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CORPORATION LAW

Definition and attributes of a corporation

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.
A corporation, being a creature of law, "owes its life to the state, its birth being purely dependent on its will," it is "a creature
without any existence until it has received the imprimatur of the state acting according to law." A corporation will have no
rights and privileges of a higher priority than that of its creator and cannot legitimately refuse to yield obedience to acts of
its state organs. (Tanyag v. Benguet Corporation)
A corporation has four (4) attributes:
(1)
(2)
(3)
(4)

It is an artificial being;
Created by operation of law;
With right of succession;
Has the powers, attributes, and properties as expressly authorized by law or incident to its existence.

CLASSIFICATION OF PRIVATE CORPORATIONS


Stock v. Non-Stock Corporations

Stock

Non-Stock

Corporations which have capital


stock divided into shares and
are authorized to distribute to the
holders of shares dividends or
allotments of the surplus profits on
the basis of the shares (3)

All other private corporations (3)

Purpose

Primarily to make profits for its


shareholders

May be formed or organized for


charitable, religious, educational,
professional, cultural, fraternal,
literary, scientific, social, civic
service, or similar purposes like
trade, industry, agricultural and like
chambers, or any combination
thereof. (88)

Distribution of Profits

Profit is distributed to shareholders

Whatever incidental profit made is


not distributed among its members
but is used for furtherance of its
purpose. AOI or by-laws may
provide for the distribution of its
assets among its members upon its
dissolution. Before then, no profit
may be made by members.

Composition

Stockholders

Members

Definition

One where no part of its income is


distributable as dividends to its
members, trustees or officers. (87)

Scope of right to vote

Each stockholder votes according to


the proportion of his shares in the
corporation. No shares may be
deprived of voting rights except
those classified and issued as
"preferred" or "redeemable" shares,
and as otherwise provided by the
Code. (Sec. 6)

Each member, regardless of class,


is entitled to one (1) vote UNLESS
such right to vote has been limited,
broadened, or denied in the AOI or
by-laws. (Sec. 89)

Voting by proxy

May be denied by the AOI or the bylaws. (Sec. 89)

Cannot be denied. (Sec. 58)

Voting by mail

May be authorized by the by-laws,


with the approval of and under the
conditions prescribed by the SEC.
(Sec. 89)

Not possible.

Who exercises Corporate


Powers 23

Board of Directors or Trustees

Members of the corporation

Governing Board

Board of Directors or Trustees,


consisting of 5-15 directors /
trustees.

Board of Trustees, which may


consist of more than 15 trustees
unless otherwise provided by the
AOI or by-laws. (Sec, 92)

Term of directors or
trustees

Directors / trustees shall hold office


for 1 year and until their successors
are elected and qualified (Sec. 23).

Board classified in such a way that


the term of office of 1/3 of their
number shall expire every year.
Subsequent elections of trustees
comprising 1/3 of the board shall be
held annually, and trustees so
elected shall have a term of 3 years.
(Sec. 92)

Election of officers

Officers are elected by the Board of


Directors (Sec. 25), except in close
corporations where the stockholders
themselves may elect the officers.
(Sec. 97)

Officers may directly elected by the


members UNLESS the AOI or bylaws provide otherwise. (Sec. 92)

Place of meetings

Any place within the Philippines, if


provided for by the by-laws (Sec.
93)

Generally, the meetings must be


held at the principal office of the
corporation, if practicable. If not,
then anyplace in the city or
municipality where the principal
office of the corporation is located.
(Sec. 51)

Transferability of interest
or membership

Transferable.

Generally non-transferable since


membership and all rights arising
therefrom are personal. However,
the AOI or by-laws can provide
otherwise. (Sec. 90)

Distribution of assets in
case of dissolution

See Sec. 94.

For a stock corporation to exist, 2 requisites must be complied with:

(1) a capital stock divided into shares


(2) an authority to distribute to the holders of such shares, dividends or allotments
of the surplus profits on the basis of shares held.
In the case at bar, nowhere in the AOI or by-laws of Club Filipino could be found an authority for the distribution of its
dividends or surplus profits.
FORMATION AND ORGANIZATION OF CORPORATION
Requirements in the formation of a corporation
Who may form a corporation (See SEC. 10)
INCORPORATORS

REQUIREMENTS

COMMENTS

Definition

stockholders or members mentioned in


the articles of incorporation as originally
forming and composing the corporation
and who are signatories thereof
stockholders or members mentioned in
the articles of incorporation as originally
forming and composing the corporation
and who are signatories thereof

compare with Corporators which


include all stockholders or members,
whether incorporators or joining the
corporation after its incorporation.

Characteristic

natural persons

Number

not less than 5; not more than 15

may be more than 15 for non-stock


corp. except educational corp.

excludes corporations and


partnerships

does not prevent the one-man


(person) corporation wherein the other
incorporators may have only nominal
ownership of only one share of stock; not
necessarily illegal
Age

of legal age

Residence

majority should be residents of the


Philippines

residence a requirement; citizenship


requirement only in certain areas such as
public utilities, retail trade banks,
investment houses, savings and loan
associations, schools

Steps in the formation of a corporation

Mutual Agreement to perform certain acts required for organizing a corporation


12345-

Organize and establish a corporation


Comply with requirements of corporation code
Contribute capital/resources
Mode of use of capital/resource and control/management of capital/resource
distribution/disposition of capital/resource (embodied in constitutive documents)

STEPS

COMMENTS

a. Promotional Stage (See SEC. 2.


Definitions)

Promoter

brings together persons who become interested in


the enterprise

aids in procuring subscriptions and sets in motion


the machinery which leads to the formation of the
corporation itself

formulates the necessary initial business and


financial plans and, if necessary, buys the rights and
property which the business may need, with the
understanding that the corporation when formed, shall
take over the same.

b. Drafting articles of incorporation


(See SEC. 14)

(see chart below)

c. Filing of articles; payment of fees.

AOI & the treasurers affidavit duly signed &


acknowledged

must be filed w/ the SEC & the corresponding fees


paid

failure to file the AOI will prevent due incorporation


of the proposed corporation & will not give rise to its
juridical personality. It will not even be a de facto corp.

Under present SEC rules, the AOI once filed , will be


published in the SEC Weekly Bulletin at the expense of
the corp. (SEC Circular # 4, 1982).

d. Examination of articles; approval or


rejection by SEC.

Process:
a) SEC shall examine them in order to determine
whether they are in conformity w/ law.
b) If not, the SEC must give the incorporators a
reasonable time w/in w/c to correct or modify the
objectionable portions.
Grounds for rejection or disapproval of AOI:
a) AOI /amendment not substantially in accordance
w/ the form prescribed
b) purpose/s are patently unconstitutional, illegal,
immoral, or contrary to government rules & regulations;
c) Treasurers Affidavit is false;
d) required percentage of ownership has not been
complied with (Sec. 17)
e) corp.s establishment, organization or operation
will not be consistent w/ the declared national economic
policies (to be determined by the SEC, after consultation
w/ BOI, NEDA or any appropriate government agency -PD 902-A as amended by PD 1758, Sec. 6 (k))

Decisions of the SEC disapproving or rejecting AOI


may be appealed to the CA by petition for review in
accordance w/ the ROC.

e. Issuance of certificate of
incorporation.

Certificate of Incorporation will be issued if:


a) SEC is satisfied that all legal requirements have
been complied with; and
b) there are no reasons for rejecting or
disapproving the AOI.

It is only upon such issuance that the corporation


acquires juridical personality.
(See Sec. 19. Commencement of corporate existence)

Should it be subsequently found that the


incorporators were guilty of fraud in procuring the
certificate of incorporation, the same may be revoked by
the SEC, after proper notice & hearing.

b. Drafting articles of incorporation (See SEC. 14)


CONTENTS OF AOI

COMMENTS

Corporate Name

Essential to its existence since it is through it that the


corporation can sue and be sued and perform all legal acts

A corporate name shall be disallowed by the SEC if the


proposed name is either:
(1)
identical or deceptively or confusingly similar to that of any
existing corporation or to any other name already protected by law;
or
(2)
patently deceptive, confusing or contrary to existing laws.
(Sec. 18)
LYCEUM OF THE PHILS. VS. CA (219 SCRA 610)
The policy underlying the prohibition against the registration of a
corporate name which is identical or deceptively or confusingly
similar to that of any existing corporation or which is patently
deceptive or patently confusing or contrary to existing laws is:
1.
the avoidance of fraud upon the public which would have
occasion to deal with the entity concerned;
2.
the prevention of evasion of legal obligations and duties, and
3.
the reduction of difficulties of administration and supervision
over corporations.

Purpose Clause

A corporation can only have one (1) primary purpose.


However, it can have several secondary purposes.

A corporation has only such powers as are expressly granted


to it by law & by its articles of incorporation, those which may be
incidental to such conferred powers , those reasonably necessary to

accomplish its purposes & those which may be incident to its


existence.

Corporation may not be formed for the purpose of practicing a


profession like law, medicine or accountancy
Principal Office

must be within the Philippines

specify city or province

street/number not necessary

important in determining venue in an action by or against the


corp., or on determining the province where a chattel mortgage of
shares should be registered

Term of Existence

cannot specify term which is longer than 50 years at a time

may be renewed for another 50 years, but not earlier than 5


years prior to the original or subsequent expiry date UNLESS there
are justifiable reasons for an earlier extension.

Incorporators and Directors

names, nationalities & residences of the incorporators;

names, nationalities & residences of the directors or trustees


who will act as such until the first regular directors or trustees are
elected;

treasurer who has been chosen by the pre-incorporation


subscribers/members to receive on behalf of the corporation, all
subscriptions /contributions paid by them.

Capital Stock

amount of its authorized capital stock in lawful money of the


Philippines

number of shares into which it is divided

in case the shares are par value shares, the par value of each,

names, nationalities and residences of the original


subscribers, and the amount subscribed and paid by each on his
subscription, and if some or all of the shares are without par value,
such fact must be stated

for a non-stock corporation, the amount of its capital, the


names, nationalities and residences of the contributors and the
amount contributed by each

25% of 25% rule to be certified by Treasurer

paid up capital should not be less than P5,000

Other matters

Classes of shares into w/c the shares of stock have been


divided; preferences of & restrictions on any such class;
and any denial or restriction of the pre-emptive right of
stockholders should also be expressly stated in said articles.

If the corporation is engaged in a wholly or partially


nationalized business or activity, the AOI must contain a
prohibition against a transfer of stock which would reduce
the Filipino ownership of its stock to less than the required
minimum.

Any corporation may be incorporated as a close corporation, except:


a) mining or oil companies;
b) stock exchanges;
c) banks;
d) insurance companies;
e) public utilities;
f) educational institutions; &

g) corporations declared to be vested w/ public interest


De Facto Corporations: Requisites

User of Corporate Powers


What is a de facto corporation?
A de facto corporation is a defectively organized corporation, which has all the powers and liabilities of a de jure
corporation and, except as to the State, has a juridical personality distinct and separate from its shareholders, provided that
the following requisites are concurrently present:
(1)

That there is an apparently valid statute under which the corporation with its purposes may be formed;

(2)

That there has been colorable compliance with the legal requirements in good faith; and,

(3) That there has been use of corporate powers, i.e., the transaction of business in some way as if it were a
corporation.
Can a corporation transact business as a de facto corporation while application is still pending with SEC?
No. In the case of Hall v. Piccio (86 Phil. 603; 1950), where the supposed corporation transacted business as a corporation
pending action by the SEC on its articles of incorporation, the Court held that there was no de facto corporation on the
ground that the corporation cannot claim to be in good faith to be a corporation when it has not yet obtained its certificate
of incorporation.
HALL v. PICCIO (29 SCRA 533; 1969)
In the case of Hall v. Piccio, where the supposed corporation transacted business as a corporation pending action by the
SEC on its articles of incorporation, the Court held that there was no de facto corporation on the ground that the
corporation cannot claim to be in good faith to be a corporation when it has not yet obtained its certificate of incorporation.
NOTE: The validity of incorporation cannot be inquired into collaterally in any private suit
to which such corporation may be a party. Such inquiry must be through a quo warranto proceeding made by the Solicitor
General. (Sec. 20)
CORPORATION BY ESTOPPEL
(Sec. 21)
Distinguish a de facto corporation from a corporation by estoppel.
The de facto doctrine differs from the estoppel doctrine in that where all the requisites of a de facto corporation are
present, then the defectively organized corporation will have the status of a de jure corporation in all cases brought by and
against it, except only as to the State in a direct proceeding. On the other hand, if any of the requisites are absent, then the
estoppel doctrine can apply only if under the circumstances of the particular case then before the court, either the
defendant association is estopped from defending on the ground of lack of capacity to be sued, or the defendant third party
had dealt with the plaintiff as a corporation and is deemed to have admitted its existence.
(De facto has status of de jure corpo, except separate personality against State, provided all requisites are present)
What are the effects of a Corporation by Estoppel in suits brought:
(1) against the Corporation? Considered a corporation in suits brought against it if
it held itself out as such and denies capacity to be sued;
(2) against third party?
dealt with it as such.

Third party cannot deny existence of corporation if it

BY-LAWS (Sec. 46 & 47)

When adopted:
(a) No later than one (1) month after receipt from SEC of official notice of issuance of Cert. of incorporation.
Requirement: Affirmative vote of stockholders representing at least majority of outstanding capital stock (Stock
Corp.) or members (Non-Stock)
Must be signed by stockholders or members voting for them
(b) Prior to incorporation
Requirement:
Where kept:

Approval of all incorporators; must be signed by all of them

(1) In the principal office of the corporation ; and


(2) Securities and Exchange Commission

When effective:
Only upon the SECs issuance of a certification that the by-laws
are not inconsistent with the Corporation Code.
Special corporations: By-laws and/or amendments thereto must be accompanied by
a certificate of the appropriate government agency to the
effect that such by-laws / amendments are in accordance with
law.

banks or banking institutions


building and loan associations
trust companies
insurance companies
public utilities
educational institutions
other special corporations governed by special laws

Contents of By-laws - Subject to the provisions of the Constitution, this Code, other
special laws, and the articles of incorporation, a private corporation may provide in its by-laws for:
1)

the time, place and manner of calling and conducting regular or special meetings of the directors or trustees;

2)

the time and manner of calling and conducting regular and special meetings of the stockholders or members;

3)

the required quorum in meetings of stockholders or members and the manner of voting herein;

4)

the form for proxies of stockholders and members and the manner of voting them;

5)

the qualifications, duties and compensation of directors or trustees, officers and employees;

6)

the time for holding the annual election of directors or trustees and the mode or manner of giving notice thereof;

7)

the manner of election or appointment and the term of office of all officers other than directors or trustees;

8)

the penalties for violation of the by-laws;

9)

in the case of stock corporations, the manner of issuing certificates; and

10) such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs.
Is a provision in the by-laws fixing the salary of directors valid?
Yes. Since the Corporation Law does not prescribe the rate of compensation, the power to fix compensation lies with the
corporation.

Is a provision requiring persons elected to the Board of Directors to own at least P 5,000 shares valid?
Yes. Since the Corporation Law does not prescribe the rate of compensation, the power to fix compensation lies with the
corporation.
Is a provision requiring persons elected to the Board of Directors to own at least P 5,000 shares valid?
Yes. The Corporation Law gives the corporation the power to provide qualifications of its directors.
LOYOLA GRAND VILLAS v. CA (276 SCRA 681)
ISSUE: Whether the failure of a corporation to file its by-laws within one (1) month from the date
of its incorporation, as mandated by Art. 46 of the Corporation Code, results in the corporation's automatic dissolution.
RULING:
No. Failure to file by-laws does not result in the automatic dissolution of the corporation. It only constitutes a
ground for such dissolution. (Cf. Chung Ka Bio v. IAC, 163 SCRA 534) Incorporators must be given the chance to explain
their neglect or omission and remedy the same.
THE CORPORATE ENTITY
The Theory of Corporate Entity

When does the corporations existence as a legal entity commence?


Upon issuance by the SEC of the certificate of incorporation (Sec. 19)
What rights does the corporation acquire?
The right to:
1)
2)
3)
4)

sue and be sued;


hold property in its own name;
enter into contracts with third persons; &
perform all other legal acts.

Since corporate property is owned by the corporation as a juridical person, the stockholders have no claim on it as owners,
but have merely an expectancy or inchoate right to the same should any of it remain upon the dissolution of the corporation
after all corporate creditors have been paid. Conversely, a corporation has no interest in the individual property of its
stockholders, unless transferred to the corporation. Remember that the liability of the stockholders is limited to the amount
of shares.
PIERCING THE CORPORATE VEIL

Q: What is the theory of corporate entity?


A: That a corporation has a personality distinct from its stockholders, and is not affected by the personal rights, obligations
and transactions of the latter.
Q: When Can the Veil of Corporate Entity be Pierced?
A:
The veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice, or for
purposes that could not have been intended by law that created it or to defeat public convenience, justify wrong, protect
fraud or defend crime or to perpetuate fraud or confuse legitimate issues or to circumvent the law or perpetuate deception
or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders.

Q: What are the effects of disregarding the corporate veil?


(1) Stockholders would be personally liable for the acts and contracts of the corporation whose existence at least for the
purpose of the particular situation involved is ignored.
(2) Court is not denying corporate existence for all purposes but merely refuses to allow the corporation to use the
corporate privilege for the particular purpose involved.
Parent-Subsidiary Relationship

Q: What is the general rule governing parent-subsidiary relationship?


A: The mere fact that a corporation owns all or substantially all of the stocks of another corporation is not alone sufficient to
justify their being treated as one entity.
Q:

When may it be disregarded by the courts?

(1)

if the subsidiary was formed for the payment of evading the payment of higher taxes

(2)

where it was controlled by the parent that its separate identity was hardly discernible

(3)

parent corporations may be held responsible for the contracts as well as the torts of the subsidiary

Q: What are the criteria by which the subsidiary can be considered a mere
instrumentality of the parent company?
1.
the parent corp. owns all or most of the capital stock of the subsidiary.
2.
the parent and subsidiary have common directors and officers
3.
the parent finances the subsidiary
4.
the parent subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation
5.
the subsidiary has grossly inadequate capital
6.
the parent pays the salaries and other expenses or losses of the subsidiary
7.
the subsidiary has substantially no business except with the parent corp. or no assets except those conveyed to or
by the parent corp.
8.
in the papers of the parent corp. or in the statements of its officers, the subsidiary is described as a department or
division of the parent corp. or its business or financial responsibility is referred as the parents own
9.
the parent uses the property of the subsidiary as its own
10. the directors or the executives of the subsidiary do not act independently in the interest of the subsidiary but take their
orders from the parent corp. in the latters interest
11. the formal legal requirements of the subsidiary are not observed
PROMOTERS CONTRACTS PRIOR TO INCORPORATION
Liability of Corporation for Promoters Contracts

While a corporation could not have been a party to a promoter's contract since it did yet exist at the time the contract was
entered into and thus could not possibly have had an agent who could legally bind it, the corporation may make the
contracts its own and become bound thereon if, after incorporation, it:
(1)
(2)

Adopts or ratifies the contract; or


Accepts its benefits with knowledge of the terms thereof.

It must be noted, however, that the contract must be adopted in its entirety; the corporation cannot adopt only the part that
is beneficial to it and discard that which is burdensome. Moreover, the contract must be one which is within the powers of
the corporation to enter, and one which the usual agents of the company have express or implied authority to enter.

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Corporate Rights under Promoters Contracts

Should the other contracting party fail to perform its part of the bargain, the corporation which has adopted or ratified
the contract may either sue for:
(1)
(2)

Specific performance; or
Damages resulting from breach of contract.

The fact of bringing an action on the contract has been held to constitute sufficient adoption or ratification to give the
corporation a cause of action.
Personal Liability of Promoter on Pre-Incorporation Contracts

GENERAL RULE: Promoters are personally liable on their contracts made on behalf
of a corporation to be formed.
EXCEPTION: If there is an express or implied agreement to the contrary. It must be noted that the fact that the
corporation when formed has adopted or ratified the contract does not release the promoter from responsibility unless a
novation was intended.
CORPORATE POWERS
General Powers of Corporation (Sec. 36)

To sue and be sued in its corporate name;

Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of
incorporation;

To adopt and use a corporate seal;

To amend its articles of incorporation in accordance with the provisions of this Code;

To adopt by-laws not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with
this Code;

In case of stock corporations, to issue of sell stocks to subscribers and to sell treasury stocks in accordance with the
provisions of this Code; and to admit members to the corporation if it be a non-stock corporation;

To purchase, receive, take, grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and
personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the
corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution;
(NOTE: There are two (2) general restrictions on the power of the corp. to acquire and hold properties:
(1) that the property must be reasonable and necessarily
required by the transaction of its lawful business, and
(2) that the power shall be subject to the limitations prescribed
by other special laws and the Constitution.)

To adopt any plan of merger or consolidation as provided in this Code;

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To make reasonable donations, including those for the public welfare of for hospital, charitable, cultural, scientific,
civic, or similar purposes:
Provided that: no corporation, domestic or foreign, shall give donations in
aid of any political party or candidate or for purposes of partisan political activity;

To establish pension, retirement and other plans for the benefit of its directors, trustees, officers and employees; and

To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in its
articles of incorporation.
Specific Powers of Corporation

Extension or shortening of the corporate term (Sec. 37)

Increase or decrease of the capital stock (Sec. 38)

Incur, create or increase bonded indebtedness (Sec. 38)

Denial of the pre-emptive right (Sec. 39)

Sale or other disposition of substantially all its assets. (Sec. 40)

O
A sale is deemed to substantially cover all the corporate property and assets if such sale renders the corporation
incapable of continuing the business or accomplishing the purpose for which it was incorporated.

Acquisition of its own shares. (Sec. 41)

Investment in another corporation or business. (Sec. 42)


Declaration of dividends. (Sec. 43)

Entering into management contracts. (Sec. 44)

Implied Powers

Under Sec. 36, a corporation is given such powers as are essential or necessary to carry out its purpose or purposes as
stated in the articles of incorporation. This phrase gives rise to such a wide range of implied powers, that it would not be at
all difficult to defend a corporate act versus an allegation that it is ultra vires.
A corporation is presumed to act within its powers and when a contract is not its face necessarily beyond its authority; it
will, in the absence of proof to the contrary, be presumed valid.
The Ultra Vires Doctrine

Blacks Law Dictionary Definition:


Ultra vires acts are those acts beyond the scope of the powers of the corporation, as defined by its charter or laws of state
of incorporation. The term has a broad application and includes not only acts prohibited by the charter, but acts which are
in excess of powers granted and not prohibited, and generally applied either when a corporation has no power whatever to
do an act, or when the corporation has the power but exercises it irregularly.

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Q: What are the consequences of ultra vires acts?

The corporation may be dissolved under a quo warrranto proceeding.

The Certificate of Registration may be suspended or revoked by the SEC.

Parties to the ultra vires contract will be left as they are, if the contract has been fully executed on both sides.
Neither party can ask for specific performance, if the contract is executory on both sides. The contract, provided that it is
not illegal, will be enforced, where one party has performed his part, and the other has not with the latter having benefited
from the formers performance.

Any stockholder may bring an individual or derivative suit to enjoin a threatened ultra vires act or contract. If the act
or contract has already been performed, a derivative suit for damages against the directors maybe filed, but their liability
will depend on whether they acted in good faith and with reasonable diligence in entering into the contracts. When the suit
against the injured party who had no knowledge that the corporation was engaging in an act not included expressly or
impliedly in its purposes clause.

Ultra vires acts may become binding by the ratification of all the stockholders, unless third parties are prejudiced
thereby, or unless the acts are illegal.
CONTROL AND MANAGEMENT
Allocation of Power and Control

Q: What are the three levels of corporate control/power?


Board of directors or trustees- responsible for corporate policies and the general management of the business and affairs
of the corporation.
Officers- execute the policies laid down by the board.
Stockholders or members- have residual power over fundamental corporate changes like amendments of articles of
incorporation.
Who Exercises Corporate Powers
Board of directors or trustees
Q: What are the powers of the BOD?
The BOD is responsible for corporate policies and the general management of the business affairs of the corporation. (See
Citibank v Chua)
(a)

Authority (Sec. 24)

(b)

Requirements

(i)

Qualifying share (Sec. 24)

(ii)

Residence (Sec. 24)

(iii)

Nationality

(iv)
-

Disqualifications (Sec. 27)


conviction by final judgment of offense punishable > 6 yrs. prison
violation of Corporation code within 5 years prior to date of election or appointment

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(c)

How elected (Sec. 24)

The formula for determining the number of shares needed to elect a given number of directors is as follows:
X = Y x N1
N+1

+1

X = being the number of shares needed to elect a given number of directors


Y = being the total number of shares present or represented at the meeting
N1 = being the number of directors desired to be elected
N = being the total number of directors to be elected
(d)

How removed (Sec. 28)

By a vote of the SHs holding or representing at least 2/3 of the outstanding capital stock, or by a vote of at least 2/3 of
the members entitled to vote, provided that such removal takes place at either a regular meeting of the corporation or at a
special meeting called for the purpose. In both cases, there must be previous notice to the SHs / members of the intention
to propose such removal at the meeting.
Removal may be with or without cause. However, removal without cause may not be used to deprive minority SHs or
members of the right of representation to which they may be entitled under Sec. 24 of the Code.
(e)

How vacancy filled (Sec. 29)

If vacancy due to removal


or expiration of term:

Must be filled by the SHs in a regular or special meeting


called for that purpose.

If "vacancy" due to increase Only by means of an election at a regular or special SHs


in number of directors
meeting duly called for the purpose, or in the same
or
trustees:
meeting authorizing the increase of directors or trustees
if so stated in the notice of the meeting.
All other vacancies:

May be filled by the vote of at least a majority of the


remaining directors or trustees, if still constituting a
quorum.

Note: Directors or trustees so elected to fill vacancies shall be elected only for the unexpired
term of their predecessors in office.
(f)

How compensated (Sec. 30)


If provided in by-laws:

That compensation stated in the by-laws.

If not provided in by-laws:


Directors shall not receive any compensation other than
reasonable per diems, as directors. However, compensation other than per diems may be granted to directors by a
majority vote of the SHs at a regular or special stockholders' meeting.
Note: In no case shall the total yearly compensation of directors, as such directors, exceed 10%
of the net income before income tax of the corporation during the preceding year.
(g)

Matters requiring Board of Directors' action

(h)

Liability (See subsequent discussion under Duties of Directors and Controlling Stockholders.)

(i) In general (Sec. 31)


(ii) Business judgment rule
(iii) Dealings with the corporation (Sec. 32)

14

(iv) Contracts between corporations with interlocking directors (Sec. 33)


(v)
(vi)
(i)

Disloyalty (Sec. 34)


Watered stocks (Sec. 65)
Executive Committee (Sec. 35)

See subsequent discussion under Board Committees.


PNB VS. CA (83 SCRA 238; 1978)
The action was brought by the mortgagor (Tapnio) against PNB for damages in connection with the failure of the latter's
board of directors to act expeditiously on the proposed lease of the former's sugar quota to one Tuazon.
The Supreme Court held that while the PNB has the ultimate authority to approve or disapprove the proposed lease since
the quota was mortgaged to PNB, the latter certainly cannot escape liability for observing, for the protection of the interest
of the private respondents, that degree of care, precaution and vigilance which the circumstances justly demand in
approving or disapproving the lease of the said sugar quota.
Corporate officers and agents
(a)

Minimum set of officers and their qualifications (Sec. 25)

The minimum set of officers are:


(1)
(2)
(3)

president (who shall be a director);


secretary (who shall be a resident and Filipino citizen); and
treasurer (who may or may not be a director)

The by-laws, however, may provide for other officers.


Any 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.
(b)

Disqualifications (Sec. 27)

- Conviction by final judgment of an offense punishable by imprisonment > 6 yrs.


(c)

Violation of Corporation Code committed within 6 yrs. prior to the date of election or
appointment
Liability in general (Sec. 31)

See discussion under Duties of Directors and Controlling Stockholders. .


(d)

Dealings with the corporation (Sec. 32)

- Generally voidable (See discussion under Duties of Directors and Controlling


Stockholders)
What is the doctrine of apparent authority?
The doctrine of apparent authority provides that a corporation will be liable to innocent third persons for the acts of its agent
where the representation was made by the agent in the course of business and acting within his/her general scope of
authority even though, in the particular case, the agent is secretly abusing his authority and attempting to perpetrate a
fraud upon his/her principal or some other person for his/her own ultimate benefit.
FIRST PHILIPPINE INTERNATIONAL BANK & RIVERA v. CA (January 24, 1996)

15

The authority of a corporate officer in dealing with third persons may be actual or apparent. The doctrine of "apparent
authority," with special reference to banks, was laid out in Prudential Bank v. CA (223 SCRA 350) where it was held that:
A bank is liable for the wrongful acts of its officers done in the interest of the bank or in the course of dealings of the officers
in their representative capacity but not for acts outside the scope of their authority. A bank holding out its officers and
agents as worthy of confidence will not be permitted to profit by the frauds they may thus be enabled to perpetrate in the
apparent scope of their employment; nor will it be permitted to shrink from its responsibility for such frauds, even though no
benefit may accrue to the bank therefrom.
Accordingly, a bank is liable to innocent third persons where the representation is made in the course of its business by its
agent acting within the general scope of his authority even though, in the particular case, the agent is secretly abusing his
authority and attempting to perpetrate a fraud upon his principal or some other person for his own ultimate benefit.
Application of these principles is especially necessary because banks have a fiduciary relationship with the public and their
stability depends on the confidence of the people in their honesty and efficiency. Such faith will be eroded where banks do
not exercise strict care in the selection and supervision of its employees, resulting in prejudice to their depositors.
Board Committees
The By-laws of the corporation may create an executive committee, composed of not less than 3 members of the Board, to
be appointed by the Board. The executive committee may act, by majority vote of all its members, on such specific matters
within the competence of the board, as may be delegated to it in either (1) the By-laws, or (2) on a majority vote of the
board.
However, the following acts may never be delegated to an executive committee:
(1) approval of any action for which shareholders' approval is also required;
(2) the filling of vacancies in the board (refer to Sec. 29);
(3) the amendment or repeal of by-laws or the adoption of new by-laws;
(4) the amendment or repeal of any resolution of the board which by its
express terms is not so amendable or repealable; and
(5) a distribution of cash dividends to the shareholders.
Stockholders or Members
In the following basic changes in the corporation, although action is usually initiated by the board of directors or
trustees, their decision is not final, and approval of the stockholders or members would be necessary:
(1) Amendment of articles of incorporation;
(2) Increase and decrease of capital stock;
(3) Incurring, creating or increasing bonded indebtedness;
(4) Sale, lease, mortgage or other disposition of substantially all corporate assets;
(5) Investment of funds in another business or corporation or for a purpose other than the primary purpose for which the
corporation was organized;
(6) Adoption, amendment and repeal of by-laws;
(7) Merger and consolidation;
(8) Dissolution of corporation
In all of these cases, even non-voting stocks, or non-voting members, as the case may be, will be entitled to vote. (Sec. 6)
GOKONGWEI VS. SEC (89 SCRA 336; 1979)

Section 21 of the Corporation Law provides that a corporation may prescribe in its by-laws the qualifications, duties,
and compensation of its directors.

A stockholder has no vested right to be elected director for he impliedly contracts that the will of the majority shall
govern.

Amended by-laws are valid for the corporation has its inherent right to protect itself.

ROXAS V. DELA ROSA (49 Phil. 609; 1926)

16

Under the Law, directors can only be removed from office by a vote of the stockholders representing 2/3 of subscribed
capital stock, while vacancies can be filled by a mere majority.
A director cannot be removed by a mere majority by disguising it as filling a vacancy.
VOTING

Pledgors, mortgagors, executors, receivers, and administrators (Sec. 55)


- Pledgors or mortgagors have the right to attend and vote at stockholders' meetings.
Exception: If the pledgee or mortgagee is expressly given by the pledgor or
mortgagor such right in writing which is recorded on the appropriate corporate books.
- Executors, administrators, receivers and other legal representatives duly appointed
by the court may attend and vote in behalf of the stockholders or members without need of any written proxy.
Joint owners of stock (Sec. 56)
- Generally, consent of all co-owners shall be necessary.
Treasury shares (Sec. 57)
- Treasury shares have no voting right for as long as such shares remain in the Treasury.
Proxies (Sec. 58)
- Proxies must be in writing, signed by the stockholder/member, filed before the scheduled meeting with the corporate
secretary.
- Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be
valid and effective for a period longer than five (5) years at any one time.
- Voting trusts may be voted by proxy unless the agreement provides otherwise. (Sec. 59)
- It must be noted however that directors or trustees cannot vote by proxy at board meetings. (Sec. 25)
- Note that in Sec. 89, non-stock corporations are permitted to waive the right to use proxies via their AOI or by-laws.
Voting trust (Sec. 59)
- Voting trusts must be in writing, notarized, specifying the terms and conditions thereof, certified copy filed with SEC.
Failure to comply with this requirement renders the agreement ineffective and unenforceable.
- As a general rule, voting trusts are valid for a period not exceeding 5 years at any one time, and automatically expire at
the end of the agreed period unless expressly renewed.
However, in the case of a voting trust specifically required as a condition in a loan agreement, said voting trust may exceed
5 years but shall automatically expire upon payment of the loan.
- Voting trusts may be voted by proxy unless the agreement provides otherwise. (Sec. 59)
Pooling agreement
- Pooling agreements refer to agreements between 2 or more SHs to vote their shares the same way. They are different
from voting trust agreements in that they do not involve a transfer of stocks but are merely private agreements between 2
or more SHs to vote in the same way.

17

- Sec. 100, par. 2 of the Corporation Code provides for pooling and voting agreements in close corporations. Although
there is no equivalent provision for widely-held corporations, Justice and Prof. Campos are of the opinion that SHs of
widely-held corporations should not be precluded from entering into voting agreements if these are otherwise valid and are
not intended to commit any wrong or fraud on the other SHs that are not parties to the agreement.
Non-voting shares (Sec. 6)
- Preferred or redeemable shares.
ITF shares
And/or shares (Sec. 56)
- Any one of the joint owners can vote said shares or appoint a proxy thereof.
Devices Affecting Control

Proxy Device
Sec 58. Proxies. Stockholders and members may vote in person or by proxy in all meetings of stockholders or
members. Proxies shall be in writing, signed by the stockholder or member and filed before the scheduled meeting with the
corporate secretary. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No
proxy shall be valid and effective for a period longer than five (5) years at any one time.
Character: agency relationship; revocable at will (by express revocation, by attending the meeting) and by death, except
when coupled with interest or is a security.
Voting Trust
A Voting Trust Agreement (VTA) is an agreement whereby the real ownership of the shares is separated from the voting
rights, the usual aim being to insure the retention of incumbent directors and remove from the stockholders the power to
change the management for the duration of the trust.
Advantages

Accumulates power. Small shareholders are given the chance to have a representation in the BOD or at least a
spokesperson during stockholders meetings.

Continuity of management.

More effective than proxies because it is irrevocable.

Ensures that the required number of stockholders is met thereby facilitating smooth corporate operations.
Disadvantages

Stockholders give up rights (voting and naked title)


Susceptible to abuse
Not used in widely held corporations

Rights given up by the shareholder in a VTA in exchange for the fiduciary obligation of the trustee:

Voting rights
Proprietary rights/naked title/legal ownership
Incidental rights such as to attend meetings, to be elected, to receive dividends)

Rights retained by the shareholder

Beneficial or equitable ownership


Right to revoke VTA in case of breach by trustee
Regain full ownership after the lapse of the period
Right to an accounting by the trustee after the period of the VTA

18

How is a voting trust created?


(1)

A VTA is prepared in writing, notarized, and filed with the corporation and SEC.

(2) The certificates of stock covered by the VTA are cancelled and new ones (voting trust certificates) are issued in the
name of the trustee/s stating that they are issued pursuant to the VTA.
(3)

The transfer is noted in the books of the corporation.

(4) The trustee/s execute and deliver to transferors the voting trust certificates. (Note that these certificates shall be
transferable in the same manner and with the same effect as certificates of stock.)
(5) At the end of the period of the VTA (or the full payment of the loan to which the VTA is made a condition, as the case
may be), in the absence of any express renewal, the voting trust certificates as well as the certificates of stock in the name
of the trustee/s shall be deemed cancelled and new certificates of stock shall be reissued in the name of the transferors.
EVERETT V. ASIA BANKING (49 Phil. 512; 1926)
This case illustrates how VTA can give rise to effective control and how it can be abused. Original stockholders can set
aside the VTA when their rights are trampled upon by the trustee.
Pooling and voting agreements
What are the advantages/disadvantages of a pooling agreement?
Advantages:
1. there is a commitment to agree to a certain manner of voting
2. minority stockholders are able to control the corpo
Disadvantages:
1. possibility of disagreement thus the need for an arbitration clause
2. there is no compelling reason for stockholders to act together
What rights does a shareholder give up/ retain with a pooling agreement?
Shareholders retain their right to vote because the parties are not constituted as agents. However, the will of the parties
may not be carried out due to non-compliance with the pooling agreement.
Cumulative voting (see sec. 24)
Methods of Voting
1. Straight voting: If A has 100 shares and there are 5 directors to be elected, he shall multiply 100 by five (equals 500)
and distribute equally among the five candidates without preference
2. Cumulative voting: If A has 100 shares and there are 5 directors to be elected, he shall (one candidate) multiply 100
by five (equals 500) and he can vote the 500 for only one candidate.
3. Cumulative voting: If A has 100 shares, there are 5 directors to be elected, and he only (multiple candidates) wants to
vote for two nominees, he can divide 500 votes between the two, giving each one 250 votes.
How to compute votes needed to get a director elected by cumulative voting:
1.

Freys formula (minimum no. of votes to elect one director)

X= # of shares required

19

Y= # of outstanding votes
Z= # of directors to be elected
X = _ Y__ + 1
Z+1
2.

Baker & Carys formula (minimum no. of votes needed to elect multiple directors)

X= # of shares required
Y= # of shares represented at meeting
D= # of directors the minority wants to elect
D= total # of directors to be elected
X= Y x D + 1
D' + 1
NOTES

Levels playing field or at least ensures that the minority can elect at least one representative to the board of directors
(BOD)

Cannot of itself give the minority control of corporate affairs, but may affect and limit the extent of the majoritys
control

By-laws cannot provide against cumulative voting since this right is mandated by law in Section 24.

Classification of shares (see sec. 6)


Type of shares
1.

Common:

share with right to vote

2.
Preferred:
share has preference over dividends and distribution of assets upon liquidation;
right to vote may be restricted (Sec. 6)
3.
Redeemable: share is purchased or taken up by the corporation upon the expiration of a fixed
period (Sec. 8); right to vote may be restricted (Sec. 6)
NOTES

Stock can also be both preferred and redeemable.

Even though the right to vote of preferred and redeemable shares may be restricted, owners of these shares can still
vote on certain matter provided for in Sec. 6.

SEC requires that where no dividends are declared for three consecutive years, in spite of available profits, preferred
stocks will be given the right to vote until dividends are declared.
Restriction on transfer of shares

Peculiar to close corporations.

Most common restriction: granting first option to the other stockholders and/or the corporation to acquire the shares
of a stockholder who wishes to sell them.

Restrictions on shares of stock must conform to the requirements in Sec. 98

This gives to the corporation and/or to its current management the power to prevent the transfer of shares to persons
who they may see as having interests adverse to theirs.
Prescribing qualifications for directors; founders shares

20

Directors (See Sec. 23, 27, 47)

As long as the qualifications imposed are reasonable and not meant to unjustly or unfairly deprive the minority of
their rightful representation in the BOD, such provisions are within the power of the majority to provide in the by-laws.

According to Gokongwei vs. SEC, aside from prescribing qualifications, by-laws can also provide for the
disqualification of anyone in direct competition with the corporation.
Founders shares
See Sec. 7 for definition

Exception to the rule in sec. 6 that non-voting shares shall be limited to preferred and redeemable shares

If founders shares enjoy the right to vote, this privilege is limited to 5 years upon SECs approval, so as to prevent
the perpetual disqualification of other stockholders.
Management contracts (sec. 44)

Contract to manage the day-to-day affairs of the corporation in accordance with the policies laid down by the board
of the managed corporation.

BOD can and usually delegate many of its functions but it cant abdicate its responsibility to act as a governing body
by giving absolute power to officers or others, by way of a management contract or otherwise. It must retain its control
over such officers so that it may recall the delegation of power whenever the interests of the corporation are seriously
prejudiced thereby.
UNUSUAL VOTING AND QUORUM REQUIREMENTS (Sec. 25, 97 [for close corporations])

Increases veto power of the minority in some cases.

In exchange for the numerical majority in the BOD, minority can ask for a stronger veto power in major corporate
decisions.
Device

Favorable To:

Limitations

Cumulative voting

MINORITY: assures them of


representation on the board

Cant give minority control of


corp. affairs

Classification of shares

MINORITY: so long as they hold


more common stock as opposed
to the majority who holds more
preferred stock

Preferred and redeemable stock


can still vote on certain matters
as provided in Sec. 6 or as may
be provided by the corp.

Restriction on transfer of
shares
*applicable only to close
corporations

MAJORITY: they can choose


whether to keep or release
shares and they can prevent
opposition from acquiring shares

See Sec. 98

Prescribing qualifications for


directors; founders shares

MAJORITY: theyre the ones who


can prescribe the qualifications in
the by-laws

Qualifications must be
reasonable and do not deprive
minority of representation on the
board

Management contracts

MAJORITY: allows them to


delegate certain functions and
duties without losing control over
the corporation

Cannot exceed five years

BOD must retain control


over corp. policies

BOD must have power to


recall contract

21

Unusual voting and quorum


requirements

MINORITY: gives them stronger


veto power in certain corp. affairs

Subject to the limitations in Sec.


103.

MEETINGS
Meetings of Directors / Trustees
KINDS:
Meetings of the Board of Directors or Trustees may be either regular or
special. (Sec. 49)
REGULAR:
(Sec. 53)

Held monthly, unless otherwise provided in the by-laws.

SPECIAL:

At any time upon call of the president or as provided in the by-

laws.
NOTICE:
Note:

Must be sent at least 1 day prior to the scheduled meeting, unless otherwise provided by the by-laws.

Notice may be waived expressly or impliedly. (Sec. 53)

WHERE:

Anywhere in or outside the Philippines, unless the by-laws provide otherwise.

QUORUM:
Generally, a majority of the number of directors or trustees as fixed in the articles of incorporation shall
constitute a quorum for the transaction of corporate business. (Sec. 25)
Exceptions:
(1)
(2)

If the AOI or by-laws provide for a greater majority;


If the meeting is for the election of officers, which requires the vote of a majority of all the members of the Board

WHO PRESIDES:

The president, unless the by-laws provide otherwise. (Sec. 54)

Meetings of Stockholders / Members

KINDS:
(Sec. 49)

Meetings of stockholders or members may be either regular or special.

REGULAR:
Held annually on a date fixed in the by-laws. If no date is fixed, on any date in April of every year as
determined by the Board of Directors or trustees.
Notice: Written, and sent to all stockholders or members of record at least 2 weeks prior to the meeting, unless a different
period is required by the by-laws.
SPECIAL:

At any time deemed necessary or as provided in the by-laws.

Notice: Written, and sent to all stockholders or members of record at least 1 week prior to the meeting, unless otherwise
provided in the by-laws.
Note: Notice of any meeting may be waived expressly or
impliedly by any SH or member. (Sec. 50)
WHERE:
In the city of municipality where the principal office of the corporation is located, and if practicable in the
principal office of the corporation. Metro Manila is considered a city or municipality. (Sec. 51)

22

QUORUM:
Generally, a quorum shall consist of the stockholders representing a majority of the outstanding capital
stock, or a majority of the members.
Exception: If otherwise provided for in the Code or in the
by-laws.
WHO PRESIDES:

The president, unless the by-laws provide otherwise. (Sec. 54)

WHAT IS THE EFFECT IF A STOCKHOLDER'S MEETING IS IMPROPERLY HELD OR CALLED?


Generally, the proceedings had and/or any business transacted shall be void. However, the proceedings and/or transacted
business may still be deemed valid if:
(1)

Such proceedings or business are within the powers or authority of the corporation; and

(2)

All the stockholders or members of the corporation were present or duly represented at the meeting. (Sec. 51)

DUTIES OF DIRECTORS AND CONTROLLING STOCKHOLDERS


Duties and Liabilities of Directors

WHAT IS THE 3-FOLD DUTY THAT DIRECTORS OWE TO THE CORPORATION?


(1) Diligence
(2) Loyalty
(3) Obedience
Obedience - directors must act only within corporate powers and are liable for damages if they acted beyond their powers
unless in good faith. Assuming that they acted within their powers, liability may still arise if they have not observed due
diligence or have been disloyal to the corporation.
WHEN DOES LIABILITY ON THE PART OF DIRECTORS, TRUSTEES OR OFFICERS ARISE?
In general, liability of directors, trustees or officers arises when they either:
(1) willfully and knowingly vote for or assent to patently unlawful acts of the
corporation; or
(2) are guilty of gross negligence of bad faith in directing the affairs of the corporation; or
(3) acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees.
In such cases, the directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by
the corporation, its stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to
the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a
disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the
profits which would otherwise have accrued to the corporation. (Sec. 31)
In addition to this general liability, the Corporation Code provides for specific rules to govern the following
situations:
(1)
(2)
(3)
(4)

Self-dealing directors (Sec. 32)


Contracts between interlocking directors (Sec. 33)
Disloyalty to the corporation (Sec. 34)
Watered stocks (Sec. 65)

23

Duty of Diligence: Business Judgment Rule.


WHAT IS THE BUSINESS JUDGMENT RULE?
As a general rule, directors and trustees of the corporation cannot be held liable for mistakes or errors in the exercise of
their business judgment, provided they have acted in good faith and with due care and prudence. Contracts intra
vires entered into by the board of directors are binding upon the corporation, and the 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.
However, if due to the fault or negligence of the directors the assets of the corporation are wasted or lost, each of
them may be held responsible for any amount of loss which may have been proximately caused by his wrongful acts or
omissions. Where there exists gross negligence or fraud in the management of the corporation, the directors, besides
being liable for damages, may be removed by the stockholders in accordance with Sec. 28 of the Code. (Campos &
Campos)
GENERAL RULE: Contracts intra vires entered into by BoD are binding upon the
corporation and courts will not interfere.
EXCEPTION:
When such contracts are so unconscionable and oppressive as
a wanton destruction of the rights of the minority.

to amount to

WHAT KIND OF DILIGENCE IS EXPECTED OF DIRECTORS?


Directors are expected to manage the corporation with reasonable diligence, care and prudence, i.e. the degree of
care and diligence which men prompted by self-interest generally exercise in their own affairs. Thus, they can be held
liable not only for willful dishonesty but also for negligence.
Although they are not expected to interfere with the day-to-day administrative details of the business of the
corporation, they should keep themselves sufficiently informed about the general condition of the business.
WHAT FACTORS SHOULD BE CONSIDERED IN DETERMINING WHETHER REASONABLE DILIGENCE HAS BEEN
EXERCISED?
The nature of the business, as well as the particular circumstances of each case. The court should look at the facts as
they exist at the time of their occurrence, not aided or enlightened by those which subsequently took place. (Litwin v. Allen)
The self-dealing director
WHAT IS A SELF-DEALING DIRECTOR? (Sec. 32)
A self-dealing director is one who enters into a contract with the corporation of which he is a director.
WHAT IS THE NATURE OF CONTRACTS ENTERED INTO BY SELF-DEALING DIRECTORS?
Voidable at the option of the corporation, whether or not it suffered damages. It is possible that the self-dealing
director may have the greatest interest in its welfare and may be willing to deal with it upon reasonable terms.
However, such contract may be upheld by the corporation if all of the following
conditions are present:
(1) The presence of the self-dealing director or trustee in the board meeting for which the contract was approved was not
necessary to constitute a quorum for such meeting;
(2) The vote of such self-dealing director or trustee was not necessary for the
approval of the contract;
(3) The contract is fair and reasonable under the circumstances;
(4) In the case of an officer, the contract has been previously authorized by the
Board of Directors.

24

In the event that either of or both conditions (1) and (2) are absent (i.e., the presence of the director/trustee was necessary
for a quorum and/or his vote was necessary for the approval of the contract), the contract may be ratified by a 2/3 vote of
the OCS or all of the members, in a meeting called for the purpose. Full disclosure of the adverse interest of the directors
or trustees involved must be made at such meeting.
DOCTRINE:
A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his
corporation. In case his interests conflict with those of the corporation, he cannot sacrifice the latter to his own advantage
and benefit. As corporate managers, directors are committed to seek the maximum amount of profits for the corporation.
This trust relationship "is not a matter of statutory or technical law. It springs from the fact that directors have the control
and guidance of corporate affairs and property and hence of the property interests of the stockholders." (Prime White
Cement Corp. v. IAC, 220 SCRA 103; 1993)
PRIME WHITE CEMENT CORP. V. IAC (220 SCRA 103; 1993)
Prime White Cement Corp. (through the President and Chairman of the Board) and Alejandro Te, a director and auditor of
the corporation, entered into a dealership agreement whereby Te was obligated to act as the corporation's exclusive dealer
and/or distributor of its cement products in the entire Mindanao area for 5 years. Among the conditions in the dealership
agreement were that the corporation would sell to and supply Te with 20,000 bags of white cement per month, and that Te
would purchase the cement from the corporation at a price of P 9.70 per bag.
Relying on the conditions contained in the dealership agreement, Te entered into written agreements with several hardware
stores which would enable him to sell his allocation of 20,000 bags per month. However, the Board of Directors
subsequently imposed new conditions, including the condition that only 8,000 bags of cement would be delivered per
month. Te made several demands on the corporation to comply with the dealership agreement. However, when the
corporation refused to comply with the same, Te was constrained to cancel his agreements with the hardware stores.
Notwithstanding the dealership agreement with Te, the corporation entered into an exclusive dealership agreement with a
certain Napoleon Co for marketing of corporation's products in Mindanao. The lower court held that Prime White was liable
to Te for actual and moral damages for having been in breach of the agreement which had been validly entered into.
On appeal, the Supreme Court held that the dealership agreement is not valid and enforceable, for not having been fair
and reasonable: the agreement protected Te from any market increases in the price of cement, to the prejudice of the
corporation. The dealership agreement was an attempt on the part of Te to enrich himself at the expense of the
corporation. Absent any showing that the stockholders had ratified the dealership agreement or that they were fully aware
of its provisions, the contract was not valid and Te could not be allowed to reap the fruits of his disloyalty.
Using inside information
USE OF INSIDE INFORMATION: Do directors and officers of a company owe any duty at all to stockholders in
relation to transactions whereby the officers and directors buy for themselves shares of stock from the
stockholders?
MINORITY RULE:
YES. Directors and officers have an obligation to
stockholders individually as well as collectively.

the

MAJORITY RULE:
NO. Directors and officers owe no fiduciary duty at
all to
stockholders, but may deal with them at arms
length. No duty of disclosure of facts
known to the
director or officer exists. Nondisclosure cannot
constitute constructive fraud.
SPECIAL FACTS DOCTRINE: IT DEPENDS. Where special circumstances
or facts
are present which make in inequitable to
withhold information from the stockholder, the duty
to disclose arises, and concealment is fraud.
In the case of Gokongwei v. SEC (89 SCRA 336; 1979), the Supreme Court, quoting from the US case of Pepper v.
Litton (308 U.S. 295-313; 1939) stated that a director cannot, "by the intervention of a corporate entity violate the ancient
precept against serving two masters He cannot utilize his inside information and his strategic position for his own
preferment. He cannot violate rules of fair play by doing indirectly through the corporation what he could not do directly.
He cannot use his power for his personal advantage and to the detriment of the stockholders and creditors no matter how
absolute in terms that power may be and no matter how meticulous he is to satisfy technical requirements. For that power

25

is at all times subject to the equitable limitation that it may not be exercised for the aggrandizement, preference, or
advantage of the fiduciary to the exclusion or detriment of the cestuis."
Seizing Corporate Opportunity (Sec. 34)
If a director acquires for himself, by virtue of his office, a business opportunity which should belong to the
corporation, thereby obtaining profits to the prejudice of the corporation, he must account to the corporation for all such
profits by refunding the same. However, if his act was ratified by 2/3 stockholders' vote, he need not refund said profits.
This provision applies even though the director may have risked his own funds in the venture.
Note: This provision is to be distinguished from Sec. 32 on contracts of self-dealing
directors: contracts of self-dealing directors are voidable at the option of the corporation even if it has not suffered any
injury; on the other hand, Sec. 34 applies only if the corporation has been prejudiced by the contract.
Interlocking directors
WHAT IS AN INTERLOCKING DIRECTOR?
An interlocking director is one who occupies a position in 2 companies dealing with each other.
WHAT IS THE RULE ON CONTRACTS INVOLVING INTERLOCKING DIRECTORS?
Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract
between 2 or more corporations having interlocking directors shall not be invalidated on that ground alone. This practice is
tolerated by the Courts because such an arrangement oftentimes presents definite advantages to the corporations
involved.
However, if the interest of the interlocking director in one corporation is substantial (i.e., stockholdings exceed20% of the
OCS) and his interest in the other corporation or corporations is merely nominal, he shall be subject to the conditions
stated in Sec. 32, i.e., for the contract not to be voidable, the following conditions must be present:
(1) The presence of the self-dealing director or trustee in the board meeting for which the contract was approved was not
necessary to constitute a quorum for such meeting;
(2) The vote of such self-dealing director or trustee was not necessary for the approval of the contract;
(3) The contract is fair and reasonable under the circumstances;
(4) In the case of an officer, the contract has been previously authorized by the Board of Directors.
In the event that either of or both conditions (1) and (2) are absent (i.e., the presence of the director/trustee was necessary
for a quorum and/or his vote was necessary for the approval of the contract), the contract may be ratified by a 2/3 vote of
the OCS or all of the members, in a meeting called for the purpose. Full disclosure of the adverse interest of the directors
or trustees involved must be made at such meeting.
Note: The Investment House Law prohibits a director or officer of an investment house to be concurrently a director or
officer of a bank, except as otherwise authorized by the Monetary Board. In no event can a person be authorized to be
concurrently an officer of an investment house and of a bank except where the majority or all of the equity of the former is
owned by the bank. (P.D. 129, Sec. 6, as amended)
The Insurance Code likewise prohibits a person from being a director and/or officer of an insurance company and
an adjustment company. (Sec. 187)
Watered stocks (Sec. 65)
Any director or officer of the corporation:
(1) consenting to the issuance of stocks for a consideration less than its par or issued value or for a consideration in any
form other than cash, valued in excess of its fair value, or
(2) who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the
corporation secretary
shall be solidarily liable with the stockholders concerned to the corporation and its creditors for the difference between the
fair value received at the time of the issuance of the stock and the par or issued value of the same.

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Fixing compensation of directors and officers


GENERAL RULE:
Directors as such are not entitled to compensation for performing services ordinarily
attached to their office.
EXCEPTIONS:

(1) If the articles of incorporation or the by-laws expressly so provide;


(2) If a contract is expressly made in advance.

WHO FIXES THE COMPENSATION?


EXCEPTION:

The stockholders only (majority of the OCS)

Per diems, which can be fixed by the directors themselves

APPLICABILITY OF COMPENSATION: Only to future and NOT past services.


MAXIMUM AMOUNT ALLOWED BY LAW:
Total yearly income of the directors shall not exceed 10% of the net
income before income tax of the corporation during the preceding year (Sec. 30)
Close Corporations

Sec. 97 provides that the AOI of a close corp. may specify that it shall be managed by the stockholders rather than the
BoD. So long as this provision continues in effect:

No stockholders meeting need be called to elect directors;

Generally, stockholders deemed to be directors for purposes of this Code, unless the context clearly requires
otherwise;

Stockholders shall be subject to all liabilities of directors. The AOI may likewise provide that all officers or employees
or that specified officers or employees shall be elected or appointed by the stockholders instead of by the BoD.
Further, Sec. 100 provides that for stockholders managing corp. affairs:

They shall be personally liable for corporate torts (unlike ordinary directors liable only upon finding of negligence)

If however there is reasonable adequate liability insurance, injured party has no right of action v. stockholdersmanagers
Duty of Controlling Interest

A SH/director is still entitled to vote in a stockholders meeting even if his interest is adverse to a corporation. But a
stockholder able to control a corp. is still subject to the duty of good faith to the corp. and the minority.
Persons with management control of corporation hold it in behalf of SHs and can not regard such as their own personal
property to dispose at their whim.
The ff. acts are legal:

Transfer of managerial control through BoD resignation & seriatim election of successors if concomitant with the sale
and actual transfer of majority interest or that which constitutes voting control;

Disposal by controlling SH of his stock at any time & at such price he chooses

The ff. are illegal:

Selling corp. office or management control by itself, that is NOT accompanied by stocks or stocks are insufficient to
carry voting control;

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Transferring office to persons who are known or should be known as intending to raid the corporate treasury or
otherwise improperly benefit themselves at the expense of the corp. (Insuranshares Corp. V. Northern Fiscal);

Receiving a bonus or premium specifically in consideration of their agreement to resign & install the nominees of the
purchaser of their stock, above and beyond the price premium normally attributable to the control stock being sold;
Duty to Creditors

General rule: Corporate creditors can run after the corp. itself only, and not the directors for mismanagement of a solvent
corp.
If corp. becomes insolvent, directors are deemed trustees of the creditors and should therefore manage its assets with due
consideration to the creditors interest.
If directors are also creditors themselves, they are prohibited from gaining undue advantage over other creditors.
Personal Liability of Directors

In what instances does personal liability of a corporate director, trustee or officer validly attach together with
corporate liability?
When the director / trustee / officer:
I. (1) assents to a patently unlawful act of the corporation;
(2) is in bad faith or gross negligence in directing the affairs of the corporation;
(3) creates a conflict of interest, resulting in damages to the corporation, its stockholders or other persons
II. Consents to the issuance of watered stocks, or who, having knowledge thereof, does not forthwith file with the corporate
secretary his written objection thereto;
III. Agrees to hold himself personally and solidarily liable with the corporation;
IV. Is made, by a specific provision of law, to personally answer for his corporate action.
(Tramat Mercantile v. CA, 238 SCRA 14)
CORPORATE BOOKS AND RECORDS
AND
THE RIGHT OF INSPECTION
Corporate Books and Records
WHAT BOOKS AND RECORDS MUST A CORPORATION KEEP? (Sec. 74)
(1)
(2)
(3)
(4)

Record of all business transactions;


Minutes of all meetings of stockholders or members;
Minutes of all meetings of Board of Directors or Trustees;
Stock and Transfer book

WHAT IS A STOCK AND TRANSFER BOOK? (Sec. 75)


A stock and transfer book is a record of all stocks in the names of the stockholders alphabetically arranged. It
likewise contains the following information:

Installments paid and unpaid on all stock for which subscription has been made, and the date of any installment;

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A statement of every alienation, sale or transfer of stock made, the date thereof, and by whom and to whom made;

Such other entries as the by-laws may prescribe

The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock transfer agent,
and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days.
WHAT IS A STOCK TRANSFER AGENT? (Sec. 75)
A stock transfer agent is one who is engaged principally in the business of registering transfers of stocks in behalf
of a stock corporation. He or she must be licensed by the SEC; however, a stock corporation is not precluded from
performing or making transfer of its own stocks, in which case all the rules and regulations imposed on stock transfer
agents, except the payment of a license fee, shall be applicable.
WHO IS THE CUSTODIAN OF CORPORATE RECORDS?
In the absence of any provision to the contrary, the corporate secretary is the custodian of corporate records.
Corollarily, he keeps the stock and transfer book and makes the proper and necessary entries. (Torres, et al. vs. CA, 278
SCRA 793; 1997)
Basis of the Right of Inspection

Ordinary stockholders, the beneficial owners of the corporation, usually have no say on how business affairs of
the corp. are run by the directors. The law therefore gives them the right to know not only the financial health of the corp.
but also how its affairs are managed so that if they find it unsatisfactory, they can seek the proper remedy to protect their
investment.
WHAT IS THE NATURE OF THE RIGHT TO INSPECT?
PREVENTIVE :

deterrent to an ill-intentioned management knowing its acts


are subject to scrutiny; and

REMEDIAL:
A dissatisfied SH may avail of this right as a preliminary step towards seeking more direct and
appropriate remedies against
mismanagement.
What Records Covered
1.

Records of ALL business transactions

This includes book of inventories and balances, journal, ledger, book for copies of letters and telegrams, financial
statements, income tax returns, vouchers, receipts, contracts, papers pertaining to such contracts, voting trust agreements
(sec. 59)
2.

By-laws

These are expressly required to be open to inspection by SH/members during office hours (Sec. 46). Note: There is no
similar provision as to AOI, but these are filed with the SEC anyway.
3.

Minutes of directors meetings

This is to inform stockholders of Board policies. Such right arises only upon approval of the minutes, however.
4.

Minutes of stockholders' meetings

5.

Stock and transfer books

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These are records of all stocks in the names of the stockholders alphabetically arranged. contain all names of the
stockholders of record. Useful for proxy solicitation for elections. SEC has however ruled that a SH cannot demand that he
be furnished such a list but he is free to examine corp. books.
6.

Most recent financial statement

Sec. 75 of the Code provides that within 10 days from the corporation's receipt of a written request from any stockholder or
member, the corporation must furnish the requesting party with a copy of its most recent financial statement, which shall
include a balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable year.
Note: Under the Secrecy of Bank Deposits Act, records of bank deposits of the corporation are NOT open to inspection,
EXCEPT under the following circumstances:
(1) Upon written consent of concerned depositor (presumably the
corporation);
(2) In cases of impeachment;
(3) Upon court order in cases of bribery or dereliction of duty of a public
official; and
(4) In cases where the money deposited / invested is the subject matter
of litigation
(5) Upon order of a competent court in cases of unexplained wealth
under RA 3019 or the Anti-Graft and Corrupt Practices Act
(6) Upon order of the Ombudsman
Extent and Limitations on Right

1.
The exercise of this right is subject to reasonable limitations similar to a citizens exercise of the right to information.
Otherwise, the corp. might be impaired, its efficiency in operations hindered, to the prejudice of SHs.
2.

Such limitations to be valid must be reasonable and not inconsistent with law ( Sec. 36[5] and 46).

3.
A corp. may regulate time and manner of inspection but provisions in its by-law which gives directors absolute
discretion to allow or disallow inspection are prohibited.
Limitations as to time and place:

Exercise of right only at REASONABLE HOURS on BUSINESS DAYS.

Such business days should be THROUGHOUT THE YEAR. BoD cannot limit such to merely a few days within the
year. (Pardo v. Hercules Lumber)
4.

By-laws cannot prescribe that authority of president must first be obtained.

5.

Inspection should be made in such a manner as not to impede the efficient operations

6.
Place of inspection: Principal office of the corp. SH cannot demand that such records be taken out of the principal
office.
7.

As to purpose:

PRESUMPTION: that SHs purpose is proper. Corp. cannot refuse on the mere belief that his motive is improper
(sec 74).

BURDEN OF PROOF: lies with corp. which should show that purpose was illegal.

To be legitimate, the purpose for inspection must be GERMANE to the INTEREST of the stockholder as such, and it
is not contrary to the interests of the corporation.
Legitimate:

inquiry about failure to declare dividends

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Not legitimate:

for mere satisfaction or speculation.

Belief in good faith that a corp. is being mismanaged may be given due course even if later, this is proven
unfounded.

If motive can be clearly shown as inimical to corp., right may be denied.


Who May Exercise Right

Every director, trustee, stockholder, member may exercise right personally or through an agent who can better
understand and interpret records (impartial source, expert accountant, lawyer).
As to VTA: both voting trustee and transferor
SH of parent corp. over subsidiary:
If the two are operated as SEPARATE entities

: NO right of inspection

If they are ONE AND THE SAME with respect to management and control, and inspection is demanded due to
mismanagement of subsidiary by the parents directors who are also directors of the subsidiary : With right of inspection
If the subsidiary is wholly-owned by the parent, and its books & records are in the possession and control of the parent
corporation : With right of inspection
(Gokongwei v. SEC)
Remedies available if Inspection Refused
WHAT REMEDIES ARE AVAILABLE IF INSPECTION IS REFUSED BY THE CORPORATION?
(1) Writ of mandamus.
NOTE: Writ shall not issue where it is shown that the petitioners purpose is improper and inimical to the interests of
the corporation. Writ should be directed against the corporation. The secretary and the president may be joined as party
defendants.
(2) Injunction
(3) Action for damages against the officer or agent refusing inspection. Also, penal
sanctions such as fines and / or imprisonment (Sec. 74; Sec. 144)
What defenses are available to the officer or agent?
(1)
(2)
(3)

The person demanding has improperly used any information secured through any prior examination; or
Was not acting in good faith; or
The demand was not for a legitimate purpose.

GOKONGWEI V. SEC (April 11, 1979)


The law takes from the SH the burden of showing impropriety of purpose and places upon the corporation the burden of
showing impropriety of purpose and motive.
Considering that the foreign subsidiary is wholly owned by SMC and therefore under its control, it would be more in accord
with equity, good faith and fair dealing to construe the statutory right of Gokongwei as petitioner as SH to inspect the books
and records of such wholly subsidiary which are in SMCs possession and control.
DERIVATIVE SUITS
Nature and Basis of derivative suit

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Suits of stockholders/ members based on wrongful or fraudulent acts of directors or other persons:
a.
Individual suits - wrong done to stockholder personally and not to other stockholders
(ex. When right of inspection is denied to a stockholder)
b.
Class suit - wrong done to a group of stockholders
(ex. Preferred stockholders' rights are violated)
c.

Derivative suit - wrong done to the corporation itself

Cause of action belongs to the corp. and not the stockholder

But since the directors who are charged with mismanagement are also the ones who will decide WON the corp. will
sue, the corp. may be left without redress; thus, the stockholder is given the right to sue on behalf of the corporation.

An effective remedy of the minority against the abuses of management

An individual stockholder is permitted to bring a derivative suit to protect or vindicate corporate rights, whenever the
officials of the corp. refuse to sue or are the ones to be sued or hold the control of the corp.

Suing stockholder is merely the nominal party and the corp. is actually the party in interest.

A SH can only bring suit for an act that took place when he was a stockholder; not before. (Bitong v. CA, 292 SCRA
503)
Requirements Relating to Derivative Suits
WHAT ARE THE LEGAL PRINCIPLES CONCERNING DERIVATIVE SUITS?
1)

Stockholder/ member must have exhausted all remedies within the corp.

2)
Stockholder/ member must be a stockholder/ member at the time of acts or transactions complained of or in case of
a stockholder, the shares must have devolved upon him since by operation of law, unless such transaction or act continues
and is injurious to the stockholder.
3)
Any benefit recovered by the stockholder as a result of bringing derivative suit must be accounted for to the corp.
who is the real party in interest.
4)

If suit is successful, plaintiff entitled to reimbursement from corp. for reasonable expenses including attorneys' fees.

FINANCING THE CORPORATION


Sources of Financing
WHERE CAN CAPITAL TO FINANCE THE CORPORATION BE SOURCED?
1)
2)
3)

Contributions (stockholders); also known as stockholder equity/equity investment


Loans or advances (creditors)
Profits (corporation itself)
Capital Structure

WHAT IS MEANT BY CAPITAL STRUCTURE?

32

This refers to the aggregate of the securities -- instruments which represent relatively long-term investment -- issued by the
corporation. There are basically 2 kinds of securities: shares of stock and debt securities.

Capital and Capital Stock Distinguished


CAPITAL STOCK

CAPITAL

DEFINITION

the amount fixed, usually by the


corporate charter, to be subscribed
and paid in or secured to be paid in
by the SHS of a corporation, and
upon which the corporation is to
conduct its operation

actual property of the corporation,


including cash, real, and personal
property. Includes all corporate
assets, less any loss which may have
been incurred in the business.

CONSTANCY

CONSTANT, unless amended by the


AOI

FLUCTUATING

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Shares of Stock: Kinds


COMMON

PREFERRED

PAR

NO PAR*

DEFINITION

Stock which
entitles the
owner of such
stocks to an
equal pro rata
division of profits

Stock which entitles


the holder to some
preference either in
the dividends or
distribution of assets
upon liquidation, or in
both

VALUE

Depends if its
par or no par

Stated par value

Fixed in the
AOI, and
indicated in the
stock certificate.
May be sold at
a value higher,
but not lower,
than that fixed
in the AOI.

Value not fixed in


the AOI, and
therefore not
indicated in the
stock certificate.
Price may be set
by BOD, SHs or
fixed in the AOI
eventually.

VOTING RIGHTS

Usually vested
with the
exclusive right to
vote

Can vote only under


certain circumstances

Depends if its
common or
preferred.

Depends if its
common or
preferred.

PREFERENCE UPON
LIQUIDATION

No advantage,
priority, or
preference over
any other SH in
the same class

First crack at
dividends / profits /
distribution of assets

TREASURY
Shares that have
been issued and
fully paid but
subsequently
reacquired by the
issuing corporation
by lawful means.

No voting rights for


as long as such
stock remains in the
treasury (Sec. 57)

NOTE: Only preferred and redeemable shares may be deprived of the right to vote. (Sec. 6, Corporation Code)
EXCEPTION: As otherwise provided in the Corporation Code.
* No-par value shares may not be issued by the following entities: banks, trust companies, insurance companies, public
utilities, building & loan association (Sec. 6)

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Nature of Subscription Contract

WHAT IS A SUBSCRIPTION CONTRACT?


It is any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed. This is
notwithstanding the fact that the parties refer to it as a purchase or some other contract. (Sec. 60)
WHAT IS THE NATURE OF A SUBSCRIPTION CONTRACT?

Subscriptions constitute a fund to which the creditors have a right to look for satisfaction of their claims.

The assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for
the payment of its debts.

A subscription contract is INDIVISIBLE (Sec. 64).

A subscription contract subsists as a liability from the time that the subscription is made until such time that the
subscription is fully paid.
Pre-incorporation subscription
RULE: When a group of persons sign a subscription contract, they are deemed not only to make a continuing offer to the
corporation, but also to have contracted with each other as well. Thus, no one may revoke the contract even prior to
incorporation without the consent of all
the others.
WHEN IS A PRE-INCORPORATION SUBSCRIPTION IRREVOCABLE?
1)

For a period of at least 6 months from the date of subscription;


EXCEPTIONS: (1) unless all of the other subscribers consent to the revocation; or

(2) unless the incorporation of said corporation fails to materialize within the said period or within a
longer period as may be stipulated in the contract of subscription
2) After the AOI have been submitted to the SEC (Sec. 61)
Post-incorporation subscription
NOTE:

Under the Corporation Code, there is no longer any distinction between a


subscription and a purchase. Thus, a subscriber is liable to pay for the shares even
if the corporation has become insolvent.

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