Minutes
Lost or destroyed certificates (Sec. 73)
Q: What are the contents of the book of minutes?
Q: What is the purpose of Art. 73?
A:
A: To protect not only the real owner but the corporation as well.
The real owner is protected against improvident issuance of another 1. The date and time of meeting
certificate and at the same time it provides some sort of a shield to 2. The place of holding the meeting
the corporation and its officers to prevent them from being liable. 3. How the meeting was authorized
4. The fact that notice was given
Q: When is Art. 73 applicable? 5. Whether the meeting was regular or special
6. If the meeting is special, its object must be stated
A: It applies only if the certificates are lost, stolen or destroyed. If 7. Those present and absent
the certificates are just worn out, this article does not apply and it is 8. Every act done or ordered done at the meeting.
up to the corporation to decide if it will replace the certificates. This
will also not apply if the certificate was never issued to the NOTE: The minutes need not be word-for-word transcription of the
shareholder because it was not delivered by the corporation. proceedings.
Q: State the procedure. Stock and Transfer book
A: Q: What are the contents of the Stock and Transfer book?
1. The registered owner will execute and file an affidavit A:

regarding the share and circumstances regarding its loss
2. The corporation shall verify the same 1. All stocks in the name of the stockholders alphabetically
3. The corporation shall publish a notice in a newspaper of arranged
general circulation published at a place where the 2. Amount paid and unpaid on all stocks and the date of
corporation has its principal office, once a week for 3 payment of any installment
consecutive weeks at the expense of the registered owner 3. Alienation, sale, or transfer of stocks
4. There shall be a one year waiting period from the date of 4. Other entries as the by-laws may prescribe
last publication
5. If a contest has been presented to said corporation or if an Q: Who will make entries in the Stock and Transfer book?
action is pending in court, the issuance of new certificate
shall be suspended until the final decision by the court A: Only the corporate secretary is authorized.
regarding the ownership of said certificate
6. Replacement Q: What is the importance of the Stock and Transfer book?
Q: What are the contents of notice? A: They are best evidence of the transactions that must be entered
or stated therein. However, the entries are considered prima facie
A: evidence only and may be subject to proof to the contrary.
1. The name of the said corporation Q: In case of conflict, which will prevail: Stock and Transfer book or
2. Name of the registered owner the AOI?
3. The serial number of said certificate
4. The number of shares represented by such certificate A: The AOI.
5. That after the expiration of 1 year from the date of said
corporation regarding said certificate of stock, the right to Right to inspect
make such contest shall be barred and the corporation
shall cancel in its books the certificate of stock which has Q: What are the requisites for the exercise of the right?
been lost, stolen or destroyed
XPN: The registered owner files a bond or other security in A:
lieu thereof effective for a period of 1 year.
1. It must be exercised at reasonable hours on business days
Books to be kept; stock transfer agent (Sec. 74)
2. The stockholder has not improperly used any information Right to financial statements (Art. 75)
he secured through any previous examination
3. Demand is made in good faith or for a legitimate purpose NOTE: The financial statements must be furnished within 10 days
from receipt of a written request.
Q: What is the rationale for this right of inspection?
A: It is based upon his interest over the assets and properties of the
corporation. It is predicated upon the necessity of self-protection. TITLE IX
MERGER OR CONSOLIDATION
RULES:
Plan or merger of consolidation (Art. 76)
Stockholder’s or member’s approval (Art. 77)
Extent Covers all books of the corporation including the Articles of merger or consolidation (Art. 78)
journal, ledger, financial statements, income tax Effectivity of merger or consolidation (Art. 79)
returns, vouchers, receipts, contracts and all Effects or merger or consolidation (Art. 80)
papers pertaining to the operation of the
corporation Q: Distinguish merger from consolidation.
Time and Only at reasonable hours on business days
place throughout the year at the principal office of the A:
corporation
Purpose For proper or legitimate purpose: germane to the MERGER CONSOLIDATION
interest of the stockholder One where a corporation One where a new corporation is
absorbs another corporation created, and consolidating
Q: Give examples of improper purpose? and remains in existence while corporations are extinguished.
the other is dissolved
A: Signifies the absorption of one Signifies the union that
corporation by another which necessarily results in the
1. Learning business secrets to aid a retains its name and corporate creation of a new corporation
competitor identity with the added capital, and the termination of the
2. To secure prospects of personal business franchises, and powers of a constituent ones
3. To look for defects in corporate merged corporation.
transactions for blackmail and extortion There must be an express provision of law authorizing them since it
4. To pursue one’s social or political goals. involves fundamental changes in the corporation as well as in the
Manner He is not only allowed to go over the records, but rights of the stockholders and creditors.
he can also make copies, extracts and memoranda
of pertinent records. Concept of “triangular merger”
However, he is not allowed to take corporate Q: What is “triangular merger”?

books out of the principal office of the corporation
Remedy if File a complaint under Rule 7 of the Interim Rule A: The purchasing corporation creates a subsidiary corporation and
refused for Intra-corporate Controversies transfers to the subsidiary shares in the parent company which will
be used for the share exchange that will be provided in the merger
Q: What is the liability for the unlawful denial? plan. The subsidiary is sometimes known as “phantom corporation”
because it may exist only long enough to consummate the merger,
A: The penalty under Article 144. hence, at one time, the triangular merger was sometimes called as
“phantom merger” or “reverse phantom merger.”
Q: What are the requisites for the penal provision of Art. 144 to
apply? The actual merger is not between the acquiring corporation and the
acquired or target corporation but rather between the newly
A: formed subsidiary and the target corporation.
1. A director, trustee, stockholder, or member has made a Combination

prior demand in writing for the inspection
2. Any officer or agent of the corporation shall refuse to allo Q: What is combination?
the said director, trustee, stockholder, or member to
examine and copy A: It is used to designate an alliance or confederation or sale or
3. If such refusal is made pursuant to a resolution or order of other transaction between 2 or more corporations, by virtue of
the board, the liability shall be imposed upon the directors which will not necessarily result in the loss of the separate existence
or trustees who voted for such refusal of the corporations.
4. If the defense that the stockholder has improperly used
any information he secured through any previous Q: Give illustrations.
examination is used, the contrary must be shown or
proved. A:

1. Voting trust agreement Q: May the plan be amended?

2. Formation of a holding company
3. Transfer of assets from one corporation to another A: Yes, but the same must be approved by the majority vote of the
board of the constituent corporations and affirmative vote of 2/3 of
NOTE: Combinations include merger and consolidation the outstanding capital stock of the members.
Q: What are the effects of merger or consolidation? De facto meger and consolidation
A: Q: Explain de facto meger and consolidation.
1. The constituent corporations shall become a single A: It means reorganization involving at least 2 corporations which
corporation has the effect or merger or consolidation and which entitles the
2. The separate existence of the constituents shall cease dissenting stockholders to an appraisal right.
except that of the surviving corporation (in merger) or the
consolidated corporation (in consolidation)
3. The surviving or the consolidated corporation shall possess
all the rights, privileges, immunities, and powers and shall TITLE X
be subject to all duties and liabilities of a corporation APPRAISAL RIGHT
4. The surviving or the consolidated corporation shall possess
all the rights, privileges, immunities, and franchises of each Instances of appraisal right (Art. 81)
constituent and properties shall be deemed transferred to
the surviving or the consolidated corporation Q: What is appraisal right?
5. All liabilities of the constituents shall pertain to the
surviving or the consolidated corporation. A: It is the right of a shareholder to dissent and demand payment of
the fair value of his shares in the instances provided for under the
NOTE: In merger, the receivables of the dissolved corporation are Code.
transferred to the surviving corporation.
NOTE: The appraisal right is more extensive in close corporations
Q: What is the effect on employees? where it may be exercised for any reason provided only that the
corporation has sufficient assets to cover its debts and liabilities,
A: In BPI v. BPI Employees Union, the court said that there is nothing exclusive of capital
in the law that mandates automatic employment as regular
employees by the surviving corporation in the merger. The Q: What is the rationale behind the appraisal right?
employees are not assets and liabilities that are considered
absorbed. A: It gives the dissenters a simple and direct remedy not only where
there is a harmful change in the share contract but also where they
Procedure simply do not desire to accept shares in different corporation or
shares different from those they purchased.
Q: State the procedure for merger and consolidation.
Q: When is the appraisal right available?
A:
A:
1. The Board of each corporation shall draw up a plan of
merger and consolidation 1. In case any amendment to the AOI has the effect of
2. The plan of merger or consolidation shall be approved by changing or restricting the rights of any stockholder or
majority of each of the BOD of the concerned corporations class of shares
at separate meetings 2. In case any amendment to the AOI authorizing preferences
3. The plan of merger or consolidation shall be approved by in any respect superior to those of outstanding shares of
2/3 of the Outstanding capital stock or members any class
4. Articles of merger or Articles of consolidation shall be 3. In case of amendment to the AOI extending corporate
executed by each of the constituent corporations: term
a. Signed by the president or VP 4. In case any amendment to the AOI shortening corporate
b. Certified by the secretary or asst. sec. term
5. 4 copies of the Articles of merger or Articles of 5. In case of sale, lease, exchange, transfer, mortgage, pledge
consolidation (with the favorable recommendation from or other disposition of all or substantially all of the
the appropriate government agency) shall be submitted to corporate property and assets as provided in the code
the SEC 6. Merger of consolidation
6. The SEC shall issue a certificate of merger 7. If the corporation will invest it funds in another
7. Otherwise, the SEC will conduct a hearing to give the corporation or business or for any purpose other than its
corporations the opportunity to be heard. Written notice primary purpose
of the date, time, and place of hearing shall be given to 8. In close corporation
each constituent corporation at least 2 weeks before said
hearing How is right exercised (Art. 82)
Effect of demand and termination of right (Art. 83) be distributed as dividends to its members. It
When right to payment ceases (Art. 84) shall instead be used for the furtherance of the
Who bears cost of appraisal (Art. 85) purpose or purposes for which the corporation
Notation on certificates; rights of transferee (Art. 86) was organized.
Profits obtained GR: It cannot lawfully engage in any business
Q: What are the conditions for the exercise? from investment activity for profit as it would run counter to its
of accumulated very nature as non-profit entity.
A: funds
XPN: When necessary to carry out the purpose
1. Any of the instances set forth by law must be present or purposes for which it was organized.
2. The dissenting stockholder must have voted against the
proposed corporate fiction It may invest its accumulated funds fro profit
3. The demand for payment must be made by the dissenting purposes.
stockholder within 30 days from the date a vote is taken
thereon. Failure to make such demand within such period It may subscribe to the capital stock of a corp.
shall be deemed a waiver of the appraisal right or invest in commercial papers such as money
4. The price of the shares based on the fair value as of the instruments but such power must be included
day prior to the date on which vote was taken in its AOI in order that the investment may not
5. Submission by the withdrawing stockholder of his share be considered as ultra vires.
certificates to the corporation for notation as dissenting
shares within 10 days from written demand. It cannot venture primarily in business
6. Payment of shares must be made only when the activities.
corporation has unrestricted retained earnings in its books Powers necessary Thus, an association of exporters cannot
to cover such payment furtherance of engage in fund-raising projects where such
7. The stockholder must transfer his shares to the purposes activity is neither necessary nor incidental to
corporation upon such payment of the corporation. the furtherance of its objectives. It should
amend its AOI to include the same in its
Q: What if the corporation refuses? purposes.
Determination of It is determined by the purpose or object as
A: The aggrieved party may file the appropriate action before the actual purpose or stated in the AOI
RTC to compel the corporation to allow him to exercise his appraisal object
right.
CHAPTER I
MEMBERS
TITLE XI Right to vote (Sec. 89)

NON-STOCK CORPORATIONS
Non-transferability of membership (Sec. 90)
Definition (Sec. 87)
Termination of membership (Sec. 91)
Purpose (Sec. 88)
CHAPTER II
Q: What is a non-stock corporation? TRUSTEES AND OFFICERS
A: It refers to ordinary non-stock corporation formed for any of the Election and term of Trustees (Sec. 92)
purposes mentioned in Sec. 88.
Place of meetings (Sec. 93)
NOTE: In the enumeration of the purposes for which non-stock
corporations may be organized, political purpose is not specifically CHAPTER III
included. Hence, SEC may reject the AOI if the purpose of the DISTRIBUTION OF ASSETS IN NON-STCOK CORPORATIONS
corporation is to engage in election campaign or partisan political
activity. Rules applicable only to non-stock corporations
Power to make profits and engage in business a. Prohibition against distribution of dividends
Incidental profits GR: Non-stock corp. is not empowered to No part of its income is distributable as dividends to its members.
obtained from engage in business with the object of making
operations income or profits directly or indirectly. No pecuniary benefits shall inure in favor of the members although
they may avail of, or derive other forms of assistance from the
Yet, it is not prohibited to make income or corporation.
profits as an incident to its operations.
Board cannot pass resolution giving benefits like grocery items and
Such profit from any authorized activity cannot the like to active members of the corporation.

XPN: Unless the by-laws provide otherwise.
b. Non-profit character ii. Meetings may not take anywhere else without first
The fact that there is no distribution by any organization earnings or amending the by-laws.
profits by way of dividends or otherwise to its members is not iii. In case the by-laws do not indicate the place of meeting,
conclusive as to its non-profit character. the members cannot hold their meetings outside the place
where the principal office of the corporation is located.
c. Right to vote iv. The authority to transfer the place where the principal
office of the corporation is located must be expressly
Right to vote may be limited, broadened or even denied in the AOI granted by the by-laws.
and by-laws.
f. Dissolution
i. By-laws may declare who shall be entitled to vote and how
they shall be entitled to vote or impose other restrictions i. Assets shall be applied and distributed in accordance with
such as limiting the right to vote to each member to a certain specific rules laid down by law;
maximum number of votes irrespective of the amount of ii. Not allowed to distribute any of the assets of the
his capital contribution; or restraining proxies from corporation or any incidental income or profit made by the
participating directly in the election of trustees at the corporation during its existence.
annual meeting of members; or limiting the right to
members of good standing (delinquent members shall not g. Conversion into stock corporation
be included in determining the existence of the required
quorum; i. Cannot be converted into a stock corporation by mere
ii. GR: A member may vote by proxy amendment of the AOI;
XPN: Unless otherwise provided by the AOI or the by-laws.
iii. GR: Each member shall be entitled to only 1 vote in the RATIO: To avoid using the scheme as a means of defrauding the
election of trustees. public who might have contributed some donations or grants to
XPN: Cumulative voting is authorized in the AOI or by- the non-stock, non-profit corporation.
laws.
iv. Voting by mail or other similar means may be authorized. ii. It must be dissolved and then be organized as a stock
corporation.
d. Governing boards
Membership in a non-stock corporation
Trustees of non-stock corporations have similar duties to those of
stock corporations. 1. Manner or mode of acquisition
i. Number of trustees may be more than 15 but the number a. Acquired in the particular manner or mode of acquiring
of incorporating trustees shall not be more than 15; the same as provided for in its by-laws;
ii. Principle of Delegation of Corporate Management—the b. Transfer of membership rights by virtue of inheritance is
board is supposed to be small in number so that it may not a valid mode of acquiring membership.
easily muster a quorum to act on urgent matters.
iii. Terms of office of the trustees first elected are staggered 2. Approval of admission of new members
with 1 year interval.
a. Admission of members, in the absence of any express
While staggered terms are allowed, members of the board provision in the by-laws as to what body the admission of
should always be elected in accordance with Sec. 24 and corporate members is lodged, must logically be in the
any vacancy thereof filled as provided by Sec. 29. board of trustees;
iv. Lifetime or unlimited term is not allowed as it is absolutely RATIO: It is the board which exercises the corporate
deprives other members the opportunity to participate in powers of all corporations.
the management of the corporation or become officers of b. Approval of the members of the corporation shall not be
the corporation. necessary.
v. Only members of the corporation can be elected to sit in
the board. 3. Mode adopted in the by-laws
vi. A corporation is not qualified to occupy the position of a
director or trustee in the absence of an express provision a. By-laws may provide that new members may be admitted
in the by-laws stating that authorized representatives of by the majority of the member of the BOT or a committee
juridical persons or corporate members are also to be on membership.
considered as “members” of the corporation for purpose
of qualifying them to be elected as members of the board. 4. Qualifications for membership
vii. Officers other than trustees may be directly elected by the
members not only by the board.
a. Equal access to membership
b. Corporations may validly prescribe certain qualifications
e. Meetings necessary for membership and the mode of procedure in
which membership can be acquired.
i. GR: May be held anywhere in or outside the Philippines; c. Reasonable classification is allowed.

5. Admission before adoption of corporate by-laws TITLE XII

CLOSE CORPORATIONS
a. Law does not require the adoption of corporate by-laws
before a corporation can commence its operation by Definition and applicability of Title (Sec. 96)
accepting membership.
b. It may accept members even there is a provision in its AOI Q: What is a close corporation?
stating that additional members may be accepted
pursuant to the by-laws of the corporation. A: A corporation in which the stock is held in few hands, or in few
families and which stock is not at all or rarely dealt in buying and
6. Amendment of by-laws selling.
a. BOT cannot increase the membership fee by mere PECULIARITY OF A CLOSE CORPORATION
resolution without first properly amending the by-laws of
the corporation; Identity between stock ownership and active management
b. Sec. 48-by-laws may be amended by vote of majority of
the members of the non-stock corp. a. In a closed corporation, all outstanding stock is owned by the
c. In the absence of due delegation by members of such persons who are active in the management and conduct of the
power to the BOT, the latter cannot amend the by-laws business.
nor circumvent the law by adopting a resolution to that b. It is essentially an incorporated partnership.
effect.
A close corporation is one whose AOI provide the following:
7. Nature of membership rights
a. All its issued stock, exclusive of treasury shares, shall be
a. GR: Membership and all rights arising therefrom are held of record by not more than a specified number of
personal and non-transferable. persons not exceeding 20;
XPN: Otherwise provided by the AOI or the by-laws b. All its issued stock shall be subject to one or more
b. In the absence of restrictions, it may act arbitrarily and restrictions on transfer permitted by the Code; and
exclude any person it may see unfit and the courts have no c. Any of stock shall not be listed in any stock exchange or
power to interfere. offered to the public.
8. Power of courts NOTE: Corporations which are vested with public interest such as
those mentioned are not allowed to be incorporated as a close
a. Courts are without power to strip a member of a non- corporation.
stock, non-profit corporation of his membership without
cause; Articles of Incorporation (Sec. 97)
Permissible provisions in AOI
b. Right of a corporation to determine its membership.
Classification of directors into one or more classes
9. Termination of membership
a. Only in the manner and for the causes provided in the AOI a. AOI provides for 2 classes of stock allocating a number of
directors for each class, and the holders of each class
or by-laws;
b. It is essential that the expulsion or suspension of a would be elected to the BOD solely by the holders of the
member must be based on just and reasonable ground same class regardless of the number of shares in each
class.
after notice and hearing of the charged against him;
c. Entitlement to due process. b. But the members of the BOD cannot be divided into
groups, with each group having different terms of office.
10. Payment of dues and other assessments
Quorum and voting requirements
a. Membership or club dues;
b. Dues are obligations payable at recurring intervals for AOI may provide for quorum and voting requirements in meetings of
SH or directors greater than those provided in the Corporation Code.
the maintenance of an organization.
c. AOI and by-laws may provide that only members of
good standing or those who are up-to-date in the Management of the corporation by the SH
payment of their dues or other obligations may vote.
Where the AOI provide that the business of the corporation shall be
managed by the SH themselves rather than by a BOD, then the SH
shall be deemed to be the directors will all the liabilities imposed by
the Code on directors.
Election or appointment of officers directly by the SH

AOI may provide that all or certain specified officers or EEs shall be mortgage, pledge or encumbrance of such stock without the written
elected or appointed directly by SH, instead of BOD. consent of the other SH.
In ordinary stock corporation, corporate officers are elected by a Issuance or transfer of stock of a close corporation in breach of
majority of all members of the BOD. qualifying conditions (Sec. 99)
Validity of restrictions on transfer of shares (Sec. 98) The term “transfer” includes donation as it is not limited to transfer
for value.
Q: What are the 2 conditions for the validity of restrictions o the
right to transfer shares? Breach of any restriction in the issuance or transfer of stock is
without prejudice to the right of the transferee under existing laws
A: to rescind the transaction or recover under applicable warranty.
1. Such restrictions must appear in the AOI and in the by- Agreements by SH (Sec. 100)
laws, as well as in the Certificate of Stock; otherwise, they Valid agreements by SH
shall not be binding on any purchaser thereof in good
faith; and 1. Pre-incorporation agreements among SH shall continue to
2. They shall not be more onerous than granting the existing be valid and binding even after incorporation if such be
SH or the corporation the option to purchase the shares of their intent, subject to the limitation that they should not
the transferring shareholders with such reasonable terms, be inconsistent with the AOI;
conditions or periods stated therein. 2. Refers to voting or pooling agreements in particular;
3. Even if a provision in any written agreement relating to
Right of First Refusal any phase of the corporate affairs is to make the parties
partners among themselves, the same shall not be
SH who wants to sell his shares to any third person must first offer it invalidated on that ground. A SH’s agreement shall not be
either to the corporation or to the other existing SH usually under invalidated on the ground that it restricts or interferes
the same terms and conditions. If the SH or the corporation fails to with the discretion or powers of the BOD;
exercise the option to purchase within the period stated, the 4. But the SH actively engaged in the management of the
transferring SH may sell his shares to any third person. close corporation shall be personally liable for corporate
torts unless the corporation has obtained reasonably
Need for stock transfer restrictions in close corporations adequate liability insurance.
Prevent changes in control of corporation When board meeting is unnecessary or improperly held (Sec. 101)
GR: In the 4 cases mentioned, the action by the directors without a

The usual purpose of restrictions is to prevent changes in control of meeting is deemed valid.
the corporation which might otherwise result from the transfer of
shares. XPN: When the by-laws provide otherwise.
Maintain delectus personae of parterhsip NOTE: Under Sec.53, an oral objection is sufficient to preserve the
right of a director to question the validity of any action taken in a
meeting held without proper notice.
The incorporators want to continue as partners albeit with the
advantages of corporate personality; they do not want other people
to be able to step into the shoes of their co-partners. Pre-emptive right in close corporations (Sec. 102)
Scope of restrictions In close corporations, pre-emptive right of SH extends to all stock to

be issued, whether common, preferred, voting or non-voting, etc.
These restrictions are not to be “enlarged by implications.” newly authorized shares or newly issued balance of originally
authorized shares including treasury shares, whether the
consideration for the issuance of the stock is cash or otherwise; and
Transfers covered
whether or not its denial will affect their relative interests or
positions in the corporation.
The AOI should make clear whether the restrictions imposed upon
transfers of stock are applicable only to voluntary inter vivos sales or
GR: Right of pre-emption is a matter of absolute right on the part of
also to gift or to testamentary dispositions and devolution upon
SH;
death or other transfers by operation of law.
XPN: When limited or curtailed by the AOI.
Ordinarily, option restrictions apply only voluntary transfers.
In widely-held corporation, the pre-emptive right extends only to
new issues of shares out of an increase of the capital stock.
Where the AOI do not provide an option period, a clause that
restricts the transfer of makers of stock by way of pledge or
Amendment of AOI (Sec. 103)
mortgage is not valid and enforceable because the effect of the
absence of such option period is to absolutely prohibit the

The amendment of the AOI must be approved at the SH’s meeting The SEC shall not accept or approve the AOI and by-laws of any
duly called for the purpose. Mere assent of the SH which is allowed educational institution unless accompanied by a favorable
under Sec. 16 is insufficient. recommendation of the DepED.
Even those without rights are entitled to vote. Board of Trustees (Sec. 108)
Deadlocks (Sec. 104) For non-stock educational corporations
Arbitration of intra-corporate deadlocks by the SEC 1. Number of trustees shall not be less than 5 nor more than
15;
In case of deadlock wherein directors or SH of a close corporation 2. Shall be in multiples of 5;
are evenly divided respecting the management of the corporation’s 3. GR: The terms of office of the trustees shall be staggered
business and affairs, and there is no way to settle the dispute, the with 1 year interval;
SEC shall have the power to arbitrate the dispute. XPN: Otherwise provided in the AOI or by-laws
4. Trustees subsequently elected shall have a term of 5 years;
The SEC in the exercise of its powers, may order the dissolution of 5. Trustees elected to fill vacancies occurring before the
the corporation if it will be beneficial to the SH and CRs but where expiration of a particular term should hold office only for
the business is successful, it may appoint instead a provisional the unexpired period;
director as additional member of the board. 6. Majority of the trustees shall constitute a quorum for the
transaction of business; and
Dissolution in the event of deadlock 7. Powers and authority of trustees shall be defined in the
by-laws.
SEC has the in cases where there exists a fundamental deadlock
which is causing injury to the corporation, to order the dissolution For stock educational corporations
when there is no other way to save the SH’s investment from
disintegration. The number and term of directors shall be governed by the
provisions on stock corporations.
Withdrawal of SH or dissolution of corporation (Sec. 105)
Right of SH to withdraw or to have the corporation dissolved

Chapter II
May be exercised provided that the corporation has sufficient assets RELIGIOUS CORPORATIONS
to over its debts and liabilities exclusive of capital stock.
Religious corporations
His right to have the corporation dissolved by written petition to the
SEC must be founded on some legal grounds mentioned justifying A corporation composed entirely of spiritual persons and which is
the dissolution by the Commission which shall order the dissolution organized for the furtherance of a religion or for perpetuating the
only after proper notice and hearing. rights of the church or for the administration of church or religious
work or property.
The Code does not require any religious group, sect, or

TITLE XIII denomination to be registered as a corporation but the status of an
SPECIAL CORPORATIONS unregistered religious group is that of an ordinary organization or
association without judicial or legal personality separate and distinct
Chapter I from that of its members.
EDUCATIONAL INSTITUTIONS
Classes of religious corporation (Sec. 109)
Incorporation (Sec. 106)
Corporation sole (Sec. 110)
Q: What is an educational corporation? It is incorporated by one person and consists of one member or
corporator only and his successors such as a bishop.
A: It is a stock or non-stock corporation organized to provide
facilities for teaching or instruction. It is a special form of corporation usually associated with the clergy.
NOTE: They are different from ordinary non-stock corporation Through this legal fiction, church properties acquired by the
formed or organized for educational purpose. incumbent if a corporation sole pass by operation of law, upon his
death, not to his personal heirs but to his successor in office.
They are governed primarily by special laws and suppletorily by the
general provisions of the Corporation Code. It is created not only to administer the temporalities of the church or
religious society where he belongs, but also to hold and transmit the
Prerequisite to incorporation (Sec. 107) same to his successor in said office.

Merely the administrator of the properties of the church
Corporation sole may be dissolved voluntarily by filing with the SEC
Corporation sole is not the owner of the properties he may acquire for approval a verified declaration of dissolution setting forth the
but merely the administrator thereof and holds the sane in trust for matters in Sec. 115.
the church to which the corporation is an organized and constituent
part. Religious societies (Sec. 116)
A corporation sole can purchase private lands in the Philippines A religious society is incorporated by an aggregate of persons.
without violating the Constitution although its head is an alien as
long as it can be shown that the religious denomination which he Any religious society or religious order, or any diocese, synod, or
represents is owned at least 60% by Philippine citizens. district organization of any religious denomination, sect or church,
unless forbidden by the rules of the latter or by competent authority
Without nationality may, upon consent and/or by an affirmative vote at a meeting called
for the purpose, of 2/3 of its membership, incorporate for the
The nationality of the constituents of the diocese and not the administration or management of its temporalities, affairs and
nationality of the actual incumbent of the parish, must be taken into property.
consideration.
Filing of AOI
Filing AOI and other documents
To incorporate, said society must file with the SEC a verified AOI
The chief archbishop, etc. must file with the SEC a verified AOI setting forth the matters in Sec. 116.
setting forth the matters mentioned in Sec. 111, although it may
include other provision not contrary to law for the regulation of the The law does not expressly require the approval by the SEC of the
affairs of the corporation. AOI which is a condition for incorporation in the case of educational
corporations.
Effect of filing
Registration not mandatory
From and after such filing, the chief archbishop shall become a
corporation sole. But the properties acquired by the corporation Law does not require religious societies to register as a corporation
shall be registered in the name of such chief archbishop or in the but they may do so in order to acquire legal personality for the
name of the corporation and not in the name of the archbishop, etc. administration of their temporalities or properties.
Sec. 112 does not expressly require the approval by the SEC of the Term of existence
AOI unlike in the case of educational corporations.
Sec. 116 does not provide for a term of existence of religious
corporations whether classified as a corporation sole or a
Articles of incorporation (Sec. 111) corporation aggregate. It may exist perpetually.
Submission of the AOI (Sec. 112)
Acquisition and alienation of property (Sec. 113) TITLE XIV

DISSOLUTION
A corporation sole may purchase and hold property and receive
bequests or gifts for its church, charitable or educational purposes. Methods of dissolution (Sec. 117)
Yet, the authority from the RTC is required before it can mortgage or Q: What is dissolution?
sell real property but such authority is not necessary where the
religious denomination has rules which regulate the acquisition, A:
mortgage, and selling or real estate and personal property.
1. It signifies the extinguishment of its franchise to be a
Filling of vacancies (Sec. 114) corporation and the termination of its corporate existence.
2. It is that condition of law and fact which ends the capacity
The successors in office of any chief archbishop shall become the if the body corporate to act as such and necessitates a
corporation sole on the filing with the SEC of a notarized copy of liquidation and extinguishment of all legal relations
their commission, certificate of election or letters of appointment. existing in respect of the corporate enterprise.
3. Denotes complete destruction of the corporation and
Term of existence within contemplation of the law, is equivalent to its death.
AOI of a corporation sole is not required to state the term for which Power to dissolve corporation
it is to exist. Once incorporated, a corporation sole shall exist
indefinitely unless it is dissolved. Being a creation of the state, a corporation can only be dissolved
with the consent of the state.
Dissolution (Sec. 115)

De jure dissolution Compliance with the legal requirements
This is dissolution in law adjudged and determined by judicial a. Mere resolution of the BOD/T and by the SH or members
sentence or brought about by an act of or with the consent of the to dissolve the corporation does not have the effect of
sovereign power, or which results from the expiration of the charter dissolution;
period of corporate life. b. It can have no legal effect until the requirements
prescribed by law are complied with;
De facto dissolution c. A corporation can only be dissolved in the manner
prescribed by law which gave it life.
One which takes place in substance and in fact when the corporation
by reason of insolvency, cessation of business or otherwise, Q: When is a corporation deemed dissolved?
suspends all its operations and goes into liquidation still retaining its
primary franchise to be a corporation. A:
Fact that the corporation has quit doing business does not a. Upon the issuance of the Certificate of Dissolution, or
necessarily constitute even a de facto dissolution, if it is still solvent b. When a judgment is rendered dissolving the corporation;
and has not gone into liquidation. c. Upon the approval of the amended AOI;
d. Expiration of the shortened term;
Two legal steps in corporate dissolution e. Upon approval of the verified declaration of dissolution.
1. Termination of the corporate existence at least as far as A corporation sole may be dissolved and its affairs settled voluntarily
the right to go on doing ordinary business is concerned; by submitting to the SEC a verified declaration of dissolution.
and
2. Voluntary dissolutions where no creditors are affected
3. Winding up of its affairs, payment of its debts, and the
distribution of its assets among the SH. a. Without necessity of going to the SEC or the court in case
the dissolution does not affect the rights of any CR;
After winding up, the existence of the corporation is terminated for b. Effected by mere vote of the BOD and the resolution duly
all purposes. adopted by the SH or members;
c. Even holders of non-voting shares or non-voting members
Methods or causes of corporate dissolution are entitled to vote on the matter;
d. Publication is required for the protection of unknown CRs.
a. Voluntary
Issuance of Certificate of Dissolution
1. By the vote of the BOD/BOT and the SH/members where
no CRs are affected; a. SEC must issue a Certificate of Dissolution
2. By judgment of the SEC after hearing of petition for b. Not present in the former law and thus the issuance of the
voluntary dissolution where CRs are affected; certificate of filing of the resolution of voluntary
3. By amending the AOI to shorten the corporate term; dissolution was sufficient to dissolve the corporation.
4. In case of corporation sole, by submitting to the SEC a
verified declaration of dissolution for approval. Dissolution of Corporation Sole
b. Involuntary A corporation sole may be dissolved voluntarily by submitting to the

SEC a verified declaration of dissolution which must be approved by
1. By expiration of the term provided for in the original AOI; the SEC before the dissolution can take effect.
2. By legislative enactment;
3. By failure to formally organize and commence the Sale of assets in anticipation of voluntary dissolution
transaction of its business within 2 years from date of
incorporation; or Liquidation of corporate debts permitted
4. By order of the SEC.
a. A corporation may convert its assets into cash and settle
NOTE: These methods are exclusive. S with the CRs;
b. The proceeds may be used to pay debts;
Piercing the veil of corporate fiction is not one of the causes by RATIO: Corporations are under no obligations to continue
which a corporation may be dissolved. in business.
Voluntary dissolution where no CRs are affected (Sec. 118) Exercise of the right to do business is one which is purely
voluntary and if at any time it is advisable to suspend the
transaction of business, pay debts and convert assets into
The legal existence of a corporation is terminated only when a cash or its equivalent, the execution of that purpose is a
corporation is dissolved by legal authority or expires by limitation of matter which concerns the corporation and its creditors
existence or by forfeiture. alone.

Q: After the dissolution of the corporation by expiration of
Distribution of corporate assets prohibited corporate term, may its corporate existence or juridical personality
be extended?
a. A corporation cannot distribute any of its assets or
property except upon lawful dissolution and after payment A: No. But the stockholders may reincorporate the expired
of all its debts and liabilities; corporation by complying with the requirements for incorporation
b. It cannot, prior to the issuance of the certificate, lawfully under Sections 10-15 of the Corporation Code.
distribute its assets to its SH though it may lawfully
liquidate its debts in anticipation of such voluntary Q: Who has the task of distributing the assets of the corporation?
dissolution.
A: The board of directors has the task of distributing the assets of
Right of minority SH to oppose dissolution the corporation.
a. If it clearly appears that the action of the SH in voting for Dissolution by legislative enactment
dissolution is in bad faith, or that the resolution for
dissolution has been superinduced by fraud or undue NOTE: Under Art. 76 of the former corporation law, any or all
influence, or if it clearly established that the resolution corporations created by virtue of the Corporation Code may be
was not taken for the benefit of the corporation or in dissolved by legislative enactment. This has been deleted under the
furtherance of its interest, but for the mere purpose of new Corporation Code. However, this power is still reserved under
unjustly oppressing the minority, such action may be Art. 145.
restrained;
b. In forcing the dissolution, the majority SH cannot Q: What are the limitations on the power to dissolve corporations
overreach the majority SH or freeze them out of their by legislative enactment?
share of the proceeds.
A:
Voluntary dissolution where creditors are affected (Sec. 119)
1. Under the Constitution, the amendment, alteration or
a. A hearing before the SEC is required; repeal of corporate franchise of a public utility shall be
b. In judgment dissolving the corporation, the Commission made only when the common good so requires.
may appoint a receiver to take charge of the liquidation of 2. Sec. 145 of the Corporation Code
the corporation. 3. It cannot impair the obligation of existing contracts
between the corporation and third persons or take away
Dissolution by shortening corporate term (Sec. 120) vested rights to creditors.
A corporation is dissolved upon the expiration of the period as fixed XPN: In case of corporate franchise of a public utility, there is
in the original articles of incorporation, unless said period is no impairment if the amendment is effected because the
extended by an amendment of the AOI. common good so requires.
Q: How is voluntary dissolution made? Q: Describe the power of the congress to amend or repeal
laws.
A: A voluntary dissolution is effected if the AOI is amended to
shorten the corporate term. Upon approval by the SEC of the A: It is inherent. The inherent power of the Congress to make
amended AOI or the expiration of the shortened term, as the case laws carries with it the power to amend or repeal them.
may be, the corporation shall be deemed dissolved without any
further proceedings except its liquidation. Q: What is the effect if the corporation does not formally
organize and commence the transaction of its business or the
NOTE: The automatic approval under Sec. 16 which is a general construction of its works within 2 years from the date of its
provision does not apply. The corporation is a creature of the State incorporation?
and it can only be dissolved with the State’s approval after
complying with the formalities of the law for dissolution. A: Its corporate powers shall cease and the corporation shall be
deemed dissolved except when such failure is due to causes
Q: Explain the publication of notice of dissolution. beyond its control
A: An Affidavit of publication of the corporation must be executed by NOTE: An attempted completion of organization after such
the publisher of the print medium. This cannot be dispensed with by time is wholly ineffective and will not give it even the status of
alleging that the same is not required under Sec. 120 and that no a de facto corporation.
creditors will be prejudiced by the dissolution.
Q: Is there an automatic dissolution?
Q: What will happen after the dissolution of the corporation by
expiration of corporate term? A: There is none until the dissolution has been lawfully declared
by the SEC after notice and hearing as required by due process
A: The corporation ceases to exist de facto or de jure except only for but the effect of the declaration shall retroact to the time the
purposes connected with winding up or liquidation. corporation should be deemed dissolved.

Q: Can the legal existence of a corporation whose powers Q: What is the effect of death of stockholders or members?
have ceased under Sec. 22 be collarerally attacked in any
private suit to which the corporation may be a party? A:
A: Yes. a. Stock corporations- the shares being property, pass by

assignment, bequest or descent, and must ever remain the
Q: What is the effect of the continuous inoperation of a property of some person who, of necessity, must be
corporation for a period of at least 5 years? members of the corporation so long as it may exist; the
corporation has the right of succession
A: It is a ground for the suspension or revocation of its b. Non-stock corporations-the death or withdrawal of
registration by the Commission. members may leave the association in such state as to be
incapable of acting or continuing itself. Where that
Q: What is the effect of change of name on corporate happens and too few members remain to continue the
existence? succession and fill vacancies under the constitution of the
association, a dissolution may result.
A: A mere change of name of a corporation does not result in its
dissolution. Effect of want of officers on the corporate existence
The changing of the name of a corporation, either by the legislature Q: What is the effect of want of officers on the corporate
or by the corporators under legislative authority is no mere change existence?
of name, not change of being.
A: It will not work as dissolution of the corporation nor operate as a
Effect of insolvency or bankruptcy on corporate existence surrender of the corporate franchise.
Q: What is insolvency? Although the proper officers may be necessary to enable the body to
act, yet they are not essential to its validity. Event the want of
A: it means the inability or the failure to pay debts as they become officers and the want of power to elect them would not be fatal to
due. When used in the bankruptcy sense, it means that the its existence.
condition of an individual or organization where the total disabilities
exceed the total assets available for their settlement. Q: What is the effect of concentration of stock on corporate
existence?
Q: What is the effect of insolvency or bankruptcy on corporate
existence? A: Although the shares are held by a less number of shareholders
than that which the law would have required as a condition
A: While the possession of assets is necessary to the creation of a precedent to the organization of the same corporation, it is held that
stock corporation, the loss of all its property does not affect its the corporation continues to exist.
existence. The appointment of a receiver does not ipso facto
produce its dissolution not bar the existence of corporate rights. The purchase however by one of all the shares if a corporation may
operate as a dissolution of the corporation to the extent that in such
However, the inability to exercise its corporate powers by reason of event, it suspends the exercise of the rights under the franchise until
insolvency might constitute such non-user as to warrant a decree of the owner transfers stock in good faith so as to maintain an
dissolution. organization under the statute.
Effect of alienation of all assets on corporate existence Involuntary Dissolution (Sec. 121)
Q: What is the effect of alienation of all assets on corporate Violations by a If the violation is committed by a
existence? corporation corporation, the same may, after notice and
hearing, be dissolved in appropriate
A: Its effect is practically dissolution, particularly when the proceedings before the SEC
corporation is insolvent or nearly so, and conveys its entire property Deadlocks in close The SEC, upon written petition of any
with a view of going out of business. corporations stockholders, shall have the authority to
make such orders as it may deem
“State of suspended animation” appropriate including an order dissolving the
corporation
Q: Explain the concept of State of suspended animation? Mismanagement of The SEC, upon written petition of any
a close corporation stockholder, may compel the dissolution of
A: Though a practical or de facto dissolution may take place when a such corporation whenever any of the acts if
corporation disposes of or is so deprived of all its property, there is, the directors, officers, officers, or those in
in such case, as a rule, no dissolution as a matter of law. It may control of the corporation is illegal,
continue in a state of suspended animation. fraudulent, or dishonest, or oppressive or
unfairly prejudicial to the corporation
Effect of death of stockholders or members Suspension or Grounds:
revocation of
certificate of 1. Fraud in procuring its certificate of
registration of a registration A: It means the winding up of the affairs of the corporation by
corporation 2. Serious misrepresentation as to what reducing its assets in money, settling with creditors and debtors, and
the corporation can do or is doing to apportioning the amount of profit and loss.
the prejudice of the public
3. Refusal to comply of any lawful of the It consists of adjusting all debts and claims, that is, collecting all that
SEC restraining commission of acts is due the dissolved corporation, the settlement and adjustment of
which would amount to a grave claims against it, and the payment of its debts.
violation of franchise
4. Continuous inoperation for at least 5 Q: What is the nature of liquidation?
years
5. Failure to file by-laws within the A: It is not a partition of community property but rather, a transfer
required period or conveyance of title of its assets to the individual stockholders.
6. Failure to file required reports in
appropriate forms Methods of corporate liquidation
Dissolution by quo warranto proceedings Q: What are the methods of corporate liquidation?
Q: Who will file a quo warranto proceeding against a de facto A:

corporation?
1. Liquidation by the corporation itself
A: The Solicitor-General. 2. Liquidation by a duly appointed receiver
3. Liquidation by a trustee to whom the corporation had
Q: Where should it be filed? conveyed the corporate assets
A: The law does not specify were the proceeding should be Q: Who has jurisdiction over liquidation?
instituted, whether with the SEC or the RTC.
A: The appropriate RTC. Thus, the SEC has no authority to liquidate
Right of minority stockholders to sue for dissolution the assets of a dissolved corporation except where it can work out a
final settlement of corporate affairs in the absence of a duly
GR: The minority stockholders of a corporation cannot sue and designated receiver or trustee.
demand its dissolution.
RULES:
XPNS:
LIQUIDATION BY THE CORPORATION
1. Where stockholders are without redress or remedy within Period 3 years after the time when it would have been
corporation itself so dissolved within which to wind up its affairs
2. Where violations do no warrant quo warranto proceedings
NOTE: Actions pending by or against a
Effects of dissolution corporation when the 3 years expires are
abated (National Abaca v. Pore, 1961)
Q: What are the effects of dissolution? Extension of The law does not allow any extension.
period
A: NOTE: If the trustee may commence a suit
which can proceed to final judgment even
1. Transfer of legal title to corporate property beyond the 3-year period, there is no reason
2. Continuation of corporate business but its status is only why a suit already commenced by the
that of an ordinary association corporation during its existence not by mere
3. There is nothing to prevent the stockholders from trustee should not be given similar treatment
conveying their respective shareholdings toward the Action against There is nothing in Art. 122 which bars an
creation of a new corporation to continue the business of liquidators or action for recovery of the debts of the
the old. stockholders corporation against the liquidator thereof after
4. Those interested may reincorporate by refilling a new AOI the lapse of the winding up period of 3 years.
and by-laws Approval of SEC SEC approval is not required for liquidation or
5. The corporation continues as a body corporate for 3 years not required distribution of the assets of the dissolved
for purposes of winding up or liquidation corporation. The same is a matter of internal
6. Cessation of corporate existence for all purposes upon the concern and falls within the power of the
expiration of the winding up period of 3 years directors and stockholders or duly appointed
liquidation trustee.
Corporate liquidation (Sec. 122) Authority of They are empowered to wind up the affairs of
hold-over officers the corporation within the 3 year liquidation
Q: What is liquidation? period. The distribution of the remaining
undistributed assets must necessarily continue
after such period

LIQUIDATION BY RECEIVER dissolution interest in the corporate assets which
Authority of the Being a ministerial officer, he has only such include creditors
receiver authority as is conferred by statute. He may 3. The only surviving stockholder or director
sue to enforce the stockholder’s liability on 4. The counsel who prosecuted and defended
unpaid subscription in the representation of the interest of the corporation and who in
the corporation fact appeared in behalf of the corporation
NOTE: The appointment of a receiver operate Q: What is the effect of dissolution on the power to enter into
to suspend the authority of a corporation and contracts?
of its officers/trustees over its property and
effects, such authority being reposed in the A: It terminates the power to enter into contracts or continue the
receiver business as a going concern.
Status of receiver He represents the court, the stockholders and
the creditors. He has the power to vote the Priority of application of assets
shares owned by the latter in other
corporations 1. The creditors of the corporation are entitled to have all its
Stay of pending Ratio: to enable the management committee assets distributed first among them to their respective
actions or the rehabilitation receiver to effectively rights and priorities
exercise its powers free from any judicial or 2. Stockholders, members, directors, officers of the
extra-judicial interference that might unduly corporation who are also its creditors
hinder or prevent the rescue of the debtor 3. The remaining shall be distributed to the stockholders or
company members in proportion to their shareholdings or interest
Equality among Its assets are held in trust for their equal in the absence of any provision to the contrary.
creditors benefit to preclude one from obtaining an
advantage or preference over another by the
expediency of an attachment, execution or
otherwise. TITLE XV
Duration of It shall exist indefinitely until the affairs of the FOREIGN CORPORATIONS
receivership dissolved corporation shall have been
completely settled and liquidated. Definition and rights of foreign corporations (Sec. 123)
Application to existing foreign corporations (Sec. 124)
Q: Is the appointment of the receiver mandatory? Application for a License (Sec. 125)
Issuance of a license (Sec. 126)
A: No, it is only discretionary. It is addressed to the sound discretion
of the court. This should be exercised with great caution and only Q: What is a foreign corporation?
when necessary, in view of the drastic nature and burdensome
character of a receivership, involving as it does appointment of a A: It is one formed, organized, or existing under any law other than
stranger who would take over the corporate business. those of the Philippines and whose laws allow Filipino citizens and
corporations to do business in its own country or state.
LIQUIDATION BY A TRUSTEE
Meaning of Q: What is the purpose of the appointment of Q: What are the requisites?
trustee “trustee”?
A:
A: For the protection of the creditors and
stockholders. 1. The corporation must be formed, organized, or existing
Conveyance Q: How are the properties conveyed? under any law other than those of the Philippines
of 2. The laws of the country where the corporation was
corporate A: Via resolution of the stockholders or members. organized allow Filipino citizens and corporations to do
property business in its own country or state
Effect of To make the trustee the legal owner of the property,
conveyance subject to the beneficial interest therein of the Q: What principle is stated in Sec. 123?
creditors, stockholders, members and other persons
in interest. A: The so-called “Incorporation test.”
NOTE: The trustee may be sued as such in all matters Modes of doing business
connected with the liquidation
Period of No time limit Q: What are the options of a foreign corporation who would like to
existence do business in the Philippines?
Where no 1. The board of directors or trustees may be
receiver or permitted to continue as “trustees” by A:
trustee is legal implication to complete the
designated liquidation 1. Subsidiary
after 2. In their absence, those having pecuniary 2. Branch office

3. Representative office XPN: The single transaction is not merely incidental or casual but
4. Regional headquarters or regional operating headquarters indicates the foreign corporation’s intention to do other business in
the Philippines.
Subsidiary A corporation that will be organized in the
Philippines through the SEC where 50% of the NOTE: Actual transaction of business within the Philippine territory
voting stock of which is owned or controlled is an essential requisite for the Philippine to acquire jurisdiction over
directly or indirectly through one or more a foreign corporation and thus require foreign corporation to secure
intermediaries by another corporation, which a Philippine business license.
thereby becomes a parent company
Branch office Carries out the business activities of the head Examples:
office and derives income from the host country
1. Soliciting orders
NOTE: A branch office of foreign corporation 2. Entering into service contracts
must deposit securities with the SEC, otherwise 3. Opening offices (liaison offices or branches)
administrative fines will be imposed 4. Appointing representatives or distributors
Representative Deals directly, with the clients of the parent 5. Participating in the management, supervision or control of
or liaison office company but does not derive income from the any domestic business, firm, entity, or corporation in the
host country and is fully subsidized by its head Philippines
office. It undertakes activities such as but not
limited to information dissemination and Q: Give examples of activities considered as “not doing business”.
promotion of the company’s products as well as
quality control of products A:
Regional or area A multi-national company is a foreign firm or
headquarters of entity engaged in international trade with 1. Mere investment as shareholder by a foreign entity in a
multi-national affiliates, subsidiaries or branches in the Asia domestic corporation
companies Pacific Region. 2. Appointing a representative or distributor domiciled in
the Philippines that transacts business in the
NOTE: Before a corporation can transact business in the Philippines, representative’s or distributor’s own account and account
it must secure proper authorizations under existing laws. 3. Performing services auxillary isolated contract of sale
which are not on a continuing basis
Q: What is the purpose of the license?
Q: What is the essential condition to be considered as “doing
A: To subject the foreign corporations to the jurisdiction of the local business” in the Philippines.
courts, otherwise, a foreign corporation illegally doing business here
may successfully avoid service and impugn the jurisdiction of the A: It is necessary that there is actual performance of specific
local courts. commercial acts within the territory of the Philippines
“Doing business” NOTE: Entering into a series of transactions implying a continuity of

commercial dealings is not sufficient if the perfection and
Q: What is meant by “doing business”? consummation of these transactions were done outside the
Philippines.
A: This is known also as “Twin-Characterization Test.” The doing
business implies a continuity of commercial dealings and Q: What is the rule in case of exporters?
arrangements and contemplates to that extent the performance of
acts or works or the exercise of some of the functions normally A: The importing country does not acquire jurisdiction over the
incident to, and in progressive prosecution of the purpose and foreign exporter who has not performed any specific commercial act
object of its organization. within the territory of the importing country.
NOTE: The activity to be undertaken in the Philippines is one that is The rule is that a foreign company that merely imports goods from a
for profit-making. Philippine exporter, without opening an officer or appointing an
agent in the Philippines, is not doing business in the Philippines.
Q: What are the elements of the “Twin-Characterization test”?
Who may be a resident agent (Sec. 127)
A: Resident agent; service of process (Sec. 128)
1. Substance test Appointment of Resident Agent

2. Continuity test
The appointment of the resident agent is a requirement for the
GR: The act should not be a single or isolated transaction or issuance of license to do business. A resident agent is one on whom
occasional, incidental, and causal transactions that do not come any summons and other legal processes may be served in all actions
within the meaning of the law. or other legal proceedings against the foreign corporation doing
business in the Philippines.
Q: Describe the power of the resident agent.

apply. However, foreign corporations are still not allowed to merge
A: The same is limited to receive, for and in behalf of the with domestic corporations.
corporation, services and other legal processes in all actions and
legal proceedings against the foreign corporation. He is not the Doing business without a license (Sec. 133)
attorney-in fact of the corporation.
Summary of rules
The resident agent is not in a position to sign the certificate because
he may not be aware of the actions initiated by the principal, 1. If a foreign corporation does business in the Philippines
whether in the Philippines against a domestic corporation or private without a license, it cannot sue before the Philippine
individual or in the country where such corporation was organized courts
and registered. 2. If a foreign corporation is not doing business in the
Philippines, it needs no license to sue before the Philippine
Q: Who can be a resident agent? courts on an isolated transaction or on a cause of action
entirely independent of any business transaction
A: 3. If a foreign corporation does business in the Philippines
with the required license, it can sue before the Philippine
1. An individual who is: courts on any transaction
a. Residing in the Philippines 4. If a foreign corporation does business in the Philippines
b. Of good moral character without a license, a Philippine national who has contracted
c. Of sound financial standing with said corporation might be stopped from challenging
2. A domestic corporation lawfully transacting business in the the foreign corporation’s personality in a suit before
Philippines Philippine courts
Substitution or addition NOTE: A license is not a condition precedent to the maintenance of

any kind of action in the Philippine courts by a foreign corporation.
Q: What is the rule as to substitution or addition of a resident
agent? It is not the absence of the license but “doing business” in the
Philippines without such license that debars the foreign corporation
A: The foreign corporation shall file with the SEC a petition for from the access to our courts.
change or substitution of resident agent within 30 days after the
acceptance of the appointment by the new resident agent. Q: What is the status of a contract entered into by a foreign
corporation doing business in the Philippines without a license?
Law applicable (Sec. 129)
Amendments to articles of incorporation or by-laws of foreign A: It is not necessarily void ab initio. Any defect is cured it if will
corporations (Sec. 130) subsequently obtain a license to do business. The contract is
Amended license (Sec. 131) enforceable and his requirement of registration affects only the
Merger or consolidation involving a foreign corporation in the remedy.
Philippines (Art. 132)
Q: Is estoppel applicable in case of foreign corporation doing
Q: What are the matters governed by the law of the country of the business in the Philippines without license?
foreign corporation and not by Philippine laws?
A: Yes. A party is estopped to challenge the personality of a
A: corporation after having acknowledged the same by entering into a
contract with it.
1. Creation, formation, organization of the foreign
corporation Q: Is doctrine of pari delicto applicable?
2. Dissolution of the foreign corporation
3. Rules which fix the relations, liabilities, responsibilities or A: Yes. Equity could not lend its said to the enforcement of an
duties of stockholders, members, or officers of the alleged right claimed by virtue of an agreement entered into in
corporation to each or to the corporation contravention of law.
Q: What is the rule in case of Amendments to articles of NOTE: It is believed that neither estoppels nor in pari delicto rule
incorporation or by-laws of foreign corporations? should be applied in this jurisdiction. The purpose of requiring
license to do business will not be served if these rules will continue
A: Any Amendment to articles of incorporation or by-laws of to be considered as an exception.
licensed foreign corporations shall be effected under the law of the
country where the foreign corporation was organized. Revocation of license (Sec. 134)
Issuance of certificate of revocation (Sec. 135)
Q: What is the effect of merger of a foreign corporation?
Q: Is the revocation of the license to do business in the Philippines
A: If the licensed foreign corporation will merge with another an infliction of a penalty?
foreign corporation, the laws of their country shall govern. However,
if the corporation will merge with a domestic corporation, the A: No. It is also not a deprivation of a right but a withdrawal of
provisions of the Corporation Code on merger or consolidation shall privilege.
Q: What are the grounds for revocation?
A:
1. When the foreign corporation has failed to comply with

the law: failure to file annual reports, pay fees, franchise
taxes or penalties
2. Failure to appoint and maintain a resident agent
3. Failure to notify the state if a change in the agent or office
4. Failure to file amendments to its AOI, articles of merger
within the time prescribed
5. Misrepresentation in the material matter in any
application, report, affidavit, or other document filed with
the state
6. Guilty of abusing or exceeding the corporation’s authority
7. Violating state law
8. Using unauthorized name
9. Acting in a manner detrimental to the citizens of the state
Withdrawal of foreign corporations (Sec. 136)
It is discretionary upon the state to grant foreign corporations in the

privilege of engaging in business in the Philippines. The foreign
corporations must comply with the rules prescribed by the SEC.
After the license is issued, the foreign corporation may voluntarily

leave the country at its discretion. The state cannot force the foreign
corporation to continue the business in the country.
Q: State the rules in case of withdrawal.
A: At any rate, while a foreign corporation has the discretion to

withdraw, it will not be allowed to formally withdraw and no
certificate of withdrawal will be issued unless its obligations are
paid.
REFERENCES:
 AQUINO, Timoteo B., Philippine Corporate Law

Compendium (With Notes on Securities Regulation and
Records of the Batasang Pambansa), 2011, Rex Bookstore
 DE LEON, Hector S., The Corporation Code of the
Philippines, 2010, Rex Bookstore


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NOTES ON CORPORATION LAW

Kenneth and King C. Hizon _________________________________________________________________________________________________________________

UNIVERSITY OF SANTO TOMAS

Trust the hands of trustees who act for a large

Form of Business Description Joint accounts Present when there is an arrangement

It is neither a creature of statute nor of Characteristics:

Facultad de Derecho Civil 1

Facultad de Derecho Civil 2

A: Yes. A corporation is after all an association of individuals under

PNB v. Ritratto Group Inc. Reynoso v. CA

Subsidiary NOTE: In applying the doctrine of piercing the veil of corporate

1. The parent corporation owns all or most of the capital

Contract Theory A corporation may be considered a resident of a particular country

A: A: It is the continued existence which enables a corporation to

XPN: 1. The capacity to act as a legal unit

a. No existing Philippine law expressly prohibiting a foreign Other classifications of corporation

Facultad de Derecho Civil 12

a. Eleemosynary i. Public utilities

a. Governmental control Gonzales v. PNB

i. Maintenance of peace and order Government as a member of a corporation

Q: What is the reason for the abovementioned rule?

Facultad de Derecho Civil 14

A: i. usually an investment banker who:

Doctrine of Equality of shares

CLASSIFICATION OF SHARES (Sec. 6) Q: Explain the Doctrine of Equality of shares?

Q: What are series? i. Without express authority in the AOI; and

Stock dividends Nature of share of stock

Q: Distinguish between capital stock and legal capital. Certificate of stock

A: a. A written acknowledgement by the corporation of the

STOCK OR SHARE OF STOCK

Facultad de Derecho Civil 18

Facultad de Derecho Civil 20

Facultad de Derecho Civil 21

Q: What is a Founder’s share? It has no inherent power in this respect.

Q: What are Redeemable shares or Collable shares? Maintenance of a sinking fund

A: a. SEC requires corporation to set up and maintain a sinking

a. Section 41 empowers a stock corporation to purchase or XPN: Sec. 51

Facultad de Derecho Civil 23

Article 45 of Civil Code

Facultad de Derecho Civil 24

Facultad de Derecho Civil 25

Q: What should be the amount to paid as promotion fees? A:

Effect if not incorporated 1. Name verification slip

INCORPORATION e. Incorporators must have the capacity to enter into a valid

Q: Give examples of restrictions on capacity to act, hence not A:

Definition of Terms Corporations Capital of which must be wholly owned by

Facultad de Derecho Civil 31

Facultad de Derecho Civil 32

Facultad de Derecho Civil 35

A: NOTE: If the new address is located within the same

Facultad de Derecho Civil 36

Authorized capital stock = total of the products X par value

Capital stock/capital and subscribers/contributors

Q: For stock corporations, their AOI must also indicate what

a. The amount of its authorized capital stock in pesos

Q: In case of non-stock corporations, what are the matters which

Facultad de Derecho Civil 37

AMENDMENT OF AOI (Sec. 16) i. Acceptance of original charter; and

Q: What is a charter? 1. Application for a charter is sufficient

i. After proper notice and Test of a.

Facultad de Derecho Civil 42

NOTE: The above are inadvertent or minor defects or

A: Direct or Failure to comply with the condition precedents