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Corporation Code of the Philippines BP Blg. 68

The Corporation Code is an act which:
1. Provides for the incorporation, organization and regulation of
private corporations;
2. Defines their powers and provides for their dissolution;
3. Fixes the duties and liabilities of directors or trustees and
other officers thereof;
4. Declares the rights and liabilities of stockholders or
5. Prescribes the conditions under which corporations including
foreign corporations may transact business;
6. Provides penalties for violations of the Code; and
7. Repeals all laws and parts of laws in conflict and
inconsistent with the Code.
1. Concession theory A corporation is an artificial creature
without any existence until it has received the imprimatur of
the state according to law, through SEC
2. Theory of corporate enterprise or economic unit The
corporation is not merely an artificial being, but more of an
aggregation of persons doing business, or an underlying
business unit
STATUTORY DEFINITION (Section 2) A corporation is an
artificial being created by operation of law, having the right
of succession and the powers, attributes and properties
expressly authorized by law or incident to its existence.

Doctrine of ultra vires acts a corporation, being a mere

creation of law, can exercise only those powers which are conferred
by law. (Sec. 45)


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It is an artificial being;
It is created by operation of law;
It has the right of succession; and
It has only the powers, attributes and properties expressly
authorized by law or incident to its existence.


1. Creation
Mere agreement of the parties
By law or by operation of law
2.No. of incorporators
At least 2 persons
5-15 incorporators (except
corporation sole)
3.Commencement of juridical personality
From the moment of execution
From the date of issuance of
of the contract
the Cert. of Inc. by the SEC
May exercise any power
Can exercise only the powers
authorized by the partners
expressly granted by law or
(provided it is not contrary to
implied from those granted or
law, morals, good customs,
incident to its existence
public order, public policy)
When management is not
Vested in the board of directors
agreed upon, every partner is
or trustees
an agent of the partnership
6.Effect of mismanagement
A partner as such can sue a
Suit against a member of the
partner who mismanages
BOD/T who mismanages must
be in the name of the
7.Right of Succession
No right
Has right of succession
8.Extent of liability to third persons
Partners are liable personally & SHs are liable only to the
subsidiarily (sometimes
extent of the shares subscribed
solidary) for partnership debts
by them (limited liability
to 3 persons
9.Transferability of interest

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Partner cannot transfer his

SH has generally the right to
interest in the partnership so
transfer his shares w/o prior
as to make the transferee a
consent of the other SHs
partner w/o the unanimous
because corporation is not
consent of all the existing
based on this principle
partners because partnership
is based on the principle of
delectus personae
10.Term of existence
Any period of time stipulated
May not be formed for a term
by the partners
in excess of 50 years
extendible to not more than 50
years in any 1 instance
11.Firm name
Limited partnership is required Any name provided it is not the
by law to add the word Ltd.
same as or similar to any reg.
to its name
firm name
May be dissolved at any time
Can only be dissolved with the
by any or all of the partners
consent of the State
13.Governing law
New Civil Code
Corporation Code
1. Juridical personality separate and distinct from that of the
individuals composing it;
2. Can act only through agents;
3. Composed of an aggregate of individuals (except
corporation sole);
4. Distributes its profits to those who contribute capital;
5. Can be organized only where there is a law authorizing its
6. A partnership is taxable as a corporation.
1. Strong separate juridical personality
Case: If A, Inc. buys the share of J, Inc., which later turns out
to be insolvent, will A, Inc. answer for the debts of J, Inc.?
(Edward J. Nell vs. Pacific Farms, 15 SCRA 415)

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GR: Where a corporation buys all the shares of

another corporation, this will not operate to dissolve the
other corporation and as the two corporations still maintain
their separate corporate entities, one will not answer for the
debts of the other.
a.) If there is an express assumption of liabilities;
b.) There is consolidation or merger;
c.) If the purchase was in fraud of creditors;
d.) If the purchaser becomes a continuation of the
N.B. Unlike a partnership which may be dissolved by many
causes, either by the withdrawal, death, insolvency, etc. of a
partner, the right of succession of a corporation allows it to
maintain its separate juridical personality in spite of what
happens to the stockholders or members who constitute it.
2. Limited Liability to Investors
- Stockholders are personally liable for corporate debts
and liabilities only to the extent of what they have
invested (paid-up capital) and what they have promised
to invest in the corporation (unpaid subscription)
3. Free Transferability of Units of Ownership
- Doctrine of delectus personae in partnership is not
applicable and that stockholders hold their shares as
personal property with rights to dispose, assign or
encumber them as they may desire
4. Centralized Management
- All corporate powers are vested in the Board of Directors
or Trustees
- Stockholders or members no management powers,
only to elect directors or trustees


- A corporation is a legal or juridical person with a personality
separate and apart from its individual stockholders or

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members composing it and from other corporations to which

it may be connected.
Rudimentary is the rule that a corporation is invested by law
with a personality distinct and separate from its
stockholders or members by legal fiction and convenience,
it is shielded by a protective mantel and imbued by law with
a character alien to the persons comprising it. (Lim vs. CA,
323 SCRA 102)
Certificate of Registration/Incorporation by the SEC
issuance thereof is the operative act for the existence of a
Once Certificate of Registration is issued, the corporation
acquires a personality distinct and separate from that of its
stockholders or members.
Effects of Doctrine of Separate Personality:
1. The corporation may not be held liable for acts or
liabilities of shareholders;
2. May acquire and possess properties as well as bring
legal action in its name;
3. Properties so acquired or conveyed to the corporation is
the property of the corporation, vice versa
4. No personality to bring action for recovery of property
belonging to individual shareholders or members
5. Not entitled to moral damages (except: when it has
established a good reputation that is debased, resulting
in its humiliation in the business realm)
Note: It was held that a juridical person such as a
corporation can validly complain for libel or any form of
defamation and claim for moral damages because Art.
2219 (7) of the Civil Code does not qualify whether the
plaintiff is a natural or a juridical person. (Filipinas
Broadcasting vs. Ago Med., GRN 141994, June 17, 2005)

Some cases on separate juridical personality:

1. Walter Smith vs. Ford (GRN 42420, Nov. 20, 1936)
obligation of the President of a corporation incurred in

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his personal capacity cannot be collected from the

corporation where he is an officer
2. Businessday Information Systems vs. NLRC (221 SCRA 9)
President/manager cannot be held personally liable for
the money claims of discharged corporate employees
unless he acted with evident bad faith in terminating
their employment.
- Under this doctrine, a corporation will be looked upon as a
separate legal entity as a general rule, and until sufficient
reason to the contrary appears; but when the notion of legal
entity is used to defeat public convenience, justify wrong,
protect fraud, defend crime, or when used as a mere alter
ego, the law will regard the corporation as an association of
persons (the corporation and the persons who compose it
are treated as identical).
- To do this, the courts must be sure that the corporate fiction
was misused, to such an extent that injustice, fraud or crime
was committed upon another. It is the protection of the
interests of innocent third persons dealing with the
corporate entity which the law aims to protect by this
doctrine. (Traders Royal Bank vs. CA, 269 SCRA 15)
- There must be a clear and convincing evidence. The
wrongdoing must be clearly and convincingly established. It
cannot be presumed.

3 Classes of Piercing:
1. Fraud cases when a corporation is used as a cloak to
cover fraud or to do wrong
2. Alter ego cases when the corporation is merely a farce
since the corporation is an alter ego, business conduit or
instrumentality of a person or another corporation
3. Equity cases to achieve justice or equity

Control Test used in determining the applicability of the

doctrine (Alter ego cases)

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1. Control must be complete domination, not only of

finances but of policy and business practice in respect to
the transaction attacked so that the corporate entity as
to this transaction had at the time no separate mind, will
or existence of its own;
2. Such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a
statutory or other positive duty, or dishonest and unjust
acts in contravention of plaintiffs legal right; and
3. The aforesaid control and breach of duty must
approximately cause the injury or unjust loss complained

Cases where piercing applied:

1. The corporate entity is being merely used as an alter-ego
of the controlling officers or stockholders, such as when
the officers and directors of two corporations are
practically the same and both corporations hold office in
the same room;
2. When the corporate officers do fraudulent or illegal acts
in the name of the corporation, such as illegal dismissal
or unfair labor practices;
3. When one tries to evade civil liability by incorporating
the properties or the business;
4. Where the corporate fiction was used as a means to
perpetrate a social injustice or as a vehicle to evade
obligations or confuse the legitimate issues;
5. Where it was used to avoid a judgment credit, to avoid
inclusion of corporate assets as part of the estate of a
decedent, to avoid liability arising from debt;
6. When used to avoid a contractual commitment by the
main stockholders or officers against his contracted noncompetition commitment.
When piercing not applicable:
1. When other remedies are still available because piercing
is a remedy of last resort, e.g. when the corporation
employed fraud in the foreclosure proceedings where the

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remedy of annulment based on vice of consent is

available (Umali vs. CA, 189 SCRA 529);
Not allowed in fraud cases unless the remedy sought is
to make the officer or another corporation pecuniary
liable for corporate debts;
Cannot be allowed when there is no wrong committed;
Where there is no allegation, much less even a scintilla
of substantiation that the parties interest in the
corporation are so considerable as to merit a declaration
of unity of their civil personalities;
Cannot be employed to allow fraud, e.g. where seller of
real property wishes to avoid the consequences of a sale
to a corporate entity by claiming that the broker through
whom the seller transacted sale was also the President
of the corporate buyer, when such fact was known to her
from the beginning (Araneta Inc. vs. Tuazon de Paterno,
91 Phil 786).


1. Stock Corporation one whose capital stock is divided
into shares and which is authorized to distribute to
shareholders dividends or allotments of the surplus profits
on the basis of the share held; created and operated for the
purpose of making a profit
2. Non-stock Corporation does not issue stocks nor
distribute dividends to its members; not created for profit
but for the public good and welfare
1. As to number of persons who compose them
a.) Corporation aggregate more than one member or
b.) Corporation sole composed of one member or
corporator only and his successors, such as a bishop
2. As to whether for religious purposes or not
a.) Ecclesiastical organized for religious purposes
b.) Lay organized for a purpose other than for religion
3. As to whether they are for charitable purposes or not

Atty. Jonathan B. Tambol

a.) Eleemosynary for charitable purposes

b.) Civil for business or profit
4. As to State or by whose laws they have been created
a.) Domestic incorporated under the laws of the
b.) Foreign formed, organized, or existing under any laws
other than those of the Philippines
5. As to their legal right to corporate existence
a.) De jure existing in fact and in law
b.) De facto (Sec 20) existing in fact but not in law; there
exists a flaw in its incorporation (Note: illustrate case
where A,B,C,D,E formed a corporation but D and E failed
to sign by omission in good faith)
-One which has not complied with all the
requirements necessary to be a de jure corporation
but has complied sufficiently to be accorded
corporate status as against third parties although not
against the state.
1.) AOI fails to state all matters required by law;
2.) Name of the corp. closely resembles that of a preexisting corp. that it will tend to deceive the public;
3.) Incorporators or certain number of them are not
residents of the Philippines;
4.) Acknowledgement of the AOI or certificate of
incorporation is insufficient or defective in form or
acknowledged before the wrong officer;
5.) Violation of Filipino ownership;
6.) Minimum paid-up capital stock has not been paid to and
received by the corporate treasurer contrary to his
The only way to question its corporate existence is in a
direct proceeding by the state (quo warranto) through the
Solicitor General. Private individuals cannot raise the
objection in such a case either directly or indirectly, and
nobody can raise the objection collaterally.
6. As to whether they are open to the public or not
a.) Close limited to selected persons or members of a

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b.) Open open to any person who may wish to become a

stockholder or member thereto
7. As to their relation to another corporation
a.) Parent or Holding one which is so related to another
corporation that it has the power either, directly or
indirectly to, elect the majority of the directors of such
other corporation
b.) Subsidiary one which is so related to another
corporation that the majority of its directors can be
elected either, directly or indirectly, by such other
8. As to whether they are corporations in a true sense or only
in a limited sense
a.) True one which exists by statutory authority
b.) Quasi-corporation exists without formal legislative
grant, exception to the rule that a corporation can exist
only by authority of law
1.) Corporation by prescription one which has
exercised corporate powers for an indefinite period
without interference on the part of the sovereign
power and which, by fiction of law, is given the status
of a corporation, e.g The Roman Catholic Church
2.) Corporation by estoppel (Sec 21) one which in
reality is not a corporation, either de jure or de facto,
because it is so defectively formed, but is considered
a corporation in relation to those only who, by reason
of their acts or admissions, are precluded from
asserting that it is not a corporation
9. As to whether public or private
a.) Public formed or organized for the government of a
portion of the State
b.) Private formed for some private purpose, benefit or
end; it may either be a stock or non-stock, governmentowned or controlled or quasi-public
1. Promoter one who by contract of lease or services or
agency, initiates and undertakes the pre-incorporation steps

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until the actual formation of the corporation; lays the

groundwork for corporate existence
Corporators those who compose the corporation,
whether stockholders or members; includes incorporators,
stockholders or members
Incorporators those corporators mentioned in the articles
of incorporation as originally forming and composing the
corporation and who executed and signed the articles of
incorporation as such
Stockholders owners of shares of stock in a stock
corporation; also called shareholders
Members corporators of a corporation which has no
capital stock
Subscribers persons who have agreed to take and pay for
original unissued shares of a corporation formed or to be
Underwriter a person who guarantees on a firm
commitment and/or declared best effort basis the
distribution and sale of securities of any kind by another
Components of a corporation: Incorporators, Corporators,
Stockholders/Members, Promoter, Board of Directors/Trustees,
Executive Committee, Officers of the corporation


General Rule: The shares of stock in a corporation may be divided
into classes or series of shares, or both, any of which classes of
series of shares may have such rights, privileges or restrictions as
may be stated in the articles of incorporation.
1.) No share may be deprived of voting rights except those
classified and issued as preferred or redeemable
2.) There shall always be a class or series of shares which
have complete voting rights.
3.) Any or all of the shares or series of shares may have a
par value or have no par value as may be provided for in
the articles of incorporation, except that banks, public
utilities, insurance companies, trust companies, and

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building and loan associations (BPI-TB) shall not be

permitted to issue no par value shares of stock.
N.B. There can be no privilege or restriction on any share other
than what is provided for in the articles of incorporation.
1. Incorporators The classes and number of shares which a
corporation shall issue are first determined by the
incorporators as stated in the AOI filed with the SEC.
2. BOD and SHs After the corporation comes into existence,
they may be altered by the BOD and the SHs by amending
the AOI pursuant to Sec. 16

Doctrine of Equality of Shares Under the law, except as

otherwise provided by the AOI and stated in the certificate of stock,
each share shall be in all respects equal to every other share. (Sec.
6, par. 5)

1. Capital stock amount fixed in the corporate charter to be
subscribed and paid in cash, in kind or in property at the
organization of the corporation or afterwards and upon
which the corporation is to conduct its operation
2. Capital value of the actual property of the corporation
whether in money or property
3. Authorized capital stock capital stock divided into
shares of par values as specified in the AOI
4. Subscribed capital stock amount of the capital stock
subscribed whether fully paid or not
5. Outstanding capital stock portion of the capital stock
issued to subscribers except treasury shares
6. Paid-up capital stock portion of the subscribed or
outstanding capital stock that is paid
7. Unissued capital stock portion of the capital stock that
is not issued or subscribed; does not vote and draws no
8. Legal capital amount equal to the aggregate par value
and/or issued value of the outstanding capital stock.

Atty. Jonathan B. Tambol

1. Common shares basic class which is ordinarily and

usually issued without extraordinary rights and privileges
and the owners thereof are entitled to a pro-rata share in
the profits of the corporation and in its assets
A stockholder who owns at least one common share has the
following rights:
a.) Right to vote at meetings;
b.) Right to dividends;
c.) Right to examine corporate books.
2. Preferred Shares those which entitle the shareholder to
some priority on dividends and asset distribution; always
with par value and enjoy preferences in dividends, voting,
and corporate property upon dissolution (Sec. 6)
Preferences may be:
a.) Stated in the AOI; or
b.) Fixed by BOD when authorized by AOI, provided such
terms and conditions shall be effective upon filing of a
SEC certificate
Kinds of Preferred Shares:
a.) Preferred shares as to assets preference in distribution
of assets after liquidation
b.) Preferred shares as to dividends to receive dividends at
fixed rates before any dividends at all are paid to
common stockholders
1.) Cumulative preferred share payment of current
dividends + dividends in arrears
2.) Non-cumulative preferred share current
dividends only
3.) Participating preferred share stipulated
dividends at the preferred rate + right to participate
in the remaining profits
4.) Non-participating preferred share stipulated
dividends only
5.) Cumulative-participating preferred share
combination of the cumulative & participating
3. Redeemable shares (callable) those which permit the
issuing corporation to redeem or purchase its own shares
(Sec. 8); redeemable at a fixed date or at the option of
either the corporation or SH or both at a redemption price;
may be issued only when expressly so provided in the AOI

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4. Treasury shares earlier issued as fully paid and have

thereafter been acquired by the corporation by purchase,
donation, redemption, or through some lawful means (Sec.
9); only surplus earnings may be used for its purchase; may
again be disposed for a reasonable price; no voting right, no
right to dividends while they remain in the treasury
Delinquent shares the corporation may bid at a public sale
5. Founders shares issued to organizers and promoters of
a corporation in consideration of some supposed right or
property (Sec. 7)
6. Par value share one with a specific money value fixed in
the AOI and appearing in the certificate of stock for each
share of stock of the same issue; primary purpose is to fix
the minimum subscription or issue price of the shares, thus,
assuring creditors that the corporation would receive a
minimum amount for its stocks
7. No par value share one without any stated or par value
appearing on the face of the certificate of stock; has always
an issued value; same rights with holders of par value
a.) Cannot have an issued price of less than P5.00;
b.) Entire consideration for its issuance constitutes capital
so that no part of it should be distributed as dividends;
c.) Cannot be issued as preferred stocks;
d.) Cannot be issued by BPI-TB;
e.) AOI must state the fact that it issued no par value shares
as well as the number of said shares;
f.) Once issued, deemed fully paid and non-assessable
8. Voting share with right to vote; given to common stock,
withheld from preferred
N.B. The rule is not one stockholder, one
vote but one share, one vote because
representation in a corporation is commensurate to
extent of ownership.
9. Non-voting share without right to vote; preferred or
redeemable shares
* Matters where non-voting shares can vote upon
a.) Merger or Consolidation

Atty. Jonathan B. Tambol

b.) Amendment of AOI

c.) Adoption & amendment of by-laws
d.) Incurring, creating or increasing bonded indebtedness
e.) Increase/decrease of capital stock
f.) Investment of corporate funds
g.) Dissolution
h.) Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the corporate property
Note: election of directors or trustees (Sec. 24) not
10. Promotion share issued to promoters, or those in some
way interested in the company, for incorporating the company,
or for services rendered in launching or promoting the welfare
of the company, such as advancing fees for incorporating,
advertising, attorneys fees, surveying
11. Share in escrow subject to an agreement wherein share
is deposited by the grantor with a third person to be kept by the
depositary until the performance of a certain condition or the
happening of a certain event contained in the agreement
12. Watered stock issued not in exchange for its equivalent
value either in cash, property, share, stock dividends, or
- includes stocks:
a.) issued without consideration (bonus share)
b.) issued as fully paid when the corporation has received a
lesser sum of money than its par or issued value
c.) issued for a consideration other than actual cash such as
property or services, the fair valuation of which is less than its
par or issued value
d.) issued as stock dividend when there are no sufficient
retained earnings to justify it


1. natural persons;
2. not less than 5 but not more than 15;

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3. of legal age;
4. majority must be resident of the Philippines (not necessarily
citizens of the Philippines except when the law requires
minimum Filipino participation);
Nota Bene: Filipino Citizenship requirement
a.) 100% Filipino owned
1.) Mass media;
2.) Retail trade (less than US$ 2,500,000);
3.) Small-scale mining;
4.) Private security agencies;
b.) 80% Filipino owned private radio communications
c.) 70% Filipino owned
1.) Pawnshop;
2.) Advertising
d.) 60% Filipino owned
1.) Utilization, exploration, development of natural
2.) Public utilities
3.) Banking
e.) 40% Filipino owned
1.) Financing companies regulated by the SEC;
2.) Investment houses regulated by the SEC
5. each must own or subscribe to at least one share
There must be at least five (5) stockholders in a stock
1. Promotion a promoter is a person who, acting alone or
with others, takes initiative in founding and organizing the
business or enterprise of the issuer and receives
consideration therefore.
a.) Discovery
b.) Investigation
c.) Assembly
2. Incorporation
a.) Drafting and execution of AOI by the incorporators and
other documents required for registration of the corp;
b.) Filing with the SEC of the AOI;
c.) Payment of filing and publication fees; and
d.) Issuance by the SEC of the certificate of incorporation.

Atty. Jonathan B. Tambol

3. Formal organization and commencement of the

transaction of the business
a.) Adoption of By-Laws and filing of the same with the SEC;
b.) Election of BOD/T and officers;
c.) Establishment of principal office;
d.) Providing for subscription & payment of capital stock.
Incorporators vs. Corporators:
signatory to articles of
stockholder of stock corporation
or member of non-stock
do not cease to be such (Once
cease to be such if they are no
an incorporator, forever an
longer stockholders
number is limited to 5-15
no restriction as to number
must have contractual capacity
may be such through a guardian
- 50 years maximum, extendible to not more than 50 years at
any single instance
- May be shortened or extended
- Any number of extensions, no limits, perpetual life
- Can only be extended before it expires and within the last 5
years of its existence
Exception: unless there are justifiable reasons for an earlier
extension as may be determined by SEC
- If there is an extension, the AOI must be amended; requires
the 2/3 votes of the OCS (Sec. 16); those opposing
stockholders can exercise their appraisal right (Sec. 37)
Remember: 50-50-5 Rule
Doctrine of Relation The filing and recording of a
certificate of extension after the term cannot relate back to
the date of the passage of the resolution of the stockholders
to extend the life of the corporation. However, the doctrine
of relation applies if the failure to file the application for
extension within the term of the corporation is due to the
neglect of the officer with whom the certificate is required to
be filed or to a wrongful refusal on his part to receive it.

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CORPORATIONS (Sec 12 & 13)
capital stock no minimum requirement as long as the paid up
capital is not less than P5,000.00
at least 25% of authorized capital stock must be subscribed by
the stockholders at the time of incorporation
at least 25% of the total subscription must be paid at the time
of subscription
Remember: 25-25 Rule + P5,000 rule
N.B. These are mandatory requirements.
Articles of Incorporation (AOI) the document prepared by the
persons establishing a corporation and filed with the SEC
containing the matters required by the code
1. Name of corporation;
2. Purpose/s, indicating the primary and secondary purposes;
3. Place of principal office;
4. Term/duration;
5. Names, citizenship, and residences of incorporators;
6. Number, names, citizenship and residences of
7. If stock corporation, amount of capital stock, number of
share and in case of par value stock corporation, the par
value of each share;
8. Names, residences, number of shares and amounts of
subscription of subscribers which shall not be less than 25%
of authorized capital stock;
9. Names, residences and amount paid by each subscriber on
their subscription, which shall not be less than 25% of total
10. Name of treasurer elected by subscribers; and
11. If a corporation engages in a nationalized industry, a
statement than no transfer of stock will be allowed if it will
reduce the stock ownership of Filipinos to a percentage
below the required legal minimum.
The corporation acquires juridical personality under the
name stated in the certificate of incorporation. It is the name of the

Atty. Jonathan B. Tambol

corporation which identifies and distinguishes it from other

corporation, firms, or entities.
1. Names which are identical, deceptively similar to that of any
existing corporation;
2. A name already protected by law;
3. A name which is patently deceptive, confusing or contrary to
existing laws
State can no longer be used as the first word of a
corporate name (SEC Circular)
deceptively similar there is tendency that the ordinary
person will be misled into thinking that such name is the
same with another one
Case: Converse vs. Universal Rubber Products (147 SCRA
154) Universal Converse is confusingly similar to
a.) Complainant corporation acquired prior right over the
use of the name
b.) Proposed name is either identical, deceptively or
confusingly similar to that of any existing corporation or
patently deceptive, confusing or contrary to existing

- Must be the exact complete address (SEC requirement);
must be the city or town, not merely the province
- Metro Manila can no longer be stated as principal office
- Change of address
a.) Change of city or municipality amendment of the AOI
to be filed with the SEC
b.) If located within the same city or municipality notice
only regarding the change of address
- A corporation commences to have juridical personality and
legal existence only from the moment the SEC issues to the
incorporators a certificate of incorporation under its official
seal. Once issued, the certificate becomes the charter or
corporate franchise from which the authority of the
corporation to operate as such flows.
Religious corporations from and after the filing with the
SEC of the AOI, the chief archbishop, etc. shall become a
corporation sole
Cooperatives upon registration with the Cooperatives
Development Authority (RA 6938, Sec. 16)
Corporate Charter an instrument or authority from the
sovereign power bestowing the right or privilege to be and
act as a corporation.

Change of name must comply with the formalities prescribed by

1. Amendment of the AOI
2. Filing of the amendment with the SEC
3. Once approved, SEC issues an amended certificate of
incorporation under the amended name
- Must be lawful; if purpose is patently unconstitutional,
illegal, immoral, or contrary to government rules and
regulations, the same is a ground for the rejection or
disapproval by the SEC of the AOI; cannot be formed for the
practice of a profession, e.g., law, medicine, etc.
- Must be definitely stated
- Primary purpose must be stated
- Secondary purposes must be compatible with the primary
purpose and with one another

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1. resolution by at least a majority vote of the Board; and
2. vote in a meeting or mere assent of 2/3 of the OCS, or in
case of non-stock, by the members
subject to the appraisal right of dissenting stockholders
Appraisal Right right of a stockholder to demand the fair value
of his share after dissenting from a proposed corporate action
involving a fundamental change in the corporation in the cases
provided by law; Sec 81-86
Corporations Governed by Special Law (banks, banking &
quasi-banking institutions, building & loan associations, trust

Atty. Jonathan B. Tambol

companies & other financial intermediaries, insurance companies,

public utilities, educational institutions) AOI or amendment
thereto must be accompanied by a favorable recommendation of
the appropriate government agency, to the effect that such AOI or
amendment is in accordance with law.
1. No substantial compliance with the required form
2. Purpose/s are patently unconstitutional, illegal, immoral, or
contrary to government rules and regulations
3. Treasurers affidavit is false
4. Citizenship requirement has not been complied with
Keyword: NUT-C
- Those matters referring to facts existing as of the date of
the incorporation, such as:
1. Name of incorporators;
2. Names of original subscribers to the capital stock of the
corporation and their subscribed and paid up capital;
3. Treasurer elected by the original subscribers;
4. Members who contributed to the initial capital of a non-stock
5. Date and place of execution of the AOI;
6. Witnesses to and acknowledgment of the articles.
Articles of Incorporation
Essentially a contract between
the corporation and the
stockholders/members; between
the stockholders/members inter
se; and between the corporation
and the State (must be
Executed before incorporation

A condition precedent in the

Law3 Private Corporations

vs. BY-LAWS:
Rule for the internal government
of the corporation but has the
force of a contract between the
corporation and the
stockholders/members and
between the stockholder and
members themselves
Usually executed after the
incorporation although Sec. 46
allows simultaneous filing of the
A condition subsequent

acquisition of corporate
Amended by a majority of the
directors/trustees and
stockholders representing 2/3 of
the outstanding capital stock or
2/3 of the members in case of
non-stock corporations
Power to amend/repeal articles
cannot be delegated by the
stockholders/members to the

May be amended by a majority

vote of the BOD and majority
vote of OCS or a majority of the
members in non-stock
Power to amend/repeal by-laws
or adopt new by-laws may be
delegated by the 2/3 of the OCS
or 2/3 of the members in case of
non-stock corporation


1. Non-user for 2 years when the corporation does not formally
organize and commence the transaction of its business or the
construction of its works within two (2) years from the date of its
incorporation, its corporate powers cease and the corporation shall
be deemed dissolved (automatic).
2. Non-user for 5 years when the corporation has commenced
the transaction of its business but subsequently becomes
continuously inoperative for a period of at least five years, the
same shall be a ground for the suspension or revocation of its
corporate franchise or certificate of incorporation; not automatic,
requires notice and hearing.
1. For a stock corporation, ownership of at least one share of
the capital stock of the corporation in his own name, and if
he ceases to own at least one share in his own name, he
automatically ceases to be a director. For a non-stock
corporation, only members of the corporation can be elected
to the BOT.

Atty. Jonathan B. Tambol



What is material is the legal title to, not beneficial

ownership of the stocks appearing on the books of the
A person who does not own a stock at the time of his
election or appointment does not disqualify him as a director
if he becomes a shareholder before assuming the duties of
his office.
A majority of the directors/trustees must be residents of the
Must not have been convicted by final judgment of an
offense, punishable by imprisonment for a period exceeding
6 years, or a violation of the Corporation Code committed
within 5 years prior to the date of his election or
appointment. (Sec 27)
Must be of legal age.
Only natural persons can be elected directors/trustees.
Other qualifications as may be prescribed in the by-laws of
the corporation or in special laws or regulations.

- Hold office for one (1) year until their successors are elected
and qualified
Holdover Principle If no election is conducted or no
qualified candidate is elected, the directors or trustees shall
continue to act as such in a hold-over capacity until an
election is held and a qualified candidate is so elected.
GENERAL RULE Unless otherwise provided in the Code, all
corporate powers and prerogatives are vested directly in the Board
of Directors or Trustees.
1. In case of an Executive Committee authorized in the bylaws;
2. Contracted manager which may be an individual, a
partnership or another corporation (Note Sec. 44 if
contracted manager is another corporation);
3. Close corporations stockholders may directly manage the
business of the corporation instead, if the AOI so provide.

Law3 Private Corporations

Principle on delegation of board power the Board may

validly delegate some of its functions and powers to officers,
committees or agents

N.B. The power to purchase real property is vested in the board.

While a corporation may appoint agents to negotiate for the
purchase of real property needed by the corporation, the final say
will have to be with the board, whose approval will finalize the
transaction. A corporation can only exercise its powers and transact
its business through its board of directors and through its officers
and agents when authorized by a board resolution or by its by-laws.
(Sps. Firme vs. Bukal Enterprises, GRN 146608, Oct. 23, 2003)
Presence during election
Owners of a majority of the
Majority of the members
OCS, in person or by proxy,
entitled to vote in person or by
must be present at the election proxy, if allowed in its AOI or
of the directors.
by-laws, must be present.
Manner of voting
Cumulative voting is
Cumulative voting is generally
mandatory; a matter of right
not available unless allowed by
granted by law to each SH with the AOI or by-laws, since each
voting rights
member is entitled only to one
A. Straight Voting every SH may vote such number of
shares for as many persons as there are directors to be
To illustrate: If A owns 10 shares of stock in a corporation
and there are 5 directors to be elected, he is entitled to 50
votes which he may give to the 5 candidates he chose by
giving 10 votes each. The votes are distributed equally
among the 5 candidates of his choice without preference.
B. Cumulative Voting for one candidate a SH is allowed
to concentrate his votes and give one candidate as many

Atty. Jonathan B. Tambol

votes as the number of directors to be elected multiplied by

the number of his shares shall equal.
To illustrate: In the above example, A may cast all the 50
votes in favor of any one candidate. Suppose there are 50
shares and 40 of these shares are owned by A while the
remaining 10 shares are owned by B, C, D and E. if there are
5 directors to be elected, A is entitled to 200 votes. The
highest number of votes that A can give each of his 4
candidates is 50. So, there is one remaining slot to complete
the 5 directors. B, C, D and E can now cumulate their votes
in favor of one candidate and thus secure representation in
the board.
C. Cumulative Voting by distribution a SH may cumulate
his shares by multiplying also the number of his shares by
the number of directors to be elected and distribute the
same among as many candidates as he shall see fit.
To illustrate: If A owns 10 shares, he is entitled to 50 votes if
there are 5 directors to be elected. A may distribute his
votes to candidates E, F and G by giving E, 20 votes, F, 15
and G, 15. Any combination may be adopted as long as the
total number of votes cast by him does not exceed 50 votes
which is the number of shares owned by him multiplied by
the number of directors to be elected.
Note: Formula for determining the votes needed in
cumulative voting:
D = [A x B] / [C + 1] + 1
A Total number of outstanding shares entitled to vote
B Number of directors desired to be elected
C Total number of directors to be elected
D Number of shares necessary to elect desired number of
E Number of votes required to elect desired number of directors
Members of non-stock corporations may cast as many votes
as there are trustees to be elected but may not cast more
than one vote for one candidate, unless otherwise provided
in the AOI.
1. At any meeting of SH/members called for the election of
D/T, there must be present either in person or by proxy,

Law3 Private Corporations



the owners of the majority of the OCS or majority of the

members entitled to vote.
Election must be by ballot if requested by any voting
A SH cannot be deprived in the AOI/by-laws of his
statutory right to use any of the methods of voting in the
election of directors.
No delinquent stock (unpaid subscription) shall be voted.
The candidates receiving the highest number of votes
shall be declared elected. A majority vote is not
necessary, only plurality. However, it is necessary
that there is a quorum and in the absence thereof,
election shall be considered invalid.


Quorum such number of the membership of a collective body as
is competent to transact its business or do any other corporate act
1. As stipulated in the AOI/by-laws (greater majority); or
2. Majority of the number of directors or trustees plus 1
Every decision of at least a majority of the directors or
trustees present at a meeting at which there is a quorum
shall be valid as a corporate act, except:
election of officers which shall require the vote of a
majority of all the members of the board.
Directors or trustees cannot attend or vote by proxy at
board meetings.
1. President must be a director and may not concurrently be
the treasurer or secretary
2. Vice-President has the authority to act or to perform any
duty of the office in the absence of the president or if the
position of president becomes vacant
3. Treasurer may or may not be a director
4. Secretary need not be a director unless required by the bylaws; must be a resident and citizen of the Philippines
5. Other officers as may be provided in the by-laws

Atty. Jonathan B. Tambol

N.B. Any two (2) or more positions may be held

concurrently by the same person, except that no one shall
act as:
a.) President and Secretary, or
b.) President and Treasurer
at the same time.
Authority of officers is generally derived from law; by-laws;
or authorization from the board, either expressly or
impliedly by habit, custom or acquiescence in the general
course of business.
Doctrine of Apparent Authority If a corporation knowingly
permits one of its officers, or any other agent, to act within the
scope of an apparent authority, it holds him out to the public as
possessing the power to do those acts; and thus, the corporation
will, as against anyone who has in good faith dealt with it through
such agent, be stopped from denying the agents authority.
1. Inherent authority to act and bind the corporation which
the officer has by reason of his office although it may not be
sanctioned by express authority
2. Express every power or authority expressly conferred
upon him by law and the by-laws of the corporation
3. Implied includes all incidental authority as is necessary,
usual and proper to effectuate the main authority expressly
4. Apparent or Ostensible when in the usual course of the
business, an officer or agent is held by such corporation or
has been permitted to act for it in such way as to justify
third persons who deal with him in assuming that he is doing
an act or making a contract within the scope of his authority.
5. Authority by estoppel when a corporation, by its
voluntary act, places an officer or agent in such a position or
situation that persons of ordinary prudence are justified in
assuming that he has authority to perform the act in

Law3 Private Corporations

1. With or without cause, by a vote of 2/3 of OCS or by 2/3 of
the members in a non-stock corporation
Exception: when a director has been elected by virtue of the
minoritys exercise of cumulative voting rights, such director
may be removed only for cause. (Sec. 28)
2. Takes place either at a regular/special meeting called for the
3. With previous notice of the time and place of such meeting,
as well as of the intention to propose such removal
May be called at the instance of any SH or member:
a.) If officers refuse to call a meeting to consider the
removal of the director
b.) With due notice
A vacancy in the office of director or trustee may be filled as
1. By the Stockholders or Members:
a.) If the vacancy results from the removal by the
b.) Expiration of term;
c.) If the vacancy occurs other than by removal or by
expiration of term such as death, abandonment,
resignation or disqualification, if the remaining
directors/trustees do not constitute a quorum for the
purpose of filling the vacancy;
d.) If the vacancy may be filled by the remaining
directors/trustees but the board refers the matter to
the SHs/members;
e.) If the vacancy is created by reason of an increase in
the number of directors or trustees.
2. By the members of the Board (if still with quorum)
at least a majority of them are empowered to fill any
vacancy occurring in the board OTHER than by:
a.) Removal by the SHs/members; or
b.) Expiration of term.
G.R.: Directors are not entitled to receive any compensation
except for reasonable per diems.

Atty. Jonathan B. Tambol

1. When their compensation is fixed in the by-laws;

2. When granted by the vote of stockholders representing at
least a majority of the OCS at a regular or special meeting
Limitation: the amount of compensation shall not exceed 10%
of the net income before income tax of the corporation during
the preceding year.
Three-fold duties of Directors:
1. Duty of Obedience to direct the affairs of the corporation
only in accordance with the purposes for which it was
Based on Sec. 25 The directors or trustees and officers to
be elected shall perform the duties enjoined on them by law
and the by-laws.
2. Duty of Diligence directors and officers are required to
exercise due care in the performance of their functions.
Based on Sec. 31 directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of the
corporation or who are guilty of gross negligence or bad
faith in directing the affairs of the corporation shall be liable
jointly and severally for all damages resulting therefrom,
suffered by the corporation, its stockholders or members
and other persons.
3. Duty of Loyalty the director or officer owes loyalty and
allegiance to the corporation a loyalty that is undivided
and an allegiance that is influenced by no consideration
other than the welfare of the corporation.
Based on Sec. 31 directors or trustees who acquire any
pecuniary or personal interest in conflict with their duty as
such directors or trustees shall be liable jointly and severally
for all damages resulting therefrom.
Nature of Powers of Board of Directors or Trustees
1. Theory of original power powers of the board are original
and undelegated. The SHs or members do not confer, nor
can they revoke those powers.
2. They are derivative only in the sense of being received from
the State in the act of incorporation.

Law3 Private Corporations


- The board is the business manager of the corporation, and
so long as it acts in good faith, its orders are not reviewable
by the courts. (Montelibano vs. Bacolod-Murcia Milling, GRN
15092, May 18, 1962)
- Courts cannot undertake to control the discretion of the
board of directors about administrative matters as to which
they have the legitimate power of action, and contracts intra
vires entered into by the board of directors are binding upon
the corporation and courts will not interfere unless such
contracts are so unconscionable and oppressive as to
amount to a wanton destruction of the rights of the minority.
(Gamboa vs. Victoriano, GRN 40620, May 5, 1979)

a.) Resolution, contracts and transactions of the Board
cannot be overturned or set aside by the SH or members
and not even by the courts under the principle that the
business of the corporation has been left to the hands of
the Board; and
b.) Directors and duly authorized officers cannot be held
personally liable for acts or contracts done with the
exercise of their business judgment.
1.) When the Corporation Code expressly provides
2.) When the Directors or officers acted with fraud, gross
negligence or in bad faith;
3.) When Director or officers act against the corporation
in conflict-of-interest situation.


1. Limitations imposed by the Constitution, statutes, AOI or bylaws
2. Cannot perform constituent or those acts which involve
fundamental changes in the corporation which require the
approval of its SHs/members.
3. Cannot exercise powers not possessed by the corporation.

Atty. Jonathan B. Tambol

G.R. Directors and officers are not solidarily liable with the
In the following cases, personal liability may be incurred by
directors and trustees or the officers in some cases, when they:
1. Willfully and knowingly vote for and assent to patently
unlawful acts of the corporation (Sec 31);
2. Are guilty of gross negligence or bad faith in directing the
affairs of the corporation (Sec 31);
3. Acquire any personal or pecuniary interest in conflict of their
duty (Sec 31);
4. Consent to the issuance of watered stocks, or, having
knowledge thereof, fails to file objections with the secretary
(Sec 65);
5. Agree or stipulate in a contract to hold himself personally
liable with the corporation; or
6. By virtue of a specific provision of law.
Note: A director is not liable for misconduct of co-directors or other
officers unless:
1.) He connives or participates in it; or
2.) He is negligent in not discovering or acting to prevent it
stockholders in the event of mismanagement or abuse of powers
are the following:
a.) Receivership;
b.) Injunction if the act has not yet been done;
c.) Dissolution if abuse amounts to a ground for quo
warranto but Solicitor General refuses to act;
d.) Derivative suit or complaint filed with SEC
Self-dealing D/T/O those who personally contract with
the corporation in which they are directors, trustees or
- Such contracts are VOIDABLE at the option of the

Law3 Private Corporations

a.) The presence of such D/T in the board meeting approving

the contract was not necessary to constitute a quorum for
such meeting;
b.) The vote of such D/T in the board meeting approving the
contract was not necessary for the approval of the contract;
c.) The contract is fair and reasonable under the circumstances;
d.) In the case of an officer, there was previous authorization by
the BOD.
If conditions a or b is absent, said contract may be
ratified by the vote of the SHs representing at least 2/3 of
the OCS or 2/3 of the members in a meeting called for the
purpose, provided that full disclosure of the adverse interest
of the director/trustee involved is made at such meeting and
the contract is fair and reasonable.
Corporation with Interlocking Directors one, some or all of
the directors in one corporation is/are also a director in
another corporation.

Interlocking directorship by itself is not prohibited under the

Corporation Code. However, the by-laws may contain
provisions that disallow the same.
A contract between two or more corporations having
interlocking directors shall not be invalidated on that ground
alone. These contracts are valid provided that:
1.) The contract is not fraudulent; and
2.) The contract is fair and reasonable under the
But if the interlocking directors interest in one corporation
or corporations is substantial (exceeding 20% of the OCS),
then all the conditions prescribed in Sec. 32 on self-dealing
directors must be present with respect to the corporation in
which he has nominal interest.
Doctrine of Corporate Opportunity A director who, by
virtue of his office, acquires for himself a business
opportunity which should belong to the corporation, thereby

Atty. Jonathan B. Tambol

obtaining profits to the prejudice of such corporation, is

guilty of disloyalty and should therefore account to the latter
for all such profits by refunding the same.
Application: Unless his act is ratified, a director shall
refund to the corporation all the profits he realizes on a
business opportunity which:
1.) The corporation is financially able to undertake;
2.) From its nature, is in line with corporations business and
is of practical advantage to it; and
3.) The corporation has an interest or a reasonable
Note: The rule shall apply notwithstanding the fact that the
director risked his own funds in the venture.
A business opportunity ceases to be corporate opportunity
and transforms to personal opportunity where the
corporation refuses or is definitely no longer able to avail
itself of the opportunity.
- A body created by the by-laws and composed of not less
than 3 members of the board which, subject to the statutory
limitations, has all the authority of the board to the extent
provided in the board resolution or by-laws.
- May act by a majority vote of all of its members.
- Its decisions are not subject to appeal to the board.
However, if the resolution of the ExeCom is invalid, i.e., not
one of the powers conferred to it, it may be ratified by the
- If the ExeCom is not validly constituted, the members
thereof may be considered as de facto officers.
Limitations of the powers of the ExeCom
- It cannot act on the following:
1. Matters needing stockholder approval;
2. Filling up of board vacancies;
3. Amendment, repeal or adoption of by-laws;
4. Amendment or repeal of any resolution of the board which
by its express terms is not amendable or repealable; and
5. Cash dividend declaration
Code of Corporate Governance

Law3 Private Corporations

The Code of Corporate Governance shall be applicable to:

1. Corporations whose securities are registered or listed;
2. Corporations which are grantees of permits/licenses and
secondary franchise from the Commission; and
3. Public companies.
Public Company any corporation with a class of equity
securities listed on an exchange or with assets in excess of
50 million pesos and having 200 or more holders, at least
200 of which are holding at least 100 shares of a class of its
equity securities.
Corporate Governance a system whereby shareholders,
creditors and other stakeholders of a corporation ensure
that management enhances the value of the corporation as
it competes in an increasingly global market place.
Mandatory corporate governance rules are necessary for 2
1.) To overcome the collective action problem resulting from
the dispersion among stockholders; and
2.) To ensure that the interests of all relevant constituencies
are represented.

APPRAISAL RIGHT (Title X, Secs. 81-86)

- Refers to the right of stockholders to demand the fair value
of his shares after dissenting from a proposed corporate
action involving a fundamental change in the corporation in
cases provided by law
A. When Right of Appraisal may be exercised:
1.) Extend or shorten corporate term (Sec. 11);
2.) Restriction of rights or privileges of shares through
amendment of the AOI (Sec. 16);
3.) Sale of all or substantially all corporate assets (Sec. 40);

Atty. Jonathan B. Tambol

4.) Equity investment in non-primary purpose business (Sec.

5.) Merger or consolidation (Sec. 77);
All the above require the 2/3 votes of the OCS. The appraisal
right refers only to stockholders who have actually dissented
from the above transactions.
B. Procedure for the Exercise of the Right:
1.) Written demand must be submitted by the dissenting
stockholder on the corporation for the payment of the
fair value of the shares within 30 days from the date the
vote was taken. (Failure to do so shall mean waiver of
the right.)
Effect: The dissenting stockholder loses all rights as a
stockholder including dividend rights; only one right
remains and that is the right to receive payment of the
fair value of his shares.
2.) Within 10 days from demand, the dissenting stockholder
must submit his certificates of stocks for notation that
such certificates represent dissenting shares. (Failure to
do so shall mean waiver of the right.)
N.B. If such shares are subsequently disposed of and
new certificates are issued to the transferee, the right of
appraisal is automatically extinguished, the transferee
becomes a regular stockholder of the corporation.
a.) 60 days from the approval of the corporate action,
the corporation and the dissenting stockholders shall
agree as to the fair value of the dissenting shares. If
no agreement is reached after the 60-day period, it
shall be determined and appraised by 3 disinterested
persons: one appointed by the SH; another appointed
by the corporation; and the third person to be chosen
by the two thus appointed.
3.) Findings of the majority of the appraisers shall be final
and the award shall be payable within 30 days after it is
4.) The dissenting stockholder can only be paid if there are
unrestricted retained earnings.

Law3 Private Corporations

Nota Bene: If the dissenting stockholder is not paid within

30 days from after the award, he shall automatically be
restored to all his rights as stockholder.
C. Outline of Instances when Right of Appraisal is Lost:
1.) Failure to make written demand within 30 days after the
vote was taken on the corporate act;
2.) Failure to surrender the certificate of stock within 10
days from demand for notation;
3.) Non-existence of unrestricted profits to cover payment of
the fair value of dissenting shares within 30 days from
date of award;
4.) Subsequent transfer of the shares which have been
annotated when new certificates of stock are issued;
5.) When the corporation consents a demanding stockholder
to withdraw the exercise of appraisal right;
6.) Abandonment of corporate action;
7.) Disapproval of action by SEC.
D. Who shall bear the Cost of Appraisal
1.) Corporation
a.) where the value as determined by the appraisers is
higher than what was offered by the corporation to
the dissenting stockholder; or
b.) if action is filed to recover the fair value of the shares
and the stockholders refusal to receive payment is
2.) Dissenting stockholder
a.) if the value determined by appraisers is
approximately the same as the price offered by the
corporation; or
b.) where an action to recover is filed and the refusal of
such stockholder to receive payment is unjustified.


1. Express those expressly authorized by the Corporation
Code and other laws, and its AOI
2. Incidental those that are incidental to the existence of the

Atty. Jonathan B. Tambol

3. Implied those that can be inferred from or necessary for

the exercise of the express powers.
Classification of Implied Powers:
a.) Acts in the usual course of business;
b.) Acts to protect debts owing to the corporation;
c.) Acts which involve embarking in a different business
usually to collect debts out of profits;
d.) Acts to protect or aid employees;
e.) Acts to increase business
2 Sources of Express Powers:
a.) Those enumerated in Sec. 36, generally;
b.) Purpose clause of the AOI, specifically
1. To sue and be sued;
2. Succession by its corporate name for the term of its
3. Adopt and use a corporate seal;
4. Amend its AOI;
5. Adopt by-laws not contrary to law, morals or public policy
and to amend or repeal the same;
6. Issue or sell stocks (stock corporations) or to admit
members (non-stock corporations);
7. Purchase, receive, take or grant, hold, convey, sell, lease,
pledge, mortgage and otherwise deal with all types of
8. Enter into merger or consolidation;
9. Make reasonable donations;
10. Establish pension, retirement and other plans for the benefit
of its directors, trustees, officers and employees; and
11. Such other powers as may be essential or necessary to carry
out its purpose/s as stated in the AOI.
1. Extension or shortening of corporate term (Sec 37);
2. Power to increase or decrease capital stock/Power to incur,
create or increase bonded indebtedness (Sec 38);
3. Power to deny pre-emptive right (Sec 39);
4. Sell, dispose, lease, encumber all or substantially all or
corporate assets (Sec 40);
5. Power to acquire own shares (Sec 41);

Law3 Private Corporations

6. Invest corporate funds in another corporation or business or

for any other purpose other than the primary purpose (Sec
7. Power to declare dividends out of unrestricted retained
earnings (Sec 43);
8. Power to enter into management contract (Sec 44).
ULTRA VIRES acts performed by a corporation in excess of its
corporate powers and which are generally not binding on the
An ultra vires act is merely voidable which may be enforced
by performance, ratification, or estoppel, while an illegal act
is void and cannot be validated.
Requisites for valid ratification of an ultra vires act:
1.) Act or contract must be consummated, not merely
2.) Creditors are not prejudiced, or all of them have given
their consent;
3.) Rights of the public or the State are not involved; and
4.) All the stockholders must give their consent.
Rules on the effects of ultra vires acts:
1.) A wholly executor ultra vires contract or act cannot be
enforced nor can damages be recovered for its breach;
2.) A wholly executed ultra vires contract or act shall not be
interfered with as between the parties or persons whose
rights are derived therefrom; but the State can always
question said contract or act;
3.) When an ultra vires act is executed on one side but
executor contract on the other side who received
benefits therefrom, recovery can be had by the former;
4.) The title of the corporation to property cannot be
questioned on the ground that it acquired the property
through an ultra vires contract of transfer.
a.) Majority vote of the BOD/T;

Atty. Jonathan B. Tambol

b.) Written notice of the proposed action and the time and
place of meeting shall be served to each stockholder or
member either by mail or personal service;
c.) Ratification in a meeting by 2/3 of the OCS or 2/3 of the
members, as the case may be.
This actually requires the amendment of the AOI; meeting
must be duly called for the purpose; dissenting stockholders
may exercise appraisal right.
The extension of corporate life cannot be made within the 3year liquidation period, because that would constitute new
a.) Majority vote of the members of the BOD/T;
b.) 2/3 vote of the OCS or the members, as the case may be, in
a meeting duly called for the purpose with notice previously
c.) Certificate of said corporate act shall be signed by majority
of the members of the Board and the Chairman and
Secretary of the stockholders meeting;
Corporate act shall take effect from and after SEC approval.
d.) Certificate must be accompanied by the Treasurers Affidavit
certifying compliance with the 25%-25% requirements as to
stock subscription.
No decrease in capital stock shall be approved by SEC if it
will prejudiced corporate creditors;
Bonds issued by the corporation shall be registered with SEC
which is given the power to determine the sufficiency of the
terms of such bonds.
Note Well:
a.) When a corporation increases capital stock, stockholders are
entitled to a PRE-EMPTIVE RIGHT to subscribe to a sufficient
number of shares in order to maintain their previous relative
strong power. The corporation must give the stockholder a
reasonable period within which to exercise such right.
b.) Dissenting stockholders cannot exercise the right of
appraisal in this case.

Law3 Private Corporations


Pre-emptive Right the shareholders right to subscribe to all
issues or disposition of shares of any class in proportion to his
present stockholdings, the purpose being to enable the shareholder
to retain his proportionate control in the corporation and to retain
his equity in the surplus.
Pre-emptive right not available in the following:
1.) Shares to be issued to comply with laws requiring stock
offering or minimum stock ownership by the public;
2.) Shares issued in good faith in exchange for property
needed for corporate purposes;
3.) Shares issued in payment of previously contracted
4.) In case the right is denied in the AOI.
a.) Majority vote of the members of the Board;
b.) 2/3 votes of the OCS or members, as the case may be, in a
meeting called for the purpose.
Dissenting stockholder may exercise their right of appraisal.
Despite approval by the stockholders or members, it is not
mandatory for the Board to continue with the disposition.
Note Well:
a.) substantially all the corporate property and assets if
thereby the corporation would be rendered incapable of
continuing the business or accomplishing the purpose for
which it was incorporated.
b.) Disposition of properties in the regular course of the
business does not need approval by or authority of
stockholders or members.
- For legitimate business purposes and subject to the
condition that there be unrestricted retained earnings to
cover the shares purchased or acquired.
Instances when corporation may buy its own stocks:
1.) To complete fractional shares;
2.) To collect indebtedness or in case of delinquency sales;

Atty. Jonathan B. Tambol

3.) The exercise of right of appraisal.

TRUST FUND DOCTRINE: The capital stock, property and
other assets of the corporation are regarded as equity in
trust for the payment of the corporate creditors.
Basis of Trust Fund Doctrine
a.) Sec. 43 the corporation can declare dividends only out
of unrestricted retained earnings.
b.) Sec. 122 no corporation shall distribute any of its
assets or property except upon lawful dissolution and
after payment of all its debts and liabilities.


a.) Majority vote of the BOD/T;
b.) Ratification by 2/3 of OCS or 2/3 of the members, as the
case may be.
Right of appraisal may be exercised by dissenting
Note: Where the investment is reasonably necessary to accomplish
the primary purpose, a board resolution is sufficient.
GR: Stock corporations are prohibited from retaining surplus profits
in excess of 100% of their paid-in capital stock.
1.) When justified by definite corporate expansion projects or
programs approved by the board;
2.) When the corporation is prohibited under any loan
agreement with any financial institution or creditor, whether
local or foreign, from declaring dividends without its consent
and such consent has not yet been secured; or
3.) When it can be clearly shown that such retention is
necessary under special circumstances obtaining in the
corporation, such as when there is a need for special reserve
for probable contingencies.
Form of Dividends:
a.) Cash Dividend can be declared by the board only
b.) Property Dividend may be payable in bonds or in stock of
another corporation

Law3 Private Corporations

c.) Stock Dividend declared by the board but requires the

approval of 2/3 of the OCS at a regular or special meeting
duly called for such purpose; cannot be issued to nonstockholders even for services rendered
a.) Resolution of the board; and
b.) Majority vote of the OCS or members, as the case may be, in
a meeting called for the purpose.
- An action brought about by minority shareholders in the
name of the corporation to redress wrongs committed
against the corporation, for which the directors refuse to sue
- A remedy designed by equity and has been the principal
defense of the minority shareholders against the abuses of
the majority.
Requisites for filing:
a.) Party bringing suit should be a shareholder as of the time of
the act or transaction complained of;
b.) He has extinguished intra-corporate remedies, i.e., has
made a demand on the board of directors for the
appropriate relief but the latter has failed or refused to heed
his plea; and
c.) Cause of action actually devolves on the corporation, the
wrongdoing or harm having been caused to the corporation
and not to the particular stockholder bringing the suit.

BY-LAWS rules of action adopted by a corporation for its internal
government and for the regulation of conduct, and prescribe the
rights and duties of its stockholders or members towards itself and
among themselves in reference to the management of its affairs.
1. Supplement the AOI;
2. Provide for details not important enough to be stated in the

Atty. Jonathan B. Tambol

3. Continuing rule for the government of the corporation and

the individuals composing it;
4. Define the rights and duties of corporate officers and
directors/trustees and of stockholders/members towards the
corporation and among themselves;
5. Source of authority for corporate officers and agents of the
1. Must not be contrary to law nor with the Corporation Code;
2. Must not be contrary to morals and public policy;
3. Must not impair the obligations of contracts
Amendments to the by-laws cannot impair the obligation of
existing contracts or any vested right, e.g., the right of an
employee to security of tenure cannot be adversely affected
by any amendment in the by-laws, hence his services can
only be terminated for causes provided for by law.
4. Must be general and uniform;
5. Must be consistent with the charter or AOI; and
6. Must be reasonable, not arbitrary or oppressive.
A. If adopted prior to incorporation must be signed and
approved by all the incorporators and filed with the SEC
together with the AOI.
B. If adopted and filed after incorporation affirmative vote of
the SHs representing at least a majority of the OCS or
majority of the members (non-stock) shall be necessary; it
shall be signed by the SHs/members voting for them.
A copy thereof duly certified by a majority of the D/T and
countersigned by the secretary of the corporation shall be
filed with the SEC which shall be attached to the original AOI
Effectivity upon approval of the SEC
Effect of non-filing within the required period Failure to
submit the by-laws within 30 days from incorporation does
not automatically dissolve the corporation. It is merely a
ground for suspension or revocation of its charter after
proper notice and hearing. The corporation is, at the very
least, a de facto corporation whose existence may not be
collaterally attacked.

Law3 Private Corporations


1. Time, place and manner of calling and conducting regular or
special meetings of the directors/trustees;
2. Time and manner of calling and conducting regular or
special meetings of the stockholders/members;
3. Required quorum in meetings of stockholders or members
and the manner of voting therein;
4. Form of proxies of stockholders and members and the
manner of voting them;
5. Qualifications, duties and compensation of directors,
trustees, officers and employees;
6. Time for holding the annual election of directors or trustees
and the mode or manner of giving notice;
7. Manner of election of appointment and the term of office of
all officers other than directors or trustees;
8. Penalties for violation of the by-laws;
9. In case of stock corporations, the manner of issuing
certificates; and
10. Such other matters as may be necessary for the proper or
convenient transaction of its corporate business.
a.) With SHs/Members approval:
1.) Majority vote of the members of the Board;
2.) Majority of the OCS/members in a meeting duly called
for the purpose
b.) By the Board of Directors/Trustees: 2/3 of the OCS/members
may delegate to the board the power to amend/repeal/adopt
new by-laws
Such power of the board may be revoked by majority vote of
the OCS/members.
The power to adopt the first original by-laws cannot be
delegated to the BOD/T; only the power to adopt new bylaws that will supplant the old by-laws can be validly

Atty. Jonathan B. Tambol


Condition precedent in the
Condition subsequent
acquisition of corporate
(absence merely furnishes a
ground for the revocation of
the franchise)
Essentially a contract
For the internal government
between the corporation and of the corporation but has
the SHs/members; between
the force of a contract
the SHs/members inter se;
between the corporation and
and between the corporation the SHs/members, and
and the State
between the SHs/members
Time of execution
Executed before
May be executed after
incorporation (may be filed
simultaneously with the AOI)
Amendment by a majority of
May be amended by a
the D/T and 2/3 of the
majority vote of the BOD and
majority of the OCS/members

1. Meetings of stockholders or members:
a.) Regular held annually on a date fixed in the by-laws, or
if not fixed, on any date in April as determined by the
b.) Special held at any time deemed necessary or as
provided in the by-laws
2. Meetings of directors or trustees:
a.) Regular held by the board monthly, unless the by-laws
provide otherwise
b.) Special held by the board at any time upon the call of
the president or as provided in the by-laws
Where? anywhere in or out of the Philippines, unless the
by-laws provide otherwise.
Note: Whenever there is no person authorized to call a meeting,
the SEC, upon petition of a stockholder or member, and on the
showing of good cause, may issue an order to the petitioning

Law3 Private Corporations

stockholder or member directing him to call a meeting of the

corporation by giving proper notice.
- In the city or municipality where the principal office of the
corporation is located, and if practicable, in the principal
office of the corporation.
Even if the meeting be improperly held or called, any
business transacted at such meeting shall be valid if within
the powers or authority of the corporation, and provided
that all the stockholders or members of the corporation are
present or duly represented at the meeting.
- Unless otherwise provided for in the Code or in the By-Laws,
a quorum shall consist of the stockholders representing a
majority of the OCS or a majority of the members in case of
non-stock corporations.
A corporation may prescribe a greater voting requirement in
its AOI or by-laws in order to protect the rights of the
minority stockholders or members. Such higher number is
also the number necessary to constitute a quorum.
Once a quorum is called and the meeting was called to
order, even if some people walked out and the people left
are less than the majority, the proceedings will be valid so
long as there is a quorum when the meeting was called to
For stock corporations, the quorum referred to in Sec. 52 of
the Corporation Code is based on the number of outstanding
voting stocks. For non-stock corporations, only those who
are actual, living members with voting rights shall be
counted in determining the existence of a quorum during
members meetings. Dead members shall not be counted.
1. Must be held at the proper place;
2. Must be held at the stated date and at the appointed time or
at a reasonable time thereafter;
3. Must be called by the proper person:

Atty. Jonathan B. Tambol

a.) The person/s designated in the by-laws have authority to

call stockholders or members meeting.
b.) In the absence of such provision in the by-laws, it may
be called by a director or trustee or by an officer
entrusted with the management of the corporation.
c.) A stockholder or member may make the call or order of
the SEC whenever for any cause, there is no person
authorized to call a meeting.
d.) The special meeting for the removal of directors or
trustees may be called by the secretary or by a
4. There must be previous notice.
Regular meeting written notice must be sent to registered
SHs or members at least 2 weeks before the meeting
Special meeting written notice must be sent at least one
5. There must be a quorum.
Note: The President shall preside at all meetings of the directors or
trustees as well as of the stockholders or members, unless the bylaws provide otherwise.
1. Delinquent shares shall not be entitled to vote.
2. Treasury shares have no voting rights while they remain in
the treasury.
3. Fractional shares shall not be entitled to vote.
4. Escrow shares shall not be entitled to vote.
5. Unpaid shares, if not delinquent, are entitled to all the rights
of a SH including the right to vote.
A SH/member may vote:
1. Directly (in person); or
2. Indirectly, through representative
a.) By means of a proxy;
b.) By a trustee under a voting trust agreement; or
c.) By executors, administrators, receivers, or other legal
representatives duly appointed by the court.
PROXIES (Sec. 58)

Law3 Private Corporations

May refer to:

1. The written authority given by one person to another so
that the second person can act for the first;
2. The person authorized by an absent SH or member to vote
for him at a SHs or members meeting;
3. The instrument which evidences the authority of the
1. In writing;
2. Signed by the SH/member concerned;
3. Filed before the scheduled meeting with the corporate
4. Valid only for the meeting for which it was intended, unless
otherwise provided in the proxy;
5. No proxy shall be valid and effective for a period longer than
5 years at any one time.
The right to vote by proxy may be exercised in any of the
following instances:
1. Election of the board of directors or trustees;
2. Voting in case of joint ownership of stock;
3. Voting by trustee under voting trust agreement;
4. Pledge or mortgage of shares;
5. As provided for in its by-laws
Nota Bene (Note well): Stockholders or members may attend
and vote in their meetings by proxy (Sec. 58); BUT directors cannot
do so. Directors must always act in person (Sec. 25).
1. General proxy confers a general discretionary power to
attend and vote at annual meetings
2. Limited proxy restricts the authority to vote to specified
matters only and may direct the manner in which the vote
shall be cast
- A stockholder or member may appoint any person he sees
fit to represent him.
- Since a proxy acts for another, he may act as such although
he himself is disqualified to vote his shares.

Atty. Jonathan B. Tambol

The same person may act as proxy for one or several

stockholders or members.
Directors or trustees cannot attend or vote by proxy at
board meetings but they may act as proxies in stockholders


Voting Trust Agreement an agreement whereby one or
more stockholders transfer their shares of stocks to a
trustee, who thereby acquires for a period of time the voting
rights (and/or any other rights) over such shares; and in
return, trust certificates are given to the stockholder/s,
which are transferable like stock certificates, subject,
however, to the trust agreement.
a.) Cannot be entered into for a period exceeding 5 years at
any one time except when it is a condition in a loan
agreement, however, said contract shall automatically
expire upon full payment of the loan.
b.) The agreement must not be used for purposes of fraud.
c.) It must be in writing and notarized and specify the terms
and conditions thereof.
d.) A certified copy of the agreement must be filed with the
corporation and with the SEC.
e.) The agreement shall be subject to examination by any
stockholder of the corporation.
f.) Unless, expressly renewed, all rights granted in the
agreement shall automatically expire at the end of the
agreed period.
Voting Trusts
Trustee votes as owner rather
Proxy holder votes as agent
than as mere agent
Agreement must be notarized
Proxy need not be notarized
Legal title
Trustee acquires legal title to
Proxy has no legal title to the
the shares of the transferring
shares of the principal

Law3 Private Corporations

Manner of voting
Trustee may vote in person or
Proxy must vote in person
by proxy unless the agreement
provides otherwise
Actions allowed
Trustee is not limited to act at
Proxy can only act at a
any particular meeting
specified stockholders
meeting (if not continuing)
Restrictions on voting
A trustee can vote and
A proxy can only vote in the
exercise all the rights of the SH absence of the owners of the
even when the latter is
Must not exceed 5 years at any Usually of shorter duration
one time except when the
although under Sec. 58 it
same is made a condition of a
cannot exceed 5 years at any
one time
Separability of ownership and voting right
Voting right is divorced from
Right to vote is inherent in or
the ownership of stocks
inseparable from the right to
ownership of stock
Agreement is irrevocable
Revocable anytime except one
which is coupled with interest



to become a Stockholder of a corporation:

Subscription contract with the corporation;
Purchase or acquisition of shares from existing SHs; and
Purchase of treasury shares from the corporation.


- Any contract for the acquisition of unissued stock in an
existing corporation or a corporation still to be formed
The subscribed shares need not be paid in full in order that
the subscription may be valid. The subscription contract is a
consensual contract that is perfected upon the meeting of

Atty. Jonathan B. Tambol

the minds of the parties. The name of the subscriber is

recorded in the stock and transfer book, and from that time,
such subscriber becomes a SH of record, entitled to all the
rights of a SH. Until the stocks are fully paid, it continues to
be a subsisting liability that is legally enforceable.
a.) Pre-incorporation subscription Sec. 61
b.) Post incorporation subscription entered into after the
incorporation for the acquisition of unissued stock
c.) Conditional one which is subject to a condition, which may
be a past event unknown to the parties or a future,
uncertain event
d.) Absolute not subject to any condition and the subscriber
becomes liable on the subscription and acquires the rights
of a SH from the time it is accepted
e.) Subscription with a special term one where the corporation
agrees to do something, the fulfillment of which not being a
condition precedent to the accrual of a liability of the
subscriber or the acquisition of the rights of a stockholder.
- One entered into before incorporation which constitutes a
binding contract among the subscribers.
- Irrevocable for a period of at least 6 months from the date of
subscription unless:
a.) All of the other subscribers consent to the revocation, or
b.) The incorporation fails to materialize.
- It shall likewise be irrevocable after the submission of the
AOI to the SEC.
- A privilege granted to a party to subscribe to a certain
portion of the unissued capital stock of a corporation within
a certain period and under the terms and conditions of the
grant exercisable by the grantee at any time within the
period granted
- An agreement between a corporation and a third person,
termed the underwriter, by which the latter agrees, for a

Law3 Private Corporations

certain compensation, to purchase a stipulated amount of

stocks or bonds, specified in the underwriting agreement, if
such securities are not purchased by those to whom they
are first offered.
Valid Considerations in Subscription Agreements:
1. Cash actually received;
2. Property, tangible or intangible, actually received and
necessary or convenient for its use and lawful purposes
a.) The property is actually received by the corporation;
b.) The property is necessary or convenient for its use and
lawful purposes;
c.) It must be subject to a fair valuation equal to the par or
issued value of the stock issued;
d.) The valuation thereof shall initially be determined by the
incorporators or the board of directors; and
e.) The valuation is subject to the approval by the SEC.
3. Labor or services actually rendered to the corporation;
4. Previously incurred corporate indebtedness;
5. Amounts transferred from unrestricted retained earnings to
stated capital;
6. Outstanding shares in exchange for stocks in the event of
reclassification or conversion
Note: Shares of stock shall not be issued in exchange for
promissory notes or future services. However, there is no
prohibition on the use of checks, bills or notes in payment of the
cash consideration.
a.) Funds furnished by shareholders;
b.) Borrowings; and
c.) Profits and stock dividends
- Interest or right which owner has in the management of the
corporation, and its surplus profits, and, on dissolution, in all
of its assets remaining after the payment of its debt.

Atty. Jonathan B. Tambol

Paper representation or tangible evidence of the stock itself

and of the various interests therein


1. Suit for specific performance of an express or implied
2. Petition for mandamus;
3. Suit for damages where specific performance cannot be
4. Rescind contract of subscription and recover the
consideration paid
1. The certificate must be signed by the President or VicePresident, countersigned by the secretary or assistant
2. Must be sealed with the seal of the corporation;
3. Certificate must be delivered;
4. The par value, as to par value shares or full subscription as
to no par value shares must first be fully paid;
BASIS: Doctrine of Indivisibility of Subscription
subscription is one, entire, indivisible and whole contract,
which cannot be divided into portions.
5. Original certificate must be surrendered where the person
requesting the issuance of a certificate is a transferee from
the stockholder.
1. Derivative Suit
2. Individual Suit
3. Representative Suit
Watered Stock stock issued not in exchange for its equivalent
either in cash, property, share, stock dividends, or services.
a.) Issued without consideration (bonus share);

Law3 Private Corporations

b.) Issued as fully p[aid when the corporation has received a

lesser sum of money than its par or issued value (discount
c.) Issued for a consideration other than actual cash such as
property or services the fair valuation of which is less than
its par or issued value; and
d.) Issued as stock dividend when there are not sufficient
retained earnings or surplus to justify it.
1. If the subscription contract fixes the date for payment,
failure to pay on such date shall render the entire balance
due and payable with interest. 30 days therefrom, if still
unpaid, the shares become delinquent, as of the due date,
and subject to sale, unless the board declares otherwise.
2. If no date is fixed in the subscription contract, the board of
directors can make the call for payment, and specify the due
date. The notice of call is mandatory. A mere demand is
insufficient. The failure to pay on such date shall render the
entire balance due and payable with interest. 30 days
therefrom, if still unpaid, the shares become delinquent, as
of the date of the call, and subject to sale, unless the board
declares otherwise.
Note: A CALL is the resolution or formal declaration of the board
that the unpaid subscriptions are due and payable.
1. Resolution of the board
2. Notice of sale
3. Publication of the notice
4. Sale at public auction
5. Transfer of the stock so purchased in the books of the
6. Credit Remainder in favor of the delinquent stockholder
1. Affidavit of Loss by the registered owner
2. Verification by the corporation
3. Publication of a notice (once a week for 3 consecutive
4. One year waiting period from the date of last publication

Atty. Jonathan B. Tambol

5. Contest
6. Replacement if no contest within the 1 year period
1. Rights as to Control and Management
a.) Attend and vote in person/proxy at stockholders
meetings (Secs. 50, 58);
b.) Elect and remove directors (Secs. 24, 28);
c.) Approve certain corporate acts (Sec. 52);
d.) Compel the calling of meetings (Sec. 50);
e.) To have the corporation voluntarily dissolved (Secs. 118,
f.) Enter into a voting trust agreement (Sec. 59);
g.) Adopt/amend/repeal the by-laws or adopt new by-laws
(Secs. 46, 48).
2. Proprietary Rights
a.) Transfer of stock in the corporate book (Sec. 63);
b.) Receive dividends when declared (Sec. 43);
c.) Issuance of certificate of stock (Sec. 63);
d.) Participate in the distribution of corporate assets upon
dissolution (Sec. 118, 119); and
e.) Pre-emption in the issue of shares (Sec. 39).
Note: Right of pre-emption extends to treasury shares in case of
their reissuance.
3. Remedial Rights
a.) Inspect corporate books (Sec. 74);
b.) Recover stock unlawfully sold for delinquency (Sec. 69);
c.) Demand payment in the exercise of appraisal right
(Secs. 41, 81);
d.) To be furnished recent financial statements (Sec. 75);
e.) To bring suits

1. Books of Account;
2. List of Stockholders or Members; and
3. Financial Records.
Persons given the right to inspect Corporate Books:
1. Any D/T/SH/member;
2. Voting trust certificate holder;
3. SH of a sequestered company; and
4. Beneficial owner of shares
Rights of stockholders to corporate books and records:
1. Right of inspection;
2. Right to demand a list of SHs;
3. Right to demand a detailed auditing of business
4. To examine books of the corporations subsidiary;
5. Right to financial statements. (Sec. 75)

Limitations on the Right of Inspection:

a.) Must be exercised during reasonable hours on business
b.) Person demanding the right has not improperly used any
information obtained through any previous examination
of the books and records of the corporation; and
c.) Demand is made in good faith or for a legitimate
Remedies if Inspection Denied:
a.) Mandamus;
b.) Damages;
c.) Criminal Suit




1. Book of all business transactions;
2. Book of minutes of all meetings of SHs/members;
3. Book of minutes of all meetings of D/T;
4. Stock and transfer book, in case of stock corporations.

Common Forms of Corporate Combinations:

1. Sale of assets;
2. Lease of assets;
3. Sale of stock;
4. Merger;
5. Consolidation

Corporate Records required by the SEC to be kept and/or


Law3 Private Corporations

Atty. Jonathan B. Tambol

MERGER - a union whereby one or more existing corporations are

absorbed by another corporation which survives and continues the
combined business
CONSOLIDATION union of two or more existing corporations to
form a new corporation called the consolidated corporation
1. Approval of plan
2. Submission to stockholders or members for approval
3. Execution of formal contract
4. Submission to SEC for approval
5. Conduct of hearing by SEC
6. Issuance of certificate by SEC
Note: The plan may still be amended before the same is filed with
the SEC, however, any amendment thereto must be approved by
the majority vote of the board members or trustees of the
constituent corporations and affirmed by the vote of 2/3 of the OCS
or members.
General Rule: When one corporation buys all the shares of
another corporation, this will not operate to dissolve the other
corporation and as the two corporations still maintain their
separate corporate entities, one will not answer for the debts of the
EXCEPTIONS as to non-assumption of Liabilites:
1. If there is an express assumption of liabilities;
2. If there is a consolidation or merger;
3. If the purchase was in fraud of creditors; and
4. If the purchaser is merely a continuation of the seller.
1. There is automatic assumption of liabilities of the absorbed
corporation or constituent corporations which are dissolved.
2. The absorbed or constituent corporations are ipso facto
dissolved by operation of law without necessity of any
further act or deed but there is no winding up or liquidation
of their assets for the surviving corporation automatically
acquires all the liabilities of the constituent corporation.

Law3 Private Corporations

3. Permits the transfer of the assets to the purchaser and the

distribution of the consideration received in a single
4. Involve exchanges of properties, a transfer of the assets of
the constituent corporations in exchange for securities in
the new or surviving corporation but neither involves
winding up of the affairs of the constituent corporations in
the sense that their assets are distributed to the
5. Dissolution of the constituent corporations cannot be made
to retroact to a date prior to the ratification of the SHs but
the transfer of the assets and liabilities of the constituent
corporations could be made effective retroactively as of the
date the said board of directors so resolved.
6. Consent of the creditors not necessary.


CONCEPT (Sec. 87)
- A non-stock corporation is one where no part of its income is
distributable as dividends to its members.
- Even if there is a statement of capital stock, for as long as
there is no distribution of retained earnings to its members,
the corporation is non-stock.
- Any profit which it may obtain as an incident to its
operations shall, whenever necessary or proper, be used in
furtherance of the purpose/s for which it was organized.
PURPOSES (Sec. 88)
Non-stock corporations may be formed or organized for:
1. Charitable
2. Religious
3. Educational
4. Professional
5. Cultural
6. Fraternal
7. Literary
8. Scientific
9. Social

Atty. Jonathan B. Tambol

10. Civic service

Or similar purposes like:
1. Trade
2. Industry
3. Agricultural
4. And like chambers
Or any combination thereof.
1. Stock to non-stock corporation may be made by mere
amendment of the AOI
- The effect of this is that after the conversion, the SHs now
become the members of the non-stock corporation and thus
will no longer have any pecuniary interest in the
corporation. Neither are they entitled to any share in the
profit that may be obtained out of the operations or
activities of the non-stock corporation. Hence, there is in
fact no distribution by the stock corporation, by conversion,
it its assets to its stockholders.
2. Non-stock to stock corporation cannot be converted by
mere amendment of its AOI because the conversion would
change the corporate nature from non-profit to monetary
- What the corporation should do is to dissolve itself and its
members may decide to organize a stock corporation.

Has capital stock, divided into
Does not have shares and may
shares and with authority to
not distribute profits to its
distribute dividends to its
Meeting/Voting of members/SHs
SHs and directors must act in a Members may be allowed by
meeting, except where a mere
the by-laws to vote by mail or
assent is sufficient or a formal
other similar means
meeting unnecessary
Manner of voting
Cumulative voting is available
Cumulative voting not

Law3 Private Corporations

in the election of directors

available unless otherwise

provided in the AOI/by-laws
SHs may vote by proxy
Members may be deprived of
the right to vote by proxy in
the AOI/by-laws
Non-transferability of membership
SHs may transfer their shares
Members cannot transfer their
membership unless allowed by
the AOI/by-laws
Directors cannot exceed 15 in
Trustees may exceed 15 in
Term of Director/trustee
Term of a director is 1 year
Term of a trustee is 3 years;
1/3 of the Board shall be
elected annually
Election of officers
Officers are elected by the
Officers may be directly
elected by the members unless
otherwise provided in the
Place of meeting
SHs meetings shall be held in
By-laws may provide that
the city or municipality where
members of a non-stock
principal office of corporation
corporation may hold their
is located, and if practicable in
meetings at any place within
the principal office
the Phils.


- Special kind of stock corporation
1. Whose articles of incorporation should provide that:
a.) The number of SHs shall not exceed 20;
b.) Issued stocks are subject to transfer restrictions, with a
right of preemption in favor of the SHs or the
corporation; and

Atty. Jonathan B. Tambol

c.) The corporation shall not be listed in the stock exchange

or its stocks should not be publicly offered; or
2. Whose stocks, at least 2/3 of the voting stocks or voting
rights of which are not owned or controlled by another
corporation which is not a close corporation.

Non-compliance with any of the requirements shall not make

the corporation a close corporation within the meaning of
the Corporation Code.

1. SHs may act as directors without need of election and
therefore are liable as directors;
2. SHs who are involved in the management of the corporation
are liable in the same manner as directors are;
3. Quorum may be greater than mere majority;
4. Transfer of stocks to others, which would increase the
number of SHs to more than the maximum are invalid;
5. Corporate actuations may be binding even without formal
board meeting, if the SH had knowledge or ratified the
informal action of the others;
6. Pre-emptive right extends to all stock issues;
7. Deadlocks in board are settled by the SEC. on the written
petition by any SH; and
8. SH may withdraw and avail of his right of appraisal.
N.B.: Special rules are provided for close corporations because it is
essentially an incorporated partnership.
Articles of Incorporation
Need only contain the general
Must contain the special
matters enumerated in Sec. 14 matters prescribed by Sec. 97,
of the code
aside from the general matters
in Sec. 14 (failure to do so
precludes a de jure close
Ownership of stocks
Its status as an ordinary stock
2/3 of its voting stock or voting

Law3 Private Corporations

corporation is not affected by

the ownership of its voting
stock or voting rights

rights must not be owned or

controlled by another
corporation which is not a close
Classification of directors
Its articles cannot classify its
Its articles may classify its
Election/appointment of officers
Corporate officers and
Its articles may provide that
employees are elected by a
any or all of the corporate
majority vote of all the
officers or employees may be
members of the board of
elected or appointed by SHs
Business of the corporation is
May be managed by the SHs if
managed by the board of
the AOI so provide, but they
are liable as directors
Pre-emptive right
Subject to the exceptions
Subject to no exceptions unless
found in Sec. 39
denied in the articles
Appraisal right
May be exercised by a SH only
May be exercised and
in the cases provided in Secs.
compelled against the
81 and 42 of the Code
corporation by a SH for any
Purchase of its own shares
Must always be made from the In case of an arbitration of an
unrestricted retained earnings
intra-corporate deadlock by the
(except as regards redeemable SEC, the corporation may be
ordered to purchase its own
shares from the SHs regardless
of the availability of URE
Remedy of arbitration
Not a remedy
Available remedy in case the
directors or SHs are so divided
respecting the management of
the corporation
Note: The following cannot be a close corporation:

Atty. Jonathan B. Tambol


Insurance companies;
Mining companies;
Public utilities;
Oil companies;
Stock exchanges;
Educational institutions;
Other corporations declared to be bested with public


It is mandatory for the AOI of a close corporation to provide
that all of the issued stocks of all classes be subject to one
or more restriction.
The restriction on transfer is in the nature of a right of first
refusal in favor of the SHs which can be waived by the SH, if
the latter fails to exercise the option to purchase within the
period stated in the articles and by-laws.
Any transfer made should not result in exceeding the
number of SHs as allowed by the Code.
Note: Under Sec. 99, good faith is not a defense because there is a
conclusive presumption of knowledge of the restriction.
1. No longer necessary to elect directors;
2. SHs concerned shall be deemed the directors;
3. SHs shall have the same liabilities as directors;
4. To the extent that the SHs are actively engaged in the
management or operation of the business and affairs of a
close corporation, the SHs shall be held to strict fiduciary
duties to each other and among themselves; and
5. The SHs shall be personally liable for corporate torts unless
the corporation has obtained reasonably adequate liability
DEADLOCKS (Sec. 104)
- Arise when the directors or SHs are so divided respecting
the management of the business and affairs of the
corporation that the votes required for any corporate action

Law3 Private Corporations

cannot be obtained and as a result, business and affairs can

no longer be conducted to the advantage of the SHs
In this case, the SEC shall have the power to arbitrate
the dispute and in the exercise of such power, the
SEC shall have the authority to:
a.) Cancel or alter any provision in the articles of
incorporation or by-laws;
b.) Cancel, alter or enjoin any resolution of the corporation;
c.) Direct or prohibit any act of the corporation;
d.) Require the purchase at their fair value of shares of any
SH either by any SH or by the corporation regardless of
the availability of URE;
e.) Appoint a provisional director;
f.) Dissolve the corporation; or
g.) Grant such other relief as the circumstances may



The extinguishment of the corporate franchise and the

termination of corporate existence; the complete
destruction of the corporation and within contemplation of
the law, is equivalent to its death.


A. Voluntary
1.) Application for dissolution with SEC:
a.) Where no creditors are affected;
b.) Where creditors are affected;
2.) Shortening of the corporate term by amending the
articles of incorporation
B. Involuntary
1.) Expiration of the corporate term;
2.) Failure to organize and commence business within 2
years from the date of issuance of the certificate of
incorporation (Sec. 121)
3.) Legislative dissolution;
4.) Quo warranto suit against a de facto corporation;
5.) Minority stockholders suit for dissolution on justifiable
grounds; or

Atty. Jonathan B. Tambol

6.) SEC dissolution, upon complaint and after notice and

hearing, on the following grounds:
a.) Corporation was illegally organized;
b.) Continuous inactivity (subsequent to incorporation,
organization and commencement of business) for at
least 5 years;
c.) Serious dissention in the corporation;
d.) Commission by the corporation of illegal or ultra vires
act or violations of the Code.
1. Transfer of legal tile to corporate property to the SHs who
become co-owners thereof;
2. Continuation of corporate business merely as an association
without juridical personality;
3. Conveyance by the SHs of their respective shareholdings
toward the creation of a new corporation to continue the
business of the old;
4. Reincorporation of the dissolved corporation by re-filing new
articles of incorporation and by-laws;
5. The corporation continues as a body corporate for 3 years
for purposes of winding up; and
6. Cessation of corporate existence for all purposes upon the
expiration of the winding up period of 3 years.
AFFECTED (Sec. 118)
1. Majority vote of the board of directors or trustees;
2. Resolution adopted by the affirmative vote of the SHs
owning at least 2/3 of the OCS or at least 2/3 of the
members at a meeting called for such purpose.
AFFECTED (Sec. 119)
1. Petition shall be filed with the SEC;
2. Signed by a majority of its board of directors or trustees or
other officers having management of its affairs;
3. Verified by its president or secretary or one of its directors or

Law3 Private Corporations

4. Shall set forth all claims and demands against it;

5. Resolved upon by the affirmative vote of the SHs
representing at least 2/3 of the OCS or by at least 2/3 of the
members at a meeting called for that purpose.
Liquidation the process by which all the assets of the
corporation are converted into liquid assets (cash) in order to
facilitate the payment of obligations to creditors, and the remaining
balance, if any, is to be distributed to the SHs or members.
N.B.: A dissolved corporation continues to be a body corporate for
3 years from the time it is dissolved for the purpose of liquidation
or winding up its corporate affairs. The termination of the life of a
juridical entity does not by itself cause the extinction or diminution
of the rights and liabilities of such entity nor those of its owners
and creditors alike. (Sec. 145)
1. By the corporation itself through its board of
2. By a trustee to whom the corporate assets have been
conveyed; and
3. By a management committee or rehabilitation receiver
appointed by the SEC.
a.) The 3-year period of liquidation does not apply to methods 2
and 3 as long as the trustee or the receiver is appointed
within the said period.
b.) But the word trustee as used in the corporation statute
must be understood in its general concept which could
include the counsel to whom was entrusted the prosecution
of the suit filed by the corporation.
c.) The board of directors may also be permitted to complete
the corporate liquidation by continuing as trustees by
legal implication.
d.) The question as to the right of priority of a claimant against
the assets of a corporation that is being dissolved and
liquidated becomes of importance only when the assets of
the corporation are not sufficient to pay all claims.

Atty. Jonathan B. Tambol



Connotes a reopening or

Connotes a winding up or
settling with creditors and
Continuity of corporate life
Winding up process so that
Contemplates a continuance of
assets may be distributed to
corporate life in an effort to
those entitled
restore the corporation to its
former successful operation



Formed, organized or existing under any law other than

those of the Philippines and whose laws allow Filipino
citizens and corporation to do business in its own country or
state. (This definition espouses the incorporation test and
the reciprocity rule and is significant for licensing purposes.)


- It is not permitted to transact or do business in the
Philippines until it has secured a license for that purpose
from the SEC and a certificate of authority from the
appropriate government agency.
Reasons why a license is important:
1. To place them under the jurisdiction of the courts;
2. To place them in the same footing as domestic corporations;
3. Protection for the public in dealing with said corporations.
RESIDENT AGENT (Secs. 127-128)
- An individual, who must be of good moral character and of
sound financial standing, residing in the Philippines, or a
domestic corporation lawfully transacting business in the
Philippines, designated in a written power of attorney by a

Law3 Private Corporations

foreign corporation authorized to do business in the

Philippines, on whom any summons and other legal
processes may be served in all actions or other legal
proceedings against the foreign corporation.
1. Failure to file annual reports required by the Code;
2. Failure to appoint and maintain a resident agent;
3. Failure to inform the SEC of the change of residence of the
resident agent;
4. Failure to submit copy of amended articles or by-laws or
articles of merger or consolidation;
5. A misrepresentation in material matters in reports;
6. Failure to pay taxes, imposts and assessments;
7. Engage in business unauthorized by SEC;
8. Acting as dummy of a foreign corporation; and
9. Not licensed to do business in the Philippines.
- Foreign corporations, even unlicensed ones, can sue or be
sued on a transaction or series of transactions set apart
from their common business in the sense that there is no
intention to engage in a progressive pursuit of the purpose
and object of business transaction.
1. To seek redress for an isolated business transaction;
2. To protect its corporate reputation, name, and goodwill;
3. To enforce a right not arising out of a business transaction,
e.g., tort that occurred in the Philippines;
4. When the parties have contractually stipulated that
Philippines is the venue of actions;
5. When the party sued is barred by the principle of estoppel
and/or principle of unjust enrichment from questioning the
capacity of the foreign corporation; and
6. Recovery of misdelivered property.

Atty. Jonathan B. Tambol