Commercial Law Review
Corporation Code
CORPORATION CODE (BP BLG 68)
*Corporation Code is the general law on Private
Corporation regarding to its creation, formation and
powers.
INTRODUCTION:
A. Historical Background
Effectivity: May 1, 1980
Article XII Section 16 of the 1987 Constitution:
The Congress shall not, except by general law,
provide for the formation, organization, or
regulation of private corporations. Government-
owned or controlled corporations may be
created or established by special charters in the
interest of the common good and subject to the
test of economic viability.
*Congress has limited powers in the formation,
creation and regulation of a private corporation.
Purposes:
1. Uniformity
2. To avoid corruption
General Rule: Congress is prohibited to enact a
law directly forming a private corporation.
Exception: GOCC may be created by special
charter.
*GOCC is a private corporation with regard to
function and in the meantime a public
corporation with regard to ownership.
Twin Conditions must be present in forming a
GOCC:
1. Interest in the common good
2. Subject to the test of economic viability
- Means can survive alone in the market;
can generate income which they can
use for their operating expenses
CONCEPT AND ATTRIBUTES OF A CORPORATION:
A. Statutory definition of a Corporation
Section 2 of the Corporation Code: 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.
B. Attributes of a Corporation
Artificial Being
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- It exist by fiction of law only, hence it is
subject to limitations that are inherent
because of its nature
- A corporation is a juridical person which
exists by process of legal fiction
Doctrine of Corporate Entity/Doctrine
of Separate Personality - A corporation
is a legal or juridical person with a
personality separate and apart from its
individual stockholders or members and
from any other legal entities to which it
may be connected
Consequences/Implications of
Separate Personality:
1. It is entitled to own properties in its
own name and its properties are
not the properties of its
stockholders, directors and officers.
Cases: Magsaysay-Labrador v CA;
Sulo ng Bayan v Araneta
*The interest of the stockholders
over the properties of the
corporation is merely inchoate.
*Merely inchoate because there are
still condition precedents before the
shareholders get their share, viz, in
Asset, there are dissolution and
satisfaction of claims; in profit-
sharing, there are unrestricted
retained earnings and declaration
by the Board of Directors.
2. It can incur obligations and its
obligations are not the obligations
of its stockholders, directors and
officers.
Case: Francisco v CA
3. The rights belonging to the
corporation cannot be invoked by
the stockholders, directors and
officers and vice versa.
4. Corporations are entitled to certain
constitutional rights, i.e., right
against unreasonable searches and
seizure, due process clause.
*It is not entitled to certain
constitutional right, i.e., right
against self-incrimination
particularly production of corporate
documents.
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*Right against self-incrimination is
applicable only to natural persons.
General Rule: Constitutional
guarantees are applicable to
corporations.
Exceptions:
1. Right against self-incrimination
2. Freedom to travel
Case: Bataan Shipyard v PCGG
5. It is liable for tort. It is liable when
the act was committed by the
officer or agent under express
direction or authority from the
stockholders or members acting as
a body or generally from the
directors as the governing body.
6. Generally, the corporation is
considered a national of the country
where it was incorporated (Place of
incorporation test)
*Exceptions: 1. In times of war, the
nationality of a corporation is
determined by the nationality of
the controlling stockholders; 2.
Under the Foreign Investment Act
of 1991
7. Corporations are incapable of
intent, hence, they cannot commit
felonies that are punishable under
the RPC. They cannot commit
crimes that are punishable under
special laws because crimes are
personal in nature requiring
personal performance of overt acts.
In addition, the penalty of
imprisonment cannot be imposed.
*Criminal liability falls upon to
responsible officers.
*Responsible officers cannot invoke
the doctrine of separate personality.
*Corporations cannot
incarcerated.
8. Moral damages cannot be awarded
in favor of corporations because
they do not have feelings and
mental state.
*Corporations can claim damages
such as actual, compensatory,
exemplary, loss of earning capacity.
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General Rule: Corporation cannot
claim moral damages.
Exception: If the corporation has a
good reputation and such
reputation was destroyed.
Case: Coastal Pacific Trading v
Southern Rolling Mills, Co.
*In Filipinas Broadcasting Network
Inc. v. Ago Medical and Educational
Center, the SC ruled that a
corporation can recover moral
damages under Article 2219(7) if it
was the victim of defamation.
Doctrine of Piercing the Veil of Corporate Entity The
doctrine that a corporation is a legal entity distinct from
the persons composing it. It is a theory introduced for
the purposes of convenience and to serve the ends of
justice. But when the veil of corporate fiction is used as
a shield to perpetuate fraud, to defeat public
convenience, justify wrong, or defend crime, this fiction
shall be disregarded and the individuals composing it
will be treated identically.
Cases: Times Transportation Co. v Santos Sotelo;
Concept Builders v NLRC
*The doctrine of piercing the veil of corporate entity is
the exception to the doctrine of corporate entity.
*The users of this doctrine are: 1. Stockholder; 2. Group
of stockholders; 3. Another corporation.
Effects: 1. Stockholders, officers and corporation are in
effect jointly liable; 2. In case of two corporations, they
will be treated as one wherein they will be both
solidarily liable. (Instrumentality rule)
*There is no effect on the existence of each corporation
as long as their separate entity is used for legitimate
purposes.
Instrumentality Rule When one corporation is so
organized and controlled and its affairs are conducted so
that it is in fact a mere instrumentality or adjunct of the
be
other, the fiction of the corporate entity to the
instrumentality may be disregarded.
*The user is another corporation.
Keyword: CONTROL
Requisites: 1. Control, not mere majority or
complete stock control, but complete dominion, not
only of finances but of policy and business 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;
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2. Such control must have been used by the
defendant to commit fraud or wrong in
contravention of plaintiffs legal rights; 3. The
aforesaid control and breach of duty must
proximately cause the injury or unjust loss
complained of.
Three cases of piercing the veil:
1. Fraud Cases when a corporation is used as a
cloak to cover fraud, or to do wrong;
2. Alter Ego Cases when the corporate entity is
merely a farce since the corporation is an alter ego,
business conduit or instrumentality of a person or
another corporation;
3. Equity cases when piercing the corporate fiction
is necessary to achieve justice or equity.
Probative Factors of Identity:
1. Identical shareholders;
2. Same set of officers, directors, or trustees;
3. Use of same premises, properties, tools and
equipments;
4. Engage practically in the same business; 5. The
same manner of keeping books and records.
*The probative factors of identity are not conclusive
but may be considered as strong evidence.
Creature of Law
Article XII Section 16 of the 1987
Constitution: The Congress shall not,
except by general law, provide for the
formation, organization, or regulation of
private corporations. Government-owned or
controlled corporations may be created or
established by special charters in the
interest of the common good and subject to
C. Classification of Private Corporations:
the test of economic viability.
Concession Theory It is a principle in the
creation of corporations, under which a
corporation is an artificial creature without
any existence until it has received the
imprimatur of the State acting according to
law, through the SEC. The life of the
corporation is a concession made by the
State.
Right of Succession
- Capacity to have continuity of existence
despite the changes on the persons
who compose it. Thus, the personality
continues despite the change of
stockholders, members, board
members or officers; death or disability.
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- Also known as Principle of Perpetual
Succession
Reason: To make the corporation more
stable
Creature of enumerated powers, attributes
and properties
Doctrine of Limited Capacity No
corporation under the Corporation Code,
shall possess or exercise any corporate
powers, except those conferred by law, its
Articles of Incorporation, those implied
from express powers and those as are
necessary or incidental to the exercise of
the powers so conferred. The corporations
capacity is limited to such express, implied
and incidental powers.
*Corporation may be restrained from
engaging a particular transaction because it
is beyond their powers.
*General Capacity a corporation can
perform any act for as long as it is lawful,
moral and not contrary to public policy or
order.
Ultra Vires Doctrine Even if the act is
lawful, moral and not contrary to public
order or policy but such act is not within the
express, implied and incidental powers of
the corporation such act shall be void for
being ultra vires.
*These doctrines are based on Section 2
and Section 45 of the Corporation Code.
1. As to existence of Stocks:
Stock Corporation Corporations which have
capital stock divided into shares and are
authorized to distribute to the holders of such
shares dividends or allotments of the surplus
profits on the basis of the shares held. (Sec. 3)
Non-stock Corporation A corporation where
no part of its income is distributable as
dividends to its members, trustees, or officers,
subject to the provisions of this Code on
dissolution. (Sec. 87)
Q: Is it correct to say that a Non-stock
corporation cannot generate income on their
own?
A: NO
2. As to function/organizers:
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Public Corporation for public purpose and
organized by the State.
Private Corporation for profit making
functions and organized by private persons
alone or with the State
3. As to laws of Incorporation (Place of
Incorporation) :
Domestic Corporation corporation formed,
organized or existing under the Philippine Laws.
Foreign Corporation corporation formed,
organized or existing under any laws other than
those of the Philippines and whose laws allow
Filipino citizens and corporations to do business
in its own country or state. (Sec. 123)
*License is necessary for; 1. Regulation
purposes and 2. Access to local courts.
4. As to legal status:
De Jure Corporation corporation created in
strict or substantial compliance with the
mandatory requirements for incorporation and
the right of which to exist as a corporation
cannot be successfully attacked or questioned
by any party even in a direct proceeding for that
purpose by the state.
De Facto Corporation the due incorporation
of any corporation claiming in good faith to be a
corporation under the Corporation Code, and its
right to exercise corporate powers, shall not be
inquired into collaterally in any private suit to
which such corporation may be a party. Such
inquiry may be made by Solicitor General in a
quo warranto proceeding. (Sec. 20)
- organized with a colourable compliance
with the requirements of a valid law
and its existence cannot be inquired
collaterally.
- There is an irregularity or defect in the
constitution or organization.
Can be compared to a voidable contract,
i.e., valid until annulled.
*Can be challenged by the State later on.
Cases: Hall v Piccio; Seventh Adventist v
Northeastern Mindanao Mission
*The filing of the Articles of Incorporation
and the issuance of the certificate of
registration are the essential requisites for
the existence of a de facto corporation.
Requisites:
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1. The existence of a valid law under which
it may be incorporated;
2. An attempt in good faith to incorporate;
3. Use of corporate powers;
4. Filing of the Articles of Incorporation;
5. Subsequent compliance with the
requirement of law.
*In both corporations, there must be a
certificate of registration issued.
Doctrine of Corporation by Estoppel All persons
who assume to act as a corporation knowing it to be
without authority to do so shall be liable as general
partners for all debts, liabilities and damages
incurred or arising as an result thereof: Provided,
however, that when any such ostensible corporation
is sued on any transaction entered into by it as a
corporation or on any tort committed by it as such,
it shall not be allowed to use as a defense its lack or
corporate personality. (Sec. 21)
- Group of persons which holds itself out
as a corporation and enters into a
contract with a third person on the
strength of such appearance cannot be
permitted to deny its existence in an
action under said contract.
Case: Lim Tong Lim v CA
*Lim is stopped because he benefited from
the transaction.
Remedy: To ran after those persons
responsible for the representations
Essence: They are precluded from denying
their existence by their previous act or
conduct
Holding Corporation it is one which controls another
as a subsidiary by the power to elect management. It is
one that holds stocks in other companies for purposes
of control rather than for mere investment.
Affiliate one related to another by owning or being
owned by common management or by a long-term
lease of its properties or other control device. It may be
the controlled or controlling corporation, or under
common control.
Subsidiary Corporation one which is so related to
another corporation that the majority of its directors
can be elected either directly or indirectly by such other
corporation. It is always controlled.
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Open Corporation one which is open to any person
who may wish to become a stockholder or member
thereto.
Close Corporation those whose shares of stock are
held by limited number of persons like the family or
other closely knit group. (Sec. 96)
FORMATION AND ORGANIZATION OF A PRIVATE
CORPORATION:
A. Submission of Articles of Incorporation;
contractual significance
*The life of a corporation commences from the
issuance of the Certificate of Registration by the
SEC upon filing of the Articles of Incorporation
and other documents.
Article of Incorporation is the charter of the
corporation, and the contractual relationships
between the State and the corporation, the
stockholder and the State, and between the
corporation and its stockholders.
Contractual Significance:
1. The issuance of a certificate of incorporation
signals the birth of the corporations juridical
personality;
2. It is an essential requirement for the
existence of a corporation, even a de facto one.
B. Contents and Form of the Articles of
Incorporation (Secs. 14 and 15)
Contents of Articles of Incorporation:
1. Corporate Name;
2. Purpose Clause;
3. Principal office;
4. Term of existence;
5. Incorporators;
6. Directors or trustees;
7. Capitalization;
8. Shares of stock;
9. Treasurers Affidavit.
Corporate Name
Purpose: Identification
*Corporation can not adopt any name or
group of words at its pleasure because of
statutory limitation, viz., Sec. 18 of the
Corporation Code which provides that: No
corporate name may be allowed by the SEC
if the proposed name is identical or
deceptively or confusingly similar to that
of any existing corporation or to any other
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name already protected by law or is
patently deceptive, confusing or contrary
to existing laws. When a change in the
corporate name is approved, the
Commission shall issue an amended
certificate of incorporation under the
amended name.
SEC Guideline x x x b. In order to prevent
confusion and difficulties of administration,
supervision and control, if the proposed
name contains a word already use as a part
of the firm name or style of a registered
entity, the proposed name must contain
two other words different and distinct from
the name of the company already registered
or protected by law. x x x
Case: Ang Mga Kaanib Ni Jesus Cristo
*The phrase Ang Mga Kaanib are words
merely descriptive of membership while the
phrase Sa Bansang Pilipinas are merely
descriptive of the place.
*Both parties are religious institutions
*Both use the acronym H.S.K.
As a rule, generic name or descriptive word
may be used as a corporate name.
Reason: public domain; can be used by
anyone; public use.
Exception: Doctrine of Secondary Meaning
a word or phrase originally incapable of
exclusive appropriation with reference to an
article on the market, because
geographically or otherwise descriptive,
might nevertheless have been used so long
and so exclusively by one producer with
reference to his article that in that trade and
to that branch of the purchasing public, the
word or phrase has come to mean that the
article was his product.
Requisites:
1. Period of use;
2. The use must be exclusive.
Case: Lyceum of the Philippines
*The exclusivity requirement was not
satisfied by Lyceum of the Philippines.
*In case of change of name, the corporation
is not dissolve nor create a new corporation;
it also does not extinguish the corporate
liability.
*Change of name can be done by amending
the Articles of Incorporation.
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Procedure:
1. Obtain approval of majority of the Board
and 2/3 stockholders;
2. Submission to the SEC for approval.
Purpose Clause
*Only one primary purpose. Primary
purpose defines the business activities of
the corporation. It is the ordinary course of
business of the corporation.
*Secondary Purpose is for future expansion.
There is no limit on the secondary purpose.
*In case the primary purpose is not viable
then secondary purpose may be used.
Principal Office
*The principal place of business may
determine the venue of court cases
involving corporations. It may also
determine if service of summons and
notices was properly made. It is also
important for tax purposes (local taxation).
*The SEC requires the exact address to be
indicated in the Articles of Incorporation.
*It is the residence of the corporation. It is
where the corporation maintains its books
and records and where normally the bulk of
its business is being conducted or
undertaken.
*For personal action, venue is the
residence.
Term of Existence
*A corporation has a maximum term of 50
years. It may be extended for a period not
exceeding 50 years in any single instance.
As a rule, no extension can be made earlier
than 5 years prior to the expiration of the
term.
*No limitations regarding number of
extension can apply.
Reason: To compel the stockholders to
meet the corporations term.
Exception: If for compelling reasons, earlier
extension will be allowed.
*During the three year winding up period,
the corporation still has personality but
activities are limited to the liquidation of
the corporation affairs and not to transact
further business.
As a rule, after the term has expired, no
more extensions be allowed or entertained
by the SEC.
Reason: No more period to extend.
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Exception: 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
relations applies if the failure to file the
application for existence within the term of
the corporation is due to neglect of the
officer with whom the certificate is required
to be filed or to wrongful refusal on is part
to receive it.
*The delay in submitting the application for
extension is justifiable.
Keywords:
1. Excusable delay;
2. Beyond the control of the corporation
(insuperable intervening causes)
Incorporators
*Once an incorporator always an
incorporator. (Fait accompli an
accomplished fact which cannot be altered)
*They are the signatories to the Articles of
Incorporation.
*They are originally forming the corporation
Q: What is the reason behind the phrase
that an incorporator is not always a
corporator?
A: To be an incorporator it is not necessary
to own a share unlike as a corporator.
*Number is limited to 5 to 15.
*They must have a contractual capacity.
*Juridical person cannot create another
juridical person.
*There is no citizen requirement but special
laws may require otherwise.
*Majority must be a resident of the
Philippines.
Directors and trustees
*The Board of Directors is the governing
body in a stock corporation while Board of
Trustees is the governing body in a non-
stock corporation.
*They exercise the powers of the
corporation.
Qualifications:
1. Every director must own at least one (1)
share of the capital stock;
2. Majority of the directors or trustees must
be residents of the Philippines.
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*Any director who ceases to be the owner
of at least one share of the capital stock of
the corporation of which he is a director
shall thereby cease to be a director.
*Trustees of non-stock corporations must
be members thereof.
*Initial directors/trustees shall hold office
for one year until their successors are
elected and qualified.
Capitalization
Section 14(8) states that: If it be a stock
corporation, the amount of its authorized
capital stock in lawful money of the
Philippines, the number of shares into
which it is divided, and in case the share are
par value shares, the par value of each, the
names, nationalities and residences of the
original subscribers, and the amount
subscribed and paid by each on his
subscription, and if some or all of the shares
are without par value, such fact must be
stated.
*It is required that at least 25% of the
subscribed capital must be paid and in no
case may be paid-up capital be less than
P5,000.
Authorized Capital Stock the amount
fixed in the articles of incorporation to be
subscribed and paid by the stockholders of
the corporation.
*Shows the total number of shares
Subscribed Capital that portion of the
authorized capital stock that is covered by
subscription agreements whether fully paid
or not.
Paid-Up Capital the portion of the
authorized capital stock which has been
subscribed and actually paid.
Outstanding Capital Stock the total shares
of stock issued to subscribers or
stockholders, whether or not fully or
partially paid except treasury shares so long
as there is a binding subscription
agreement.
Shares of stock
Q: Why shares of stock?
A: Because there is a share on the
capitalization.
Economic Value:
1. expectancy on the share in the profits
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2. expectancy on the share of assets in case
of dissolution/liquidation.
Political Value:
1. vote
2. control in the management of the
corporation.
Doctrine of Equality of Shares Except as
otherwise provided in the articles of
incorporation and stated in the certificate of
stock, each share shall be equal in all
respects to every other share.
- Provides that where the Article of
Incorporation do not provide for any
distinction of the shares of stock, all shares
issued by the corporation are presumed to
be equal and enjoy the same rights and
privileges and are also subject to the same
liabilities.
Classes of Shares:
1. Par Value Share shares that have a
nominal value in the certificate of stock.
Contractual Significance: The minimum
price at which the shares are to be
issued.
*The price is fixed. It is stated in the
Articles of Incorporation.
2. No Par Value Share those shares
which do not have nominal value.
However, they have issued value stated
in the certificate or articles of
incorporation.
*There is flexibility in the price.
*The price is determined by the Board.
Limitations:
1. No par value shares cannot have an
issued price of less than P5.00;
2. The entire consideration for its
issuance constitutes capital so that no
part of it should be distributed as
dividends;
3. They cannot be used as preferred
stocks;
4. They cannot be issued by banks, trust
companies, insurance companies, public
utilities and building and loan
association (Reason: imbued with
public interest);
5. The articles of incorporation must
state the fact that it issued no par value
shares as well as the number of said
shares;
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6. Once issued, they are deemed fully
paid and non-assessable.
3. Voting Shares shares with the right to
vote. They have the right to participate
in the management of the corporation
through the exercise of such right.
4. Non-voting Shares shares without the
right to vote.
*Has only a limited right to vote.
General Rule: Shareholder owning non-
voting shares has no right to vote.
Exceptions:
1. Amendment of the articles of
incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage,
pledge or other disposition of all or
substantially all of the corporate
property;
4. Incurring, creating or increasing
bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the
corporation with another corporation or
other corporations;
7. Investment of corporate funds in
another corporation or business in
accordance with the Corporation Code;
8. Dissolution of the corporation.
*The exceptions are exclusive; the list is
a closed list
Statutory Constraint: Sec. 6 of the
Corporation Code
*The corporation cannot provide for
shares with no voting right
General Rule: Only redeemable and
preferred shares are deprived of voting
right.
Exception: Common shares may be
denied of its voting right in the
following instances: 1. Delinquent in
paying the subscription; 2. If there was
a founders share where it was given
the right to vote exclusively for 5 years
(Sec. 7).
5. Common Shares the most common
type of shares which enjoy no
preference.
*The basic class of stock ordinarily and
usually issued without extraordinary
rights and privileges, and the owners
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thereof are entitled to a pro rata share
in the profits of the corporation and in
its assets upon dissolution and, likewise,
in the management of its affairs without
preference or advantage whatsoever.
6. Preferred Shares- shares which enjoy
preference as to dividends or assets
upon dissolution as stated in the
Articles of Incorporation.
Reason: To attract investors.
*Preference does not give them a lien
upon the property nor make them
creditors of the corporation.
*Characterized as redeemable shares.
Kinds:
1. Preferred shares as to assets share
which gives the holder thereof
preference in the distribution of the
assets of the corporation in case of
liquidation;
2. Preferred shares as to dividends
share which gives the holder thereof
preference in the distribution of the
dividends to the extent agreed upon
before any dividends at all are paid to
the holders of common shares;
3. Participating preferred shares the
holders thereof are still given the right
to participate with the common
stockholders in dividends beyond their
stated preference;
4. Non-participating preferred shares
where there is no such participation;
5. Cumulative preferred shares the
shareholder is entitled to recover
dividends in arrears. While dividend
declaration may not be compelled, once
it is declared, the shareholder is entitled
to the said arrears;
6. Non-cumulative preferred shares
not entitled to arrears only to present
dividends.
7. Redeemable Shares are those which
permit the issuing corporation to
redeem or purchase its own shares.
Limitations:
1. Redeemable shares may be issued
only when expressly provided for in the
Articles of Incorporation;
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2. The terms and conditions affecting
said shares must be stated both in the
certificate of stock representing such
share;
3. Redeemable shares may be deprived
of voting rights in the Articles of
Incorporation, unless otherwise
provided in the Corporation Code;
4. The corporation is required to
maintain a sinking fund to answer for
redemption price if the corporation is
required to redeem;
5. The redeemable shares are deemed
retired upon redemption unless
otherwise provided in the Articles of
Incorporation;
6. Unrestricted retained earnings is not
necessary before shares can be
redeemed but there must be sufficient
assets to pay the creditors and to
answer for operations.
8. Treasury Shares shares which have
been earlier issued as fully paid and
have thereafter been acquired by the
corporation by purchase, donation,
redemption or through some lawful
means.
- Shares which are previously issued by
the corporation but subsequently
reacquired by the corporation.
*Retired thus can no longer be re-
issued.
*They are not entitled to dividends.
*They are not entitled to voting rights.
Rationale: to prevent abuse by the
management.
*These shares may again be disposed of
for a reasonable price fixed by the
Board of Directors.
9. Founders Shares classified as such in
the articles of incorporation may be
given certain rights and privileges not
enjoyed by the owners of other stocks,
provided that where the exclusive right
to vote and be voted for in the election
of directors is granted, it must be for
the limited period not to exceed 5 years
subject to the approval of the SEC. The
5 year period shall commence from the
date of the approval by the SEC.
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Treasurers affidavit
*The SEC shall not accept the Articles of
Incorporation of any stock corporation
unless accompanied by a sworn statement
of the Treasurer elected by the subscribers
showing that at least 25% of the authorized
capital stock of the corporation has been
subscribed, and at least 25% of the total
subscription has been fully paid to him in
actual cash and/or in property the fair
valuation of which is equal to at least 25%
of the said subscription, such paid up capital
being not less than P5,000.
*If the Treasurers affidavit is false such act
is tantamount to fraud. (PD 902-A)
*Fraud on the part of the corporation is a
ground for revocation or suspension of
license depending upon the extent of the
violation committed.
*If theres no Treasurers Affidavit, the first
ground shall apply, i. e., noncompliance
with the minimum requirement.
General Rule: 25% must be subscribed and
25% must be paid.
Exception: If the law provides otherwise,
i.e., special laws.
C. Grounds for rejection of the Articles of
Incorporation
1. The articles of incorporation or any
amendment thereto is not substantially in
accordance with the form prescribed
herein;
2. The purpose or purposes of the corporation
are patently unconstitutional, illegal,
immoral, or contrary to government rules
and regulations;
3. The Treasurers Affidavit concerning the
amount of capital stock subscribed and/or
paid is false;
4. The percentage of ownership of the capital
stock to be owned by citizens of the
Philippines has not been complied with as
required by existing laws or the
Constitution.
Dual Franchise Requirement: No articles of
incorporation or amendment to articles of
incorporation of banks, banking and quasi-
banking institutions, building and loan
9

associations, trust companies and other
financial intermediaries, insurance companies,
public utilities, educational institutions, and
other corporations governed by special laws
shall be accepted or approved by the
Commission unless accompanied by a
favourable recommendation of the appropriate
government agency to the effect that such
articles or amendment is in accordance with
law.
D. Commencement of Corporate Existence
Sec. 19 of the Corporation Code states that A
private corporation formed or organized under
this Code commences to have corporate
existence and juridical personality and is
deemed incorporated from the date the SEC
issues a certificate of incorporation under its
official seal; and thereupon the incorporators,
stockholders/members and their successors
shall constitute a body politic and corporate
under the name stated in the articles of
incorporation for the period of time mentioned
therein, unless said period is extended or the
corporation is sooner dissolved in accordance
with law.
*For purposes of determining whether a
corporation enjoys the status of a de facto
corporation, it must have been at least issued a
certificate of registration.
E. Amendment of the Articles of Incorporation
Sec. 16 of the Corporation Code states that:
Unless otherwise prescribed by this Code or by
special law, and for legitimate purposes, any
provision or matter stated in the articles of
incorporation may be amended by a majority
vote of the board of directors or trustees and
the vote or written assent of the stockholders
representing at least 2/3 of the outstanding
capital stock, without prejudice to the appraisal
right of dissenting stockholders in accordance
with the provisions of this Code, or the vote or
written assent of at least 2/3 of the members if
it be a non-stock corporation.
*It is effective upon the approval of the SEC.
*There may be an amendment by inaction.
Amendment by Inaction Upon filing with the
SEC of the amendment and the Commission
failed to act on it within 6 months from the date
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of filing for a cause not attributable to the
corporation.
F. Effects of Non-Use of Corporate Charter
Sec. 22 of the Corporation Code states that: If
a corporation does not formally organize and
commence the transaction of its business or the
construction of its work within 2 years from the
date of its incorporation, its corporate powers
cease and the corporation shall be deemed
dissolved. However, if the corporation has
commenced the transaction of its business but
subsequently becomes continuously inoperative
for a period of at least 5 years, the same shall be
a ground for the suspension or revocation of its
corporate franchise or certificate of
incorporation. This provision shall not apply if
the failure to organize, commence the
transaction of its businesses or the construction
of its works, or to continuously operate is due to
causes beyond the control of the corporation as
may be determined by the SEC.
*The period must be counted from the issuance
of the Certificate of Incorporation.
*Automatic dissolution is not contemplated
under Section 22. (SEC Opinion).
*Section 22 must be read in conjunction with
Sec 6(1) of PD 902-A which requires that the
corporation must be given the opportunity to
be heard in compliance with the requirement of
due process before the revocation of its license.
CONTROL AND MANAGEMENT OF A CORPORATION:
A. Levels of Corporate Control
1. By Stockholders/Shareholders;
2. By Corporate Officers;
3. By Directors/Trustees
B. Board of Directors/Trustees
General Powers of the Board
Sec. 23 of the Corporation Code states that:
Unless otherwise provided in this Code,
the corporate powers of all corporations
formed under this Code shall be exercised,
all business conducted and all property of
such corporations controlled and held by
the board of directors or trustees to be
elected from among the holders of stocks,
or where there is no stock, from among the
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members of the corporation, who shall hold
office for one year until their successors are
elected and qualified.
Powers of the Board of Directors:
1. Corporate Powers;
2. Manage the Corporation; and
3. Control over and hold the properties of
the Corporation.
*Board of Directors/Trustees is the statutory
representative of the corporation.
General Rule: All corporate powers
emanate from the Board of
Directors/Trustees.
Exception: Unless otherwise provided in
this Code. (Limiting Clause)
The limiting clause means that there are
certain corporate matters that cannot be
done by the Board by reason that such
matters fall upon the shareholders; or
corporate matters that cannot be resolved
by the Board alone, i.e., it must be done
with the approval of the shareholders.
Business Judgment Rule
Business Judgment Rule questions of
policy or management are left solely to the
honest decision of officers and directors of a
corporation and the courts are without
authority to substitute their judgment for
the judgment of the board of directors; 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 or the SEC.
- A resolution or transaction pursued within
the corporate powers and business
operations of the corporation, and passed in
good faith by the board of directors/trustee,
is valid and binding, and generally the
courts have no authority to review the same
and substitute their own judgment, even
when the exercise of such power may cause
losses to the corporation or decrease the
profits of a department.
*Great respect is accorded to the decisions
of the Board of Directors/Trustees.
*The directors are not liable to the
stockholders in performing such acts.
Qualifications of the Board Members
Sec. 23 of the Corporation Code states that:
Every director must have at least one share
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of the capital stock of the corporation of
which he is a director, which share shall
stand in his name on the books of the
corporation. Any director who ceases to be
the owner of at least one share of the
capital stock of the corporation of which he
is a director shall thereby cease to be a
director. Trustees of non-stock corporations
must be members thereof. A majority of the
directors or trustees of all corporations
organized under this Code must be
residents of the Philippines.
*In order to be eligible as director, what is
material is the legal title to and not
beneficial title or ownership of the stocks
appearing on the books of the corporation.
*The directors/trustees must be natural
persons.
*They must also be of legal age.
*He must possess other qualifications as
may be prescribed in the by-laws of the
corporation.
*Under Sec. 27 of the Corporation Code:
No person convicted by final judgment of
an offense punishable by imprisonment for
a period exceeding 6 years, or a violation of
this Code committed within 5 years prior to
the date of his election or appointment,
shall qualify as a director, trustee or officer
of any corporation.
Reason: The position is based on trust and
confidence.
*No citizenship requirement.
*The By-Laws may provide additional
qualifications/disqualifications.
Election of the Board Members
Sec. 24 of the Corporation Code provides
that: At all elections of directors or
trustees, there must be present, either in
person or by representative authorized to
act by written proxy, the owners of a
majority of the outstanding capital stock, or
if there be no capital stock, a majority of the
members entitled to vote. The election
must be by ballot if requested by any voting
stockholder or member. In stock
corporations, every stockholder entitled to
vote shall have the right to vote in person or
by proxy the number of shares of stock
standing, at the time fixed in the by-laws, in
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his own name on the stock books of the
corporation, or where the by-laws are silent
at the time of the election; and said
stockholder may vote such number of
shares for as many persons as there are
directors to be elected or he may cumulate
said shares and give one candidate as many
votes as the number of directors to be
elected multiplied by the number of his
shares shall equal, or he may distribute
them on the same principle among as many
candidates as he shall see fit: Provided, that
the total number of votes cast by him shall
not exceed the number of shares owned by
him as shown in the books of the
corporation multiplied by the whole
number of directors to be elected: Provided,
however, that no delinquent stock shall be
voted. Unless otherwise provided in the
articles of incorporation or in the by-laws,
members of the corporations which have no
capital stock may cast as many votes as
there are trustees to be elected but may not
cast more than one vote for one candidate.
Candidates receiving the highest number of
votes shall be declared elected. Any
meeting of the stockholders or members
called for an election may adjourn from day
to day or from time to time but not sine die
or indefinitely if, for any reason, no election
is held, or if there not present or
represented by proxy, at the meeting, the
owners of a majority of the outstanding
capital stock, or if there be no capital stock,
a majority of the member entitled to vote.
*It is the stockholders or corporators who
elect members of the Board of Directors.
*The only procedure required by the Code
is through Election. There can be no other
modes.
*The election must be by ballot if requested
by any voting member or stockholder.
*A stockholder cannot be deprived in the
articles of incorporation or in the by-laws of
his statutory right to use any of the
methods of voting in the election of
directors.
*No delinquent stock shall be voted.
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*It is not required that the candidate
received the majority vote, what the law
provides is only plurality of votes.
*Majority number is required only for the
existence of a quorum.
Not included in outstanding capital stocks:
1. Unissued stocks;
2. Non-voting stocks;
3. Treasury Shares.
Methods of Voting:
1. Straight Voting every stockholder may
vote such number of shares for as many
persons as there are directors to be elected.
2. Cumulative Voting for One Candidate a
stockholder is allowed to concentrate his
votes and give one candidate as many votes
as the number of directors to be elected
multiplied by the number of his shares shall
equal.
*Example: X has 10 shares in his name;
there are 5 numbers of directors to be
elected. X has 50 votes (10x5) available to
him. X may opt to concentrate all his 50
votes to a particular candidate.
3. Cumulative Voting by Distribution a
stockholder 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.
*Example: X has 10 shares in his name;
there are 5 numbers of directors to be
elected. X has 50 votes available to him. X
may opt to distribute the votes to as many
candidates as there are provided that the
total number of votes does not exceed 50.
Purpose of cumulative voting: To protect
the minority stockholders.
*The elected officer must act as a body.
*In a stock corporation, cumulative voting is
a statutory right whereas in a non-stock
corporation, cumulative voting is applicable
if it is provided in the Article of
Incorporation.
Sec. 26 of the Corporation Code provides
that: Within 30 days after the election of
the directors, trustees and officers of the
corporation, the secretary, or any other
officer of the corporation, shall submit to
the SEC, the names, nationalities and
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residences of the directors, trustees and
officers elected. Should a director, trustee
or officer die, resign or in any manner cease
to hold office, his heirs in case of his death,
the secretary, or any other officer of the
corporation, or the director, trustee or
officer himself, shall immediately report
such fact to the SEC.
Term of Office
*The directors or trustees shall hold office
for one (1) year subject to the hold over
principle, i.e., they continue in office until
their successors are elected and qualified.
*The one year period does not apply to
directors initially elected for purposes of
incorporation.
Quorum Requirement in Board Meetings
Sec. 25 of the Corporation Code states that:
Unless the articles of incorporation or the
by-laws provide for a greater majority, a
majority of the number of directors or
trustees as fixed in the articles of
incorporation shall constitute a quorum for
the transaction of corporate business, and
every decision of at least a majority of the
directors or trustees present at a meeting at
which there is a quorum shall be valid as a
corporate act, except for the election of
officers which shall require the vote of a
majority of all the members of the board.
Q: Is the director allowed to let a proxy
attend a board meeting in behalf for
himself?
A: NO. Proxy prohibition.
Reason: Because of their personal
qualifications.
*Quorum requirement should always be
computed based on the number specified in
the Articles of Incorporation regardless of
ensuing vacancies.
*The basis is always the number specified in
the Articles of Incorporation.
*The corporation can modify the number by
providing a different provision in the articles
of incorporation, however, the law provides
that the modification must be for a number
greater than that provided in the law. It
cannot provide for a number less than the
general requirement of the code.
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*For voting purposes, majority of the
member present constituting a quorum.
Except: election of directors.
Removal of Board Members
Sec. 28 of the Corporation Code states that:
Any director or trustee of a corporation
may be removed from office by a vote of
the stockholders holding or representing at
least 2/3 of the outstanding capital stock, or
if the corporation be a non-stock
corporation, by a vote of at least 2/3 of the
members entitled to vote: Provided, that
such removal shall take place either at a
regular meeting of the corporation or at a
special meeting called for the purpose, and
in either case, after previous notice to
stockholders or members of the corporation
of the intention to propose such removal at
the meeting. A special meeting of the
stockholders or members of a corporation
for the purpose of removal of directors or
trustees, or any of them, must be called by
the secretary on order of the president or
on the written demand of the stockholders
representing or holding at least a majority
of the outstanding capital stock, or, if it be a
non-stock corporation, on the written
demand of a majority of the members
entitled to vote. Should the secretary fail or
refuse to call the special meeting upon such
demand or fail or refuse to give the notice,
or if there is no secretary, the call for the
meeting may be addressed directly to the
stockholders or members by any
stockholder or member of the corporation
signing the demand. Notice of the time and
place of such meeting, as well as of the
intention to propose such removal, must be
given by publication or by written notice
prescribed in this Code. Removal may be
with or without cause: Provided, that
removal without cause may not be used to
deprive minority stockholders or members
of the right of representation to which they
may be entitled under Sec. 24 of this Code.
Requisites:
1. It must take place either at a regular
meeting or special meeting of the
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stockholders or members called for the
purpose;
2. There must be previous notice to the
stockholders or member of the intention to
remove;
3. The removal must be by a vote of the
stockholders representing 2/3 outstanding
capital stock or 2/3 of members;
4. The director may be removed with or
without cause unless he was elected by the
minority, in which case, it is required that
there is cause for removal.
Reason: The functions of directors are
fiduciary in nature.
Requisites for the removal of minority
directors are:
1. Justifiable cause;
2. Satisfaction of the voting requirements,
i.e., 2/3 of OCS or members.
*It is the secretary of the corporation upon
order of the president or in case there is no
secretary, stockholder representing majority
of the outstanding capital stocks or member
signing the demand who may call a meeting
for the purpose of removal.
Vacancies in the Board
Sec. 29 of the Corporation Code provides
that: Any vacancy occurring in the board of
directors or trustees other than by removal
by the stockholders or members or by
expiration of term, may be filled by the vote
of at least a majority of the remaining
directors or trustees, if still constituting a
quorum; otherwise, said vacancies must be
filled by the stockholders in a regular or
special meeting called for that purpose. A
director or trustee so elected to fill a
vacancy shall be elected only or the
unexpired term of his predecessor in office.
A directorship or trusteeship to be filled by
reason of an increase in the number of
directors or trustees shall be filled only by
an election at a regular or at a special
meeting of stockholders or members duly
called for the purpose, or in the same
meeting authorizing the increase of
directors or trustees if so stated in the
notice of the meeting.
General Rule: Power to elect directors is
vested in the stockholders
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Exception: Vacancy occurring in the board
of directors or trustees other than by
removal by the stockholders or members or
by expiration of term may be filled by the
vote of at least a majority of the remaining
directors or trustees if still constituting a
quorum.
Compensation of Board Members
Sec. 30 of the Corporation Code provides
that: In the absence of any provision in the
by-laws fixing their compensation, the
directors shall not receive any
compensation, as such directors, except for
reasonable per diems: Provided, however,
that any such compensation other than per
diems may be granted to directors by the
vote of the stockholders representing at
least a majority of the outstanding capital
stock at a regular or special stockholders
meeting. In no case shall the total yearly
compensation of directors, as such
directors, exceed 10% of the net income
before income tax of the corporation during
the preceding year.
General Rule: Directors are not entitled to
receive compensation
Exceptions:
1. When their compensation is fixed in the
by-laws;
2. If compensation is granted to directors by
the vote of the stockholders representing at
least a majority of the outstanding capital
stock at a regular or special stockholders
meeting.
Limitation: In no case shall the total yearly
compensation of directors exceed 10% of
the net income before income tax of the
corporation during the preceding year.
Reason: In order to avoid temptation on the
part of directors to abuse powers by
appropriating compensation packages since
they are in control of corporate assets.
C. Corporate Officers
Concept of Corporate Officers
*Corporate powers reside on the Board of
Directors; decision/policymaking resides on
them. Implementation of rules/policy lies
on the corporate officers
Categories:
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1. Statutory Corporate Officers
President (must be a stockholder); Secretary
(must be a resident and citizen of the
Philippines); Treasurer (must be a resident
and citizen of the Philippines).
2. As provided by the By-Laws must
be clearly stated in the By-Laws that such
office is a corporate office.
3. Those designated by the Board of
Directors provided the Board of Directors is
authorized to do so by the By-Laws.
Validity and Binding Effect of Acts of
Corporate Officers
General Rule: No one, even corporate
officers can bind the corporation. It is only
the Board of Directors who has the
authority to bind the corporation.
Exceptions:
1. If the By-Laws provides that such act is
part of the function of such office;
2. If authorized by the Board of Directors
Doctrine of Apparent Authority
Doctrine of Apparent Authority/Doctrine
of Estoppel 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.
Cases: Peoples Aircargo; Inter-Asia; Lapu-
Lapu
*Requires good faith on the part of third
person.
D. Liability of Directors, Trustees and Officers
Instances when Corporate Officers/Directors
are held Solidarily Liable
Sec. 31 of the Corporation Code provides
that: Directors or trustees who wilfully and
knowingly vote for or assent to patently
unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in
directing the affairs of the corporation or
acquire any personal or pecuniary interest
in conflict with their duty as such directors
or trustees shall be liable jointly and
severally for all damages resulting
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therefrom suffered by the corporation, its
stockholders or members and other
persons. When a director, trustee or officer
attempts to acquire or acquires, in violation
of his duty, any interest adverse to the
corporation in respect of any matter which
has been reposed in him in confidence, as
to which equity imposes a disability upon
him to deal in his own behalf, he shall be
liable as a trustee for the corporation and
must account for the profits which
otherwise would have accrued to the
corporation.
General Rule: Directors/Trustees/Officers
are not solidarily liable with the
corporation.
Exceptions:
1. Wilfully and knowingly vote for and
assent to patently unlawful acts of
the corporation (Sec. 31).
Case: Carag v NLRC
2. Guilty of gross negligence or bad
faith in directing the affairs of the
corporation (Sec. 31).
Case: David v Construction Industry
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.
6. By virtue of a specific provision of
law such as BP 22; Trust receipts
Law; RA 7832 (Anti-Electricity
Pilferage Act of 1997); Securities
Regulation Code
*In Carag v NLRC, the Supreme Court held
that not any violative of law, the Code means
that violation must have a corresponding
penalty. Patently unlawful act means that a law
declares an act unlawful and that such law
provides penalty for that unlawful act.
Self-Dealing Directors/Officers
Sec. 32 of the Corporation Code states that:
A contract of the corporation with one or
15

more of its directors or trustees or officers is
voidable, at the option of such corporation,
unless all of the following conditions are
present: 1. That the presence of such
director or trustee in the board meeting in
which the contract was approved was not
necessary to constitute a quorum for such
meeting; 2. That the vote of such director or
trustee was not necessary for the approval
of the contract; 3. That the contract is fair
and reasonable under the circumstances;
and 4. That in case of an officer, the contract
has been previously authorized by the
board of directors. Where any of the first
two conditions set forth in the preceding
paragraph is absent, in the case of a
contract with a director or trustee, such
contract may be ratified by the vote of the
stockholders representing at least 2/3 of the
outstanding capital stock or of at least 2/3
of the members in a meeting called for the
purpose: Provided, That full disclosure of
the adverse interest of the directors or
trustees involved is made at such meeting:
Provided, however, that the contract is fair
and reasonable under the circumstances.
Example:
In XYZ Corporation, A is a director. The
corporation acts through the Board of
Directors. XYZ Corporation and A entered
into a lease contract. A as the lessor and
XYZ Corporation as lessee. The contract was
approved by the Board of Directors.
Q: What is the status of the contract?
General Rule: The contract is voidable.
Exception: If the requisites provided in Sec.
32 are present.
Exception to the Exception: If requirement
number 1 or 2 is absent, in the case of a
contract with a director or trustee, such
contract may be considered valid by the
ratification of at least 2/3 of the outstanding
capital stock or 2/3 of the members.
Requisites:
1. The presence of such director or trustee
in the board meeting in which the contract
was approved was not necessary to
constitute a quorum for such meeting;
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2. The vote of such director or trustee was
not necessary for the approval of the
contract;
3. The contract is fair and reasonable under
the circumstances;
4. In case of an officer, the contract has
been previously authorized by the board of
directors.
Reason: As presence in the board meeting
might affect the status of the contract.
Self-Dealing Directors/Officers
directors/officers who transact business
with their own corporation.
- This is not prohibited by law.
Interlocking Directors those who have
been elected as directors in 2 or more
different corporations.
- May be prohibited by the By-Laws
(Gokongwei case).
-Not prohibited by law however there are
consequences.
Contracts involving Inter-locking Directors
Sec. 33 of the Corporation Code provides
that: Except in cases of fraud, and provided
the contract is fair and reasonable under
the circumstances, a contract between two
or more corporations having interlocking
directors shall not be invalidated on that
ground alone: Provided, That if the interest
of the interlocking director in one
corporation is substantial and his interest in
the other corporation or corporations is
merely nominal, he shall be subject to the
provisions of the preceding section insofar
as the latter corporation or corporations are
concerned. Stockholdings exceeding 20% of
the outstanding capital stock shall be
considered substantial for purposes of
interlocking directors.
Example:
A is a director of two corporation, ABC
Corporation and XYZ Corporation. XYZ
Corporation and ABC Corporation entered
into a lease contract where ABC Corporation
is the lessor and XYZ Corporation is the
lessee.
Q: Can this contract be invalidated on the
ground that there is an interlocking
director?
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A: NO.
Q: What is the status of the contract?
A: General Rule: Contracts between two or
more corporations having interlocking
directors are valid.
Exceptions:
1. Contracts are void if contracts are
fraudulent or if contracts are unfair
and unreasonable.
2. If the By-Laws prohibits interlocking
director.
Case: Gokongwei, Jr. v SEC
*The interest is nominal if his interest is
20% or less of the outstanding capital stock.
The interest is substantial if his interest is
more than 20% of the outstanding capital
stock.
*If the interlocking director has a
substantial interest in one corporation and
has a nominal interest in the other
corporation, the director must comply with
the requisites provided in Sec. 32 on self-
dealing directors.
Reason: The case is analogous to that of
transactions involving self-dealing directors
because such director holds substantial
interest with the other company.
Doctrine of Corporate Opportunity
Sec. 34 of the Corporation Code states that:
Where a director, by virtue of his office,
acquires for himself a business opportunity
which should belong to the corporation,
thereby obtaining profits to the prejudice of
such corporation, he must account to the
latter for all such profits by refunding the
same, unless his act has been ratified by a
vote of the stockholders owning or
representing at least 2/3 of the outstanding
capital stock. This provision shall be
applicable notwithstanding the fact that the
director risked his own funds in the
venture.
General Rule: 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 expectancy.
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Exception: His act has been ratified by a
vote of the stockholders owning or
representing at least 2/3 of the outstanding
capital stock.
*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.
E. Executive Committee
Sec. 35 of the Corporation Code states that:
The by-laws of a corporation may create an
executive committee composed of not less than
3 members of the board to be appointed by the
board. Said committee may act, by majority
vote of all its members, on such specific matters
within the competence of the board, as may be
delegated to it in the by-laws or on a majority
vote of the board, except with respect to: (1)
approval of any action for which shareholders
approval is also required; (2) the filing of
vacancies in the board; (3) the amendment or
repeal of by-laws or the adoption of new by-
laws; (4) the amendment or repeal of any
resolution of the board which by its express
terms is not so amendable or repealable; and
(5) a distribution of cash dividends to the
shareholders.
Keyword: BY-LAWS
*It must be stated in the By-Laws.
*Board Resolution is not sufficient if there is no
provision in the By-Laws.
*The decision of the executive committee is
considered a Board Resolution.
*The decision of the executive committee is not
subject to appeal to the board. However, if the
resolution of the Executive Committee is invalid
it may be ratified by the Board.
*The decision of the executive committee needs
no confirmation from the Board.
Case: Filipinas Port, Inc.
*The corporation may create other committees.
Distinction: In executive committee, there is a
statutory restriction on members whereas in
other committee there is no such restriction.
General Rule: The executive committee may act
on specific matters within the competence of
the board as may be delegated to it in the by-
laws or on a majority vote of the board.
17

Exceptions:
1. Approval of any action for which
shareholders approval is also required;
2. The filing of vacancies in the board;
3. The amendment or repeal of by-laws or the
adoption of new by-laws;
4. The amendment or repeal of any resolution
of the board which by its express terms is
not so amendable or repealable;
5. A distribution of cash dividends to the
shareholders.
CORPORATE POWERS:
A. Doctrine of Limited Capacity; Concept of Ultra
Vires Act
Sec. 45 of the Corporation Code states that:
No corporation under this Code shall possess
or exercise any corporate powers except those
conferred by this Code or by its articles of
incorporation and except such as are necessary
or incidental to the exercise of powers so
conferred.
Ultra Vires Acts an act committed outside the
object for which a corporation is created as
defined by the law of its organization and
therefore beyond the power conferred upon it
by law.
Effects of Ultra Vires Acts:
1. Executed Contract courts will not set
aside or interfere with such contracts.
2. Executory Contract no enforcement even
at the suit of either party.
3. Partly executed and Partly executory
contract principle against unjust
enrichment shall apply.
B. Classes of Corporate Powers
1. Express
2. Implied
3. Incidental
Express those expressly authorized by the
Corporation Code and other laws, and its
Articles of Incorporation or Charter.
Implied those that can be inferred from or
necessary for the exercise of the express
powers.
Incidental those that are incidental to the
existence of the corporation.
Doctrine of Necessary Implication those which can be
reasonably inferred from the express powers given since
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Corporation Code
Maria Zarah Villanueva - Castro
they are necessary for the corporation to perform a
particular act are deemed part of such powers.
C. Statutory Powers of a Corporation and the
Limitations on their Exercise
Sec. 36 of the Corporation Code states that:
Every corporation incorporated under this
Code has the power and capacity: 1. To sue and
be sued in its corporate name; 2. Of succession
by its corporate name for the period of time
stated in the articles of incorporation and the
certificate of incorporation; 3. To adopt and use
a corporate seal; 4. To amend its articles of
incorporation in accordance with the provisions
of this Code; 5. To adopt by-laws, not contrary
to law, morals, or public policy, and to amend or
repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell
stocks to subscribers and to sell treasury stocks
in accordance with the provisions of this Code;
and to admit members to the corporation if it
be a non-stock corporation; 7. To purchase,
receive, take or grant, hold, convey, sell, lease,
pledge, mortgage and otherwise deal with such
real and personal property, including securities
and bonds of other corporations, as the
transaction of the lawful business of the
corporation may reasonably and necessarily
require, subject to the limitations prescribed by
law and the Constitution; 8. To enter into
merger or consolidation with other corporations
as provided in this Code; 9. To make reasonable
donations, including those for the public welfare
or for hospital, charitable, cultural, scientific,
civic, or similar purposes: Provided, That no
corporation, domestic or foreign, shall give
donations in aid of any political party or
candidate or for purposes of partisan political
activity; 10. To establish pension, retirement,
and other plans for the benefit of its directors,
trustees, officers and employees; and 11. To
exercise such other powers as may be essential
or necessary to carry out its purpose or
purposes as stated in the articles of
incorporation.
Amendment of Articles of Incorporation
Sec. 16 of the Corporation Code states that:
Unless otherwise prescribed by this Code
or by special law, and for legitimate
18

purposes, any provision or matter stated in
the articles of incorporation may be
amended by a majority vote of the board of
directors or trustees and the vote or written
assent of the stockholders representing at
least 2/3 of the outstanding capital stock,
without prejudice to the appraisal right of
dissenting stockholders in accordance with
the provisions of this Code, or the vote or
written assent of at least 2/3 of the
members if it be a non-stock corporation.
*The following are excluded in counting the
outstanding capital stock: 1. Treasury stock;
2. Unissued shares.
*Aside from the votes of majority of the
board and assent of the 2/3 of the OCS, the
approval of the SEC is necessary for the
amendment of the AOI.
*There is an implied approval of the SEC,
i.e., failure to act on the application filed by
the corporation within 6 mos.
Q: How to get the approval of the
stockholders?
A: 1. Call for a meeting; 2. Obtain the
written assent of the stockholders.
*In Tan v Sycip, the Supreme Court held that
in case of a non-stock corporation,
membership is personal and non-
transferrable unless the by-laws provides
otherwise. The deceased member is not
entitled to vote.
Four changes in Articles of Incorporation that require
the approval of the stockholders.
1. Extension of corporate term;
2. Shortening of corporate term;
3. Increase or Decrease of Capital Stock;
4. Increase or Decrease of Bonded indebtedness.
*Approval of Stockholders is necessary in these changes
because they are necessary for the corporations
existence.
Extension/Shortening of Corporate Term
Sec. 37 of the Corporation Code states that:
A private corporation may extend or
shorten its term as stated in the articles of
incorporation when approved by a majority
vote of the board of directors or trustees
and ratified at a meeting by the
stockholders representing at least 2/3 of the
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outstanding capital stock or by at least 2/3
of the members in case of non-stock
corporation. Written notice of the proposed
action and of the time and place of the
meeting shall be addressed to each
stockholder or member at his place of
residence as shown on the books of the
corporation and deposited to the addressee
in the post office with postage prepaid, or
served personally: Provided, That in case of
extension of corporate term, any dissenting
stockholder may exercise his appraisal right
under the conditions provided in this code.
Increase or Decrease of Capital Stock/
Incurrence, Creation or Increase of Bonded
Indebtedness
Sec. 38 of the Corporation Code states that:
No corporation shall increase or decrease
its capital stock or incur, create or increase
any bonded indebtedness unless approved
by a majority vote of the board of directors
and, at a stockholders meeting duly called
for the purpose, 2/3 of the outstanding
capital stock shall favor the increase or
diminution of the capital stock, or the
incurring, creating or increasing of any
bonded indebtedness. Written notice of the
proposed increase or diminution of the
capital stock or of the incurring, creating, or
increasing of any bonded indebtedness and
of the time and place of the stockholders
meeting at which the proposed increase or
diminution of the capital stock or the
incurring or increasing of any bonded
indebtedness is to be considered , must be
addressed to each stockholder at his place
of residence as shown on the books of the
corporation and deposited to the addressee
in the post office with postage prepaid, or
served personally. xxx.
Q: When the corporation increases its
capital stock, is the 25% requirement
necessary? How can it be computed?
A: YES. The SEC ruled that the 25% applies
to the increase amount.
*The corporation is required to maintain a
sinking fund.
Q: What does bonded indebtedness mean?
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A: Requires longer time of payment; special
burden on the corporation; involves the
important assets of the corporation.
Denial of Pre-emptive Right
Sec. 39 of the Corporation Code states that:
All stockholders of a stock corporation shall
enjoy pre-emptive right to subscribe to all
issues or disposition of shares of any class,
in proportion to their respective
shareholdings, unless such right is denied by
the articles of incorporation or an
amendment thereto: Provided, That such
pre-emptive right shall not extend to shares
to be issued in compliance with laws
requiring stock offerings or minimum stock
ownership by the public; or to shares to be
issued in good faith with the approval of the
stockholders representing 2/3 of the
outstanding capital stock, in exchange for
property needed for corporate purposes or
in payment of a previously contracted
debt.
*Coming from the increased authorized
capital stock.
* Similar to Right of First Refusal
*It is not a matter of right. It can be denied
by the corporation through denial of such
right in the articles of incorporation.
Purposes:
1. In order that the stockholder may be able
to maintain their relative proportional
voting trend and control in the corporation;
2. To avoid dilution of their proportionate
voting and control in the corporation.
General Rule: Pre-emptive right is available
to stockholders.
Exception: if it is denied in the Articles of
Incorporation or through amendment.
Exception to the Exception: Pre-emptive
right shall not extend to:
1. Shares to be issued in compliance with
laws requiring stock offerings or minimum
stock ownership by the public;
2. Shares to be issued in good faith with the
approval of the stockholders representing
2/3 of the outstanding capital stock, in
exchange for property needed for corporate
purposes; and
3. In payment of a previously contracted
debt.
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Maria Zarah Villanueva - Castro
*Pre-emptive right is satisfied as long as the
corporation gives the stockholder the
opportunity to buy the shares.
*The offer must first be made to the
stockholders.
Sale or Disposition of Assets
Sec. 40 of the Corporation Code states that:
Subject to the provisions of existing laws
on illegal combinations and monopolies, a
corporation may, by a majority vote of its
board of directors or trustees, sell, lease,
exchange, mortgage, pledge or otherwise
dispose of all or substantially all of its
property and assets, including its goodwill,
upon such terms and conditions and for
such consideration, which may be money,
stocks, bonds or other instruments for the
payment of money or other property or
consideration, as its board of directors or
trustees may deem expedient, when
authorized by the vote of the stockholders
representing at least 2/3 of the outstanding
capital stock, or in case of non-stock
corporation by the vote of at least 2/3 of
the members, in a stockholders or
members meeting duly called for the
purpose. Written notice of the proposed
action and of the time and place of the
meeting shall be addressed to each
stockholder or member at his place of
residence as shown on the books of the
corporation and deposited to the addressee
in the post office with postage prepaid, or
served personally: Provided, That any
dissenting stockholder may exercise his
appraisal right under the conditions
provided in this Code. A sale or other
disposition shall be deemed to cover
substantially all the corporate property and
assets if thereby the corporation would be
rendered incapable of continuing the
business or accomplishing the purpose for
which it was incorporated. xxx.
Q: What makes the disposition peculiar?
A: The disposition is of all or substantially all
of the corporations properties and assets.
Q: What kind of disposition involve?
A: 1. Sell; 2. Lease; 3. Exchange; 4.
Mortgage; 5. Pledge.
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Requirements:
1. Majority vote of the Board.
2. Vote of the Stockholders representing
2/3 of the OCS.
3. The sale does not bring about the illegal
combinations and monopolies.
*No need for the approval of the SEC.
Tests:
1. Quantitative Test no statutory test;
pertains to the disposition of all assets
2. Qualitative Test there is a statutory
test; pertains to the disposition of
substantially all of its assets.
*The provision is so strict because the law
wants the corporation will reach its
expiration term.
Q: With the sale of all the assets of the
corporation, will the same result to its
dissolution?
A: NO. Possession or continued possession
of corporate properties is not a condition
for the existence of a corporation.
Corporation still exists despite the
disposition of all its properties and assets.
Q: Will the buying corporation be made
answerable for the liabilities of the selling
corporation?
A: NO. The two corporations are two
separate personalities thus they are
separate and distinct from each other hence
the buying corporation cannot be held liable
to the obligations of the selling corporation.
General Rule: The sale of all or substantially
all of the assets of the corporation does not
make the buyer answerable for the
obligations of the seller.
Exceptions:
1. If the buyer expressly agrees to assume
the obligations of the seller.
2. If sale amounts to merger or
consolidation.
3. If and when application of piercing the
veil of corporate entity doctrine is
warranted.
4. If the purchaser becomes
continuation of the seller.
5. Sale was done in violation of the Bulk
Sales Law.
Case: PNB v Andrada
Acquisition of Corporate Shares
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Sec. 41 of the Corporation Code states that:
A stock corporation shall have the power to
purchase or acquire its own shares for a
legitimate corporate purpose or purposes,
including but not limited to the following
cases: Provided, That the corporation has
unrestricted retained earnings in its books
to cover the shares to be purchased or
acquired: 1. To eliminate fractional shares
arising out of stock dividends; 2. To collect
or compromise an indebtedness to the
corporation, arising out of unpaid
subscription, in a delinquency sale, and to
purchase delinquent shares sold during said
sale; and 3. To pay dissenting or
withdrawing stockholders entitled to
payment for their shares under the
provisions of this Code.
Requisites:
1. Unrestricted Retained Earnings
2. The acquisition must be for legitimate
purpose
Q: What is an unrestricted retained
earnings?
A: Earnings not allocated for any other
purpose.
Q: What happens to reacquired shares?
A: General Rule: They are automatically
deemed retired.
Exception: The AOI provides otherwise.
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. The
subscribed capital stock of the corporation is a trust
fund for the payment of debts of the corporation which
the creditors have the right to look up to satisfy their
credits. Corporation may not dissipate this and the
creditors may sue stockholders directly for the unpaid
subscription.
Investment of Corporate Funds
Sec. 42 of the Corporation Code states that:
Subject to the provisions of this Code, a
a
private corporation may invest its funds in
any other corporation or business or for any
purpose other than the primary purpose for
which it was organized when approved by a
majority of the board of directors or
21

trustees and ratified by the stockholders
representing at least 2/3 of the outstanding
capital stock, or by at least 2/3 of the
members in the case of non-stock
corporations, at a stockholders or
members meeting duly called for the
purpose. Written notice of the proposed
investment and the time and place of the
meeting shall be addressed to each
stockholder or member at his place of
residence as shown on the books of the
corporation and deposited to the addressee
in the post office with postage prepaid, or
served personally: Provided, That any
dissenting stockholder shall have appraisal
right as provided in this Code: Provided,
however, That where the investment by the
corporation is reasonably necessary to
accomplish its primary purpose as stated in
the articles of incorporation, the approval of
the stockholders or members shall not be
necessary.
Requisites:
1. Majority vote of the Board
2. Vote of the stockholders representing
2/3 OCS.
Declaration of Dividends
Sec. 43 of the Corporation Code states that:
The board of directors of a stock
corporation may declare dividends out of
the unrestricted retained earnings which
shall be payable in cash, in property, or in
stock to all stockholders on the basis of
outstanding stock held by them: Provided,
That any cash dividends due on delinquent
stock shall first be applied to the unpaid
balance on the subscription plus costs and
expenses, while stock dividends shall be
withheld from the delinquent stockholder
until his unpaid subscription is fully paid:
Provided, further, That no stock dividend
shall be issued without the approval of
stockholders representing not less than 2/3
of the outstanding capital stock at a regular
or special meeting duly called for the
purpose. Stock corporations are prohibited
from retaining surplus profits in excess of
100% of their paid-in capital stock, except:
1. When justified by definite corporate
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Maria Zarah Villanueva - Castro
expansion projects or programs approved
by the board of directors; or 2. When the
corporation is prohibited under any loan
agreement with any financial institution or
creditor, whether local or foreign, from
declaring dividends without its/his consent,
and such consent has not yet been secured;
or 3. When it can be clearly shown that such
retention is necessary under special
circumstances obtaining in the corporation,
such as when there is need for special
reserve for probable contingencies.
*This section is exclusive to stock
corporations.
Dividends represents part of the earnings
of the corporation which the board has
decided to distribute among the
stockholders.
*The fact that the corporation has surplus
earning does not mean that it is mandated
to declare dividends; it is still upon the
sound discretion of the board of directors.
Reason: Trust Fund Doctrine
*There must be a unrestricted retained
earnings before dividends may be declared.
*The board may opt to restrict its earnings,
as the earnings may be allocated to
legitimate business purpose.
CASH DIVIDENDS STOCK DIVIDENDS
does not require Requires
stockholders stockholders
approval approval
The stockholders The stockholders
receive cash receive stocks
Creditor-debtor No creditor-debtor
relationship relationship
Requisites for declaration of cash/property
dividends:
1. Board approval
2. Unrestricted Retained Earnings
Requisites for declaration of stock
dividends:
1. Unrestricted Retained Earnings;
2. Board approval;
3. Ratification by the stockholders.
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Q: Why stockholders ratification is
necessary in the declaration of stock
dividends?
A: Because the earnings are capitalized. It is
considered to be a corporate assets.
Q: May the board be compelled to declare
dividends?
A: General Rule: NO.
Exception: Stock corporations are
prohibited from retaining surplus profits in
excess of 100% of their paid-in capital stock.
Exceptions to the Exception:
1. Corporate expansion
2. Pursuant to loan agreement
3. Special circumstances/contingent
liabilities
Q: Are the stock dividends considered as
watered stocks because the stockholder
concerned does not pay anything therefor?
A: NO. The unrestricted retained earnings
are considered to be a consideration thus
dividends received through stocks are not
watered stocks.
*The source of payment is the unrestricted
retained earnings.
Q: Are delinquent stockholders entitled to
receive dividends?
A: YES. But only in terms of cash dividends.
Q: Who are entitled to receive dividends?
A: Stockholders
*In Nielson case, the SC held that dividends
cannot be given to non-stockholders.
*If there is date of record Dividends may
be received by those persons who are
holders of stocks as of date of record.
*If there is no date of record dividends
may be received by those persons who are
holders of stocks as of the declaration.
Q: When the corporation declares stock
dividends, would it likewise create a
creditor-debtor relationship between the
corporation and the stockholder?
A: NO. Stock dividends will not bring about
a creditor-debtor relationship. When it
comes to shareholdings, the one holding
the shares are considered investors; risk-
takers.
Q: Will legal compensation possible to
occur?
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Maria Zarah Villanueva - Castro
A: NO. The parties are not mutually
creditor-debtor of each other. The requisites
under the Civil Code on legal compensation
are not present.
Management Contract
Sec. 44 of the Corporation Code states that:
No corporation shall conclude a
management contract with another
corporation unless such contract shall have
been approved by the board of directors
and by stockholders owning at least the
majority of the outstanding capital stock, or
by at least a majority of the members in the
case of a non-stock corporation, of both the
managing and the managed corporation, at
a meeting duly called for the purpose:
Provided, That 1. Where a stockholder or
stockholders representing the same interest
of both the managing and the managed
corporations own or control more than 1/3
of the total outstanding capital stock
entitled to vote of the managing
corporation; or 2. Where a majority of the
members of the board of directors of the
managing corporation also constitute a
majority of the members of the board of
directors of the managed corporation, then
the management contract must be
approved by the stockholders of the
managed corporation owning at least 2/3 of
the total outstanding capital stock entitled
to vote, or by at least 2/3 of the members in
the case of a non-stock corporation. No
management contract shall be entered into
for a period longer than 5 years for any one
term. The provisions of the next preceding
paragraph shall apply to any contract
whereby a corporation undertakes to
manage or operate all or substantially all of
the business of another corporation,
whether such contracts are called service
contracts, operating agreements or
otherwise: Provided, however, That such
service contracts or operating agreements
which relate to the exploration,
development, exploitation or utilization of
natural resources may be entered into for
such periods as may be provided by the
pertinent laws or regulations.
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Requisite:
General Rule: Majority vote of the OCS
Exception: 2/3 of the OCS
*SECs approval is not necessary
*When the corporation enters into a
management contract, appraisal right is
NOT AVAILABLE to any dissenting
stockholder.
Reason: Sound business policy dictates that
it would be better for the corporation, at
the inception of its operation, to be
managed by a company who has been
experienced in a particular kind of business
if the managed corporation needs the
technical expertise, skills, experiences,
background of another entity.
CORPORATE BY-LAWS:
A. Concept, Use and Nature of By-Laws
By-Laws relatively permanent and continuing
rules of action adopted by the corporation for
its own government and that of the individuals
composing it and those having the direction,
management and control of its affairs, in whole
or in part, in the management and control of its
affairs and activities.
Nature: Regulates internal affairs of the
corporation.
B. By-Laws in relation to Articles of Incorporation
Distinction between By-Laws and Articles of
Incorporation:
By-Laws is a condition subsequent.
Articles of Incorporation is a condition
precedent. Essential for corporate existence.
ARTICLES OF BY-LAWS
INCORPORATION
External affairs Internal Affairs
Affects the status of Does not affect the
existence of the status of the existence
corporation but has impact on the
existence; failure to
submit is a ground for
disenfranchisement
Joint decision of the General Rule: joint
board and decision
stockholders Exception: Delegates
the power to amend
the By-Laws to the
Board
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C. Adoption of By-Laws; Effect of Non-Filing within
the prescribed period
Sec. 46 of the Corporation Code states that:
Every corporation formed under this Code
must, within 1 month after receipt of official
notice of the issuance of its certificate of
incorporation by the SEC, adopt a code of By-
Laws for its government not inconsistent with
this Code. For the adoption of By-Laws by the
corporation the affirmative vote of the
stockholders representing at least a majority of
the outstanding capital stock, or of at least a
majority of the members in case of non-stock
corporations, shall be necessary. The By-Laws
shall be signed by the stockholders or members
voting for them and shall be kept in the
principal office of the corporation, subject to
the inspection of the stockholders or members
during office hours. A copy thereof, duly
certified to by a majority of the directors or
trustees countersigned by the secretary of the
corporation, shall be filed with the SEC which
shall be attached to the original articles of
incorporation. Notwithstanding the provisions
of the preceding paragraph, By-Laws may be
adopted and filed prior to incorporation; in such
case, such By-Laws shall be approved and signed
by all the incorporators and submitted to the
SEC, together with the articles of incorporation.
In all cases, By-Laws shall be effective only upon
the issuance by the SEC of a certification that
the By-Laws are not inconsistent with this Code.
The SEC shall not accept for filing the By-Laws or
any amendment thereto of any bank, banking
institution, building and loan association, trust
company, insurance companies, public utility,
educational institution or other special
corporations governed by special laws, unless
accompanied by a certificate of the appropriate
government agency to the effect that such By-
Laws or amendments are in accordance with
law.
*Submission of By-Law is not a requirement for
acquisition of corporate existence, however, for
the corporation to be able to continue its
corporate existence, the corporation is required
to submit the corporate By-Law.
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*Non-submission of the By-Laws within the
prescribed period allowed by law is a ground for
the dissolution of the corporation.
*In Loyola Grandvillas Homeowners
Association v CA, the SC held that failure to
adopt a set of By-Laws within the prescribed
period, notwithstanding the word used in the
Code, the same would not result to automatic
dissolution of the corporation. The failure to file
by-laws would not, by itself, amount to
dissolution or extinguishment of the corporate
existence.
*Section 46 of the Corporation Code must be
read in conjunction with PD 902-A which
outlines the procedure to be followed before
the franchise/license of a private corporation
may be suspended or revoked.
*Observance of Due Process is necessary.
*In Sawadjaan v CA, the SC held that
meanwhile when the By-Laws is not yet
submitted, the corporation, at that time, and
E. Amendment to By-Laws
the very least, may be considered as a De Facto
Corporation and therefore, its right to exist as
such cannot be inquired into or cannot be
collaterally attacked in a private suit. It is for the
State to initiate a proceeding questioning the
existence, on the ground of its non-submission
of By-Laws, within the prescribed period.
D. Contents of By-Laws; Requisites of a Valid By-
Law Provision
Sec. 47 of the Corporation Code states that:
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 or special meetings of the stockholders
or members; 3. The required quorum in
meetings of stockholders or members and the
manner of voting therein; 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
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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 stock certificates; and 10. Such other
matters as may be necessary for the proper or
convenient transaction of its corporate business
and affairs.
Requisites:
1. It must be consistent with Corporation
Code, other pertinent laws and regulations.
2. It must be consistent with the Articles of
Incorporation.
3. It must be reasonable and not arbitrary or
oppressive.
4. It must not disturb vested rights, impair
contract or property rights of stockholders
or members or create obligations unknown
to law.
Sec. 48 of the Corporation Code provides that:
The board of directors or trustees, by a
majority vote thereof, and the owners of at
least a majority of the outstanding capital stock,
or at least a majority of the members of a non-
stock corporation, at a regular or special
meeting duly called for the purpose, may
amend or repeal any By-Laws or adopt new By-
Laws. The owners of 2/3 of the outstanding
capital stock or 2/3 of the members in a non-
stock corporation may delegate to the board of
directors or trustees the power to amend or
repeal any By-Laws or adopt new By-Laws:
Provided, That any power delegated to the
board of directors or trustees to amend or
repeal any By-Laws or adopt new By-Laws shall
be considered as revoked whenever
stockholders owning or representing a majority
of the outstanding capital stock or a majority of
the members in non-stock corporations, shall so
vote at a regular or special meeting. Whenever
any amendment or new By-Laws are adopted,
such amendment or new By-Laws shall be
attached to the original By-Laws in the office of
the corporation, and a copy thereof, duly
certified under oath by the corporate secretary
and a majority of the directors or trustees, shall
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Maria Zarah Villanueva - Castro

be filed with the SEC the same to be attached to any cause, there is no person authorized to call
the original articles of incorporation and original a meeting, the SEC, upon petition of a
By-Laws. The amended or new By-Laws shall stockholder or member on a showing of good
only be effective upon the issuance by the SEC cause therefor, may issue an order to the
of a certification that the same are not petitioning stockholder or member directing
inconsistent with this Code. him to call a meeting of the corporation by
giving proper notice required by this Code or by
F. By-Laws in relation to Third Parties the by-laws. The petitioning stockholder or
*In China Banking Corporation v CA, the SC
member shall preside thereat until at least a
held that in the absence of evidence that China
majority of the stockholders or members
Bank is aware of the provisions of the By-Laws,
present have been chosen one of their number
China Bank is not bound to observe the
as presiding officer.
provisions of the By-Laws. Hence, China Bank
*Regular meeting of stockholders/members
must be allowed to register the shares in its
shall be held annually on a date fixed in the by-
name.
laws or if not so fixed, on any date in April of
General Rule: Third parties are not affected by
every year. Written notice of regular meetings
the By-Laws.
shall be sent 2 weeks prior to the meeting
Exception: If the third party has actual
knowledge of the provisions of the By-Laws. unless a different period is required by the by-
laws.
CORPORATE MEETINGS: ** Special meeting of stockholders/members
shall be held at any time deemed necessary or
A. Kinds of Corporate Meetings as provided in the by-laws. Written notice shall
Sec. 49 of the Corporation Code provides that:
be sent to all stockholders or members at least
Meetings of directors, trustees, stockholders,
one week or unless otherwise provided in the
or members may be regular or special.
by-laws.
Kinds:
a. Stockholders/Members: Sec. 53 of the Corporation Code provides that:
1. Regular meeting Regular meetings of the board of directors or
2. Special meeting trustees of every corporation shall be held
b. Directors/Trustees: monthly, unless the by-laws provide otherwise.
1. Regular meeting Special meetings of the board of directors or
2. Special meeting
trustees may be held at any time upon the call
Sec. 50 of the Corporation Code provides that:
of the president or as provided in the by-laws.
Regular meetings of stockholders or members
Meetings of directors or trustees of
shall be held annually on a date fixed in the by-
corporations may be held anywhere in or
laws, or if not so fixed, on any date in April of
outside of the Philippines, unless the by-laws
every year as determined by the board of
provide otherwise. Notice of regular or special
directors or trustees: Provided, That written
meetings stating the date, time and place of the
notice of regular meetings shall be sent to all
meeting must be sent to every director or
stockholders or members of record at least 2
trustee at least 1 day prior to the scheduled
weeks prior to the meeting, unless a different
meeting, unless otherwise provided by the by-
period is required by the by-laws. Special
laws. A director or trustee may waive this
meetings of stockholders or members shall be
requirement, either expressly or impliedly.
held at any time deemed necessary or as
*Regular meetings of directors/trustees shall be
provided in the by-laws: Provided, however,
held monthly unless the by-laws provide
That at least 1 week written notice shall be sent
otherwise.
to all stockholders or members, unless
*Special meetings of directors/trustees may be
otherwise provided in the by-laws. Notice of any
held at any time upon the call of the president
meeting may be waived, expressly or impliedly,
or as provided in the by-laws.
by any stockholder or member. Whenever, for
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*Meetings of directors or trustees may be held
anywhere in or outside of the Philippines unless
the by-laws provide otherwise.
*Notice of regular or special meetings stating
the date, time and place of the meeting must be
sent to every director or trustee at least 1 day
prior to the scheduled meeting unless
otherwise provided by the by-laws.
B. Requirements of a Meeting
1. It must be held at the proper place.
2. It must be held at the stated date and at the
appointed time or at a reasonable time
thereafter.
3. It must be called by the proper person.
4. There must be a previous notice.
5. There must be a quorum.
Sec. 51 of the Corporation Code provides that:
Stockholders or members meetings, whether
regular or special, shall be held in the city or
municipality where the principal office of the
corporation is located, and if practicable in the
principal office of the corporation: Provided,
That Metro Manila shall, for purposes of this
section, be considered a city or municipality.
Notice of meetings shall be in writing, and the
time and place thereof stated therein. All
proceedings had and any business transacted at
any meeting of the stockholders or members, if
within the powers or authority of the
C. Right to Vote of Stockholders
corporation, shall be valid even if the meeting
be improperly held or called, provided all the
stockholders or members of the corporation are
present or duly represented at the meeting.
*Applies to both stock and non-stock
corporations.
General Rule: The meeting must be held in the
city or municipality where the principal office is
located.
Exception: Sec. 93 on non-stock corporations,
the By-Laws may provide different venue for
their meeting.
*A casual reading of section 51 would say that a
corporation cannot provide any other place for
the meeting of stockholders. But in case of a
non-stock corporation, Section 93 of the
Corporation provides that the by-laws could
provide any place for the meeting of its
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Maria Zarah Villanueva - Castro
members provided that it is within the
Philippines and proper notice has been given.
Q: Is there a conflict between Section 51 and
Section 93?
A: YES. There is conflict but this conflict may be
reconciled. As a rule, the by-laws may provide a
different place of meeting provided that it is
within the Philippines and notice has been
given. As an exception, if the by-laws is silent of
the place of the meeting, section 51 applies.
Sec. 52 of the Corporation Code provides that:
Unless otherwise provided for in this Code or
in the by-laws, a quorum shall consist of the
stockholders representing a majority of the
outstanding capital stock or a majority of the
members in the case of non-stock
corporations.
General Rule: Majority of the OCS or Majority
of the members
Exception: Unless otherwise provided by the
Code or by the By-Laws.
*In Tan v Sycip, deceased member is not
entitled to vote
Sec. 54 of the Corporation Code provides that:
The president shall preside at all meetings of
the directors or trustees as well as of the
stockholders or members, unless the by-laws
provide otherwise.
Instances when voting right not available
Sec. 6 of the Corporation Code provides
that: Except as provided in the
immediately preceding paragraph, the vote
necessary to approve a particular corporate
act as provided in this Code shall be
deemed to refer only to stocks with voting
rights.
Instances when voting right is not
available:
1. Delinquent shares
2. Treasury shares
3. Fractional shares
4. Escrow shares
Rules on:
1. Delinquent Shares
Sec. 71 of the Corporation Code
provides that: No delinquent stock
shall be voted for or be entitled to vote
or to representation at any
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stockholders meeting, nor shall the
holder thereof be entitled to any of the
rights of a stockholder except the right
to dividends in accordance with the
provisions of this Code, until and unless
he pays the amount due on his
subscription with accrued interest, and
the costs and expenses of
advertisement, if any.
*Delinquency arises upon default in
payment of subscription.
Q: Are they included for quorum and
voting purposes?
A: NO.
Q: Even if there are proxies?
A: YES.
Q: Shares not yet fully paid but not yet
delinquent, are they entitled to vote?
A: YES.
*Delinquent stock is not entitled to vote
and his presence would not be taken for
purposes of quorum.
*The only right remain is the right to
receive dividends subject to the
provision of Section 43.
2. Escrow Shares
*Escrow shares are not entitled to vote
before the fulfillment of the condition
imposed thereon.
3. Unpaid Shares
Sec. 72 of the Corporation Code
provides that: Holders of subscribed
shares not fully paid which are not
delinquent shall have all the rights of a
stockholder.
General Rule: The holder of unpaid
shares can exercise the right to vote.
Exception: If it is provided in the
subscription contract that such right
cannot be exercised until the
subscription is fully paid.
4. Sequestered Shares
Q: What is the reason for sequestration
process?
A: For investigative purposes; To avoid
wastage dissipation of assets.
Q: Is PCGG authorized to vote for the
sequestered shares?
A: General Rule: No. PCGG cannot vote
for the sequestered shares because
being a conservator/administrator, it
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Maria Zarah Villanueva - Castro
should only perform acts of
administration and not acts of
ownership.
Exception: If there is a strong evidence
that indeed the shares have been
purchased through public funds.
Requisites:
1. Strong evidence or prima facie
evidence that the shares are ill-
gotten.
2. There is an imminent danger that
the shares will be dissipated.
Case: Transmiddle East v CA
Q: During the pendency of
sequestration process, are the
sequestered shares included for
quorum purposes?
A: General Rule: YES.
Q: Who can vote them?
A: General Rule: Stockholder of record.
*In Republic of the Philippines v
COCOFED, the SC held that there is a
prima facie evidence that the shares are
purchased with the use of public funds.
5. Pledgor, Mortgagor or Administrator of
Shares
Sec. 55 of the Corporation Code
provides that: In case of pledged or
mortgaged shares in stock corporations,
the pledgor or mortgagor shall have the
right to attend and vote at meetings of
stockholders, unless 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.
Q: Can the pledgee/mortgagee exercise
the right to vote?
A: General Rule: No. The right to vote
remains to the owner thus, it is the
pledgor/mortgagor that can exercise it.
Exception: If there is an agreement that
the pledgee/mortgagee can exercise the
right to vote.
Case: Calapatia
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*Administrator/executor/heirs have the
right to vote even without prior proxy.
But the SEC requires them to submit
letters of appointment or documents
showing that he has been duly
instituted as executor/administrator of
the deceased.
6. Shares Jointly Owned
Sec. 56 of the Corporation Code
provides that: In case of shares of stock
owned jointly by two or more persons,
in order to vote the same, the consent
of all the co-owners shall be necessary,
unless there is a written proxy, signed
by all the co-owners, authorizing one or
some of them or any other person to
vote such share or shares: Provided,
That when the shares are owned in an
and/or capacity by the holders
thereof, any one of the joint owners can
vote said shares or appoint a proxy
therefor.
D. Concept of Proxy and Voting Trust Agreement
Proxy is a written authorization given by one
person to another so that the second person
can act for the first.
*Proxy is a representative.
*Relationship: Principal-Agent.
*Proxy is authorized to vote and also authorized
to be present in a meeting.
Functions: For quorum purposes; for voting
purposes.
*In Board meeting, proxy is not allowed (Sec. 25
of the Corporation Code).
Sec. 58 of the Corporation Code provides that:
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 5 years at any
one time.
Requisites:
1. Must be in writing
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2. Filed before the scheduled meeting; under
the SEC rule, 10 days before the scheduled
meeting
*Proxy ensures presence of a quorum and also
approval of corporate acts.
General Rule: Proxy is revocable.
Exception: If proxy is coupled with interest.
Ways to revoke proxy:
1. By execution of subsequent proxy.
2. If the stockholder concerned would appear
in the scheduled meeting.
Voting Trust Agreement is 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
stockholders, which are transferable like stock
certificates, subject however, to the trust
agreement.
PROXY VOTING TRUST
AGREEMENT
The stockholder The stockholder ceases
remains the to be a stockholder of
stockholder of record record
Revocable Irrevocable
General Rule: 5 years
Exception: If coupled
with interest
*The transfer includes the transfer of legal title.
Sec. 59 of the Corporation Code provides that:
One or more stockholders of a stock
corporation may create a voting trust for the
purpose of conferring upon a trustee or trustees
the right to vote and other rights pertaining to
the shares for a period not exceeding 5 years at
any time: Provided, That in the case of a voting
trust specifically required as a condition in a
loan agreement, said voting trust may be for a
period exceeding 5 years but shall automatically
expire upon full payment of the loan. A voting
trust agreement must be in writing and
notarized, and shall specify the terms and
conditions thereof. A certified copy of such
agreement shall be filed with the corporation
and with the SEC; otherwise, said agreement is
ineffective and unenforceable. The certificate or
certificates of stock covered by the voting trust
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agreement shall be cancelled and new ones
shall be issued in the name of the trustee or
trustees stating that they are issued pursuant to
E. Derivative Suit; Concept and Requisites
said agreement. In the books of the corporation,
it shall be noted that the transfer in the name of
the trustee or trustees is made pursuant to said
voting trust agreement. The trustee or trustees
shall execute and deliver to the transferors
voting trust certificates, which shall be
transferable in the same manner and with the
same effect as certificates of stock. The voting
trust agreement filed with the corporation shall
be subject to examination by any stockholder of
the corporation in the same manner as any
other corporate book or record: Provided, That
both the transferor and the trustee or trustees
may exercise the right of inspection of all
corporate books and records in accordance with
the provisions of this Code. Any other
stockholder may transfer his shares to the same
trustee or trustees upon the terms and
conditions stated in the voting trust agreement,
and thereupon shall be bound by all the
provisions of said agreement. No voting trust
agreement shall be entered into for the purpose
of circumventing the law against monopolies
and illegal combinations in restraint of trade or
used for purposes of fraud. Unless expressly
renewed, all rights granted in a voting trust
agreement shall automatically expire at the end
of the agreed period, and the voting trust
certificates as well as the certificates of stock in
the name of the trustee or trustees shall
thereby be deemed cancelled and new
certificates of stock shall be reissued in the
name of the transferors. The voting trustee or
trustees may vote by proxy unless the
agreement provides otherwise.
Consequence: The stockholder entering into a
voting trust agreement ceases to be a
stockholder of record.
*In case of Lee v CA, the SC held that the
stockholder concerned loses his legal title to the
shares so that if the stockholder is, at the same
time, a director of the corporation,
automatically he is disqualified to continue
performing the duties of a director because the
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law requires each and every director to have
legal, not beneficial title to at least one share.
Derivative Suit is a suit brought by any
stockholder, usually a minority shareholder, to
redress a wrong committed against the
corporation whenever the responsible officers
refuse to take any action thereon or are the very
person to be sued.
*This prerogative is developed through
jurisprudence.
*This is expressly mandated by Sec. 31 of the
Corporation Code.
Q: Why derivative?
A: From the word derive. The one bringing the
suit derives the cause of action from the
corporation.
Q: Who brings the suit?
A: Any stockholder/member usually minority
stockholder.
Q: Whose cause of action?
A: It is the corporations cause of action.
Q: Are we in violation of the Code?
A: No. Because the power to sue lies on the
board thus when the board refuses to take
action in order to protect the corporation
derivative suit may be allowed.
Compelling Reason: Inaction of the officers.
Failure to discharge their responsibilities.
Requisites:
1. The stockholder bringing the suit must be
one of record as of the time the cause of
action accrues as well as of the time the
action is brought unless the cause of action
is a continuing offer.
*The stockholder must implead the real
party in interest, i.e. the corporation.
*In Chua v CA, the SC held that the
corporation must be impleaded since it is
the real party in interest.
2. The action must be named under the
corporations name
3. General Rule: The stockholder bringing the
suit must have exhausted intra-corporate
remedies within the corporation.
Exception: If the very person to be sued is
the responsible officers themselves.
**This is a condition precedent.
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4. The suit is not intended to harass the
defendant, not a nuisance or harassment
suit.
5. Appraisal right must not be an available
remedy.
Individual suit is a suit filed by the stockholder
because his personal right has been violated.
The cause of action is personal to the
stockholder. The party injured is the stockholder
himself.
Representative suit is a suit filed by a group of
stockholders that suffered common injury.
SUBSCRIPTION CONTRACT:
A. Ways to become a Stockholder of a Corporation
1. Subscription contract with the corporation.
2. Purchase or acquisition of shares from
existing stockholders.
3. Purchase of treasury shares from the
D. Consideration for the Issuance of Shares
corporation.
*All of them involve shareholdings.
*Subscription is unique because it involves
unissued shares.
B. Concept of Subscription Contract
Subscription Contract is, under Sec. 60 of the
Corporation Code, any contract for the
acquisition of unissued stock in an existing
corporation or a corporation still to be formed
shall be deemed a subscription within the
meaning of this Title, notwithstanding the fact
that the parties refer to it as a purchase or some
other contract.
*This is strictly regulated by the Corporation
Code.
C. Kinds of Subscription
1. Pre-incorporation subscription one
entered into before incorporation.
Sec. 61 of the Corporation Code provides
that: A subscription for shares of stock of a
corporation still to be formed shall be
irrevocable for a period of at least 6 months
from the date of subscription, unless all of
the other subscribers consent to the
revocation, or unless the incorporation of
said corporation fails to materialize within
said period or within a longer period as may
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be stipulated in the contract of subscription:
Provided, That no pre-incorporation
subscription may be revoked after the
submission of the articles of incorporation
to the SEC.
*Contracts between the subscribers.
2 Fold Characteristics:
a. It is a contract between subscribers.
b. May be regarded as continuing offer on
the part of the subscriber concerned
which the corporation may accept upon
acquisition of juridical personality.
Reason: The corporation is not yet in
existence.
2. Post incorporation subscription one
entered into after the incorporation for the
acquisition of unissued stock.
*Contracts between the subscribers and the
corporation.
*Creates a creditor-debtor relationship.
Sec. 62 of the Corporation Code provides that:
Stocks shall not be issued for a consideration
less than the par or issued price thereof.
Consideration for the issuance of stock may be
any or a combination of any two or more of the
following: 1. Actual cash paid to the
corporation; 2. Property, tangible or intangible,
actually received by the corporation and
necessary or convenient for its use and lawful
purposes at a fair valuation equal to the par or
issued value of the stock issued; 3. Labor
performed for or services actually rendered to
the corporation; 4. Previously incurred
indebtedness of the corporation; 5. Amounts
transferred from unrestricted retained earnings
to stated capital; and 6. Outstanding shares
exchanged for stocks in the event of
reclassification of conversion. Where the
consideration is other than actual cash, or
consists of intangible property such as patents
of copyrights, the valuation thereof shall initially
be determined by the incorporators or the
board of directors, subject to the approval by
the SEC. Shares of stock shall not be issued in
exchange for promissory notes or future service.
The same considerations provided for in this
section, insofar as they may be applicable, may
be used for the issuance of bonds by the
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corporation. The issued price of no-par value
shares may be fixed in the articles of
incorporation or by the board of directors
pursuant to authority conferred upon it by the
articles of incorporation or the by-laws, or in the
absence thereof, by the stockholders
representing at least a majority of the
outstanding capital stock at a meeting duly
called for the purpose.
Valid considerations for the subscription
agreements:
1. Cash
2. Property
3. Labor or services actually rendered to the
corporation
4. Prior corporate obligations
5. Amounts transferred from unrestricted
retained earnings to stated capital
6. Outstanding shares in exchange for stocks in
the event of reclassification or conversion.
E. Payment of Subscription
Q When payment of the subscription is
made?
A: Look into the subscription agreement. If
subscription agreement is silent as to when the
amount of subscription to be paid, the board of
directors may call on all the unpaid subscribers
to pay the remaining balance of their
subscription.
Remedies to enforce payment of
subscription
1. By Extra-judicial sale at public auction.
2. By judicial action.
3. Collection from cash dividends and
withholding of stock dividends.
When shares are considered delinquent
Sec. 67 of the Corporation Code provides
that: Subject to the provisions of the
contract of subscription, the board of
directors of any stock corporation may at
any time declare due and payable to the
corporation unpaid subscriptions to the
capital stock and may collect the same or
such percentage thereof, in either case with
accrued interest, if any, as it may deem
necessary. Payment of any unpaid
subscription or any percentage thereof,
together with the interest accrued, if any,
shall be made on the date specified in the
contract of subscription or on the date
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stated in the call made by the board. Failure
to pay on such date shall render the entire
balance due and payable and shall make the
stockholder liable for interest at the legal
rate on such balance, unless a different rate
of interest is provided in the by-laws,
computed from such date until full
payment. If within 30 days from the said
date no payment is made, all stocks covered
by said subscription shall thereupon
become delinquent and shall be subject to
sale as hereinafter provided, unless the
board of directors orders otherwise.
*If there was no date as to payment of
subscription stated in the subscription
agreement, the board may call on all the
unpaid subscribers to pay the remaining
balance of their subscription. Failure to pay
within 30 days from the said date, all stocks
covered by said subscription shall
thereupon become delinquent and shall be
subject to sale unless the board of directors
orders otherwise.
F. Certificate of Stock
Certificate of Stock is a written evidence of the
shares of stock but it is not the share itself.
*Does not represent credit.
Q: How important is a stock certificate?
A: It is an evidence of ownership of stocks.
Q: Who issue stock certificate?
A: Stock certificates must be signed by the
president or vice-president, countersigned by
the secretary or assistant secretary.
Q: When certificate of stock may be issued?
A: Sec. 64 of the Corporation Code states that:
No certificate of stock shall be issued to a
subscriber until the full amount of his
subscription together with interest and
expenses (in case of delinquent shares), if any is
due, has been paid.
Doctrine of Indivisibility of Subscription
Contract
Doctrine of Indivisibility of Subscription
Contract: Failure to pay any of the
installments due would necessarily affect all
the other installments because the
subscription is to be treated as one, whole,
entire, indivisible contract. Upon default of
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payment on any of the installment results to
entire subscription due and demandable.
*The Certificate of Stock cannot be divided
into portions.
*No certificate of stock shall be issued until
the full payment of the subscription.
*The corporation has an automatic lien over
the shares.
Q: What will happen to the payment
already made by the subscriber?
A: The payment partially made shall be
applied proportionately to all the shares
covered by the subscription.
Example:
P10 per share; payment made is P6000
covering 1000 shares. The P6000 shall be
allocated equally to all shares. P6 per share
has been paid. P4 per share is the liability.
Certificate of Stock, quasi-negotiable
Q: can the stock certificate be treated as
negotiable instrument under NIL?
A: No. The requisites are not complied
with. There is no engagement to pay in sum
certain in money.
*Negotiable instrument represents credit.
Creditor-debtor relationship arises.
Q: Are certificates of stock negotiable?
A: They are negotiable in certain extent.
That is why they are quasi-negotiable.
*The title over the share can be assigned,
transferred by indorsement and delivery.
*Due course holding is not applicable.
G. Transfer of Shares
If represented by a certificate, the following
must be strictly complied with:
1. Delivery of the certificate;
2. Indorsement by the owner or his agent;
3. To be valid to third parties, the transfer must
be recorded in the books of the corporation.
*If not represented by the certificate, the shares
may be transferred by means of a deed of
assignment and such is duly recorded in the
books of the corporation.
*To make the transfer binding to the
corporation and third person, the transfer must
be recorded in the stock and transfer book of
the corporation.
Q: Who is the owner of the share?
A: The stockholder of record.
H. Lost and Destroyed Certificate of Stock
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Sec. 73 of the Corporation Code provides that:
The following procedure shall be followed for
the issuance by a corporation of new
certificates of stock in lieu of those which have
been lost, stolen or destroyed: 1. The registered
owner of a certificate of stock in a corporation
or his legal representative shall file with the
corporation an affidavit in triplicate setting
forth, if possible, the circumstances as to how
the certificate was lost, stolen or destroyed, the
number of shares represented by such
certificate, the serial number of the certificate
and the name of the corporation which issued
the same. He shall also submit such other
information and evidence which he may deem
necessary; 2. After verifying the affidavit and
other information and evidence with the books
of the corporation, said corporation shall
publish a notice in a newspaper of general
circulation published in the place where the
corporation has its principal office, once a week
for 3 consecutive weeks at the expense of the
registered owner of the certificate of stock
which has been lost, stolen or destroyed. The
notice shall state the name of said corporation,
the name of the registered owner and the serial
number of said certificate, and the number of
shares represented by such certificate, and that
after the expiration of 1 year from the date of
the last publication, if no contest has been
presented to said corporation regarding said
certificate of stock, the right to make such
contest shall be barred and said corporation
shall cancel in its books the certificate of stock
which has been lost, stolen or destroyed and
issue in lieu thereof new certificate of stock,
unless the registered owner files a bond or
other security in lieu thereof as may be
required, effective for a period of 1 year, for
such amount and in such form and with such
sureties as may be satisfactory to the board of
directors, in which case a new certificate may be
issued even before the expiration of the 1 year
period provided herein: Provided, That if a
contest has been presented to said corporation
or if an action is pending in court regarding the
ownership of said certificate of stock which has
been lost, stolen or destroyed, the issuance of
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the new certificate of stock in lieu thereof shall
be suspended until the final decision by the
court regarding the ownership of said certificate
of stock which has been lost, stolen or
destroyed. Except in case of fraud, bad faith, or
negligence on the part of the corporation and
its officers, no action may be brought against
any corporation which shall have issued
certificate of stock in lieu of those lost, stolen or
destroyed pursuant to the procedure above-
described.
CORPORATE BOOKS AND RECORDS:
A. Books required to be kept by a Corporation
Sec. 74 of the Corporation Code provides that:
Every corporation shall keep and carefully
preserve at its principal office a record of all
business transactions and minutes of all
meetings of stockholders or members, or of the
board of directors or trustees, in which shall be
set forth in detail the time and place of holding
the meeting, how authorized, the notice given,
whether the meeting was regular or special, if
special its object, those present and absent, and
every act done or ordered done at the meeting.
Upon the demand of any director, trustee,
stockholder or member, the time when any
director, trustee, stockholder or member
entered or left the meeting must be noted in
the minutes; and on a similar demand, the yeas
and nays must be taken on any motion or
proposition, and a record thereof carefully
made. The protest of any director, trustee,
stockholder or member on any action or
proposed action must be recorded in full on his
demand. The records of all business
transactions of the corporation and the minutes
of any meetings shall be open to inspection by
any director, trustee, stockholder or member of
the corporation at reasonable hours on business
days and he may demand, writing, for a copy of
excerpts from said records or minutes, at his
expense. Any officer or agent of the corporation
who shall refuse to allow any director, trustee,
stockholder or member of the corporation to
examine and copy excerpts from its records or
minutes, in accordance with the provisions of
this Code, shall be liable to such director,
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Maria Zarah Villanueva - Castro
trustee, stockholder or member for damages,
and in addition, shall be guilty of an offense
which shall be punishable under Section 144 of
this Code: Provided, That if such refusal is made
pursuant to a resolution or order of the board of
directors or trustees, the liability under this
section for such action shall be imposed upon
the directors or trustees who voted for such
refusal: and Provided, further, That it shall be a
defense to any action under this section that
the person demanding to examine and copy
excerpts from the corporations records and
minutes has improperly used any information
secured through any prior examination of the
records or minutes of such corporation or of any
other corporation, or was not acting in good
faith or for a legitimate purpose in making his
demand. Stock corporations must also keep a
book to be known as the stock and transfer
book, in which must be kept a record of all
stocks in the names of the stockholders
alphabetically arranged; the installments paid
and unpaid on all stock for which subscription
has been made, and the date of payment of any
installment; a statement of every alienation,
sale or transfer of stock made, the date thereof,
and by and to whom made; and 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. No stock transfer agent or one engaged
principally in the business of registering
transfers of stocks in behalf of a stock
corporation shall be allowed to operate in the
Philippines unless he secures a license from the
SEC and pays a fee as may be fixed by the
Commission, which shall be renewable annually:
Provided, That 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 herein
provided, shall be applicable.
*Keeping of books and records are mandatory.
Books required to be kept:
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1. Book of minutes reflects the decisions and
actions of the Board of
Directors/Stockholders.
2. Record of all business transactions
3. Stock and Transfer Book/Membership Book
4. Books of Proceedings
B. Right to Inspect Corporate Books
Basis and Extent of the Right of Inspection
Q: Is the keeping of these books
mandatory?
A: YES. Section 144 of the Corporation Code
provides penalty for any violation of the
provision of the Code.
Rationale: Right of inspection would be
futile. Right of inspection would not be
exercised.
Limitations on the Right of Inspection
1. The books and records shall be open to
inspection at reasonable hours on
business days.
2. The books and records shall not be
improperly used any information
secured through any prior examination
of the books or records.
3. The stockholders demand must be in
good faith or for a legitimate purpose.
*Inspection can be done personally or
through agent.
Remedies to Enforce Right of Inspection
*In case of refusal to exercise the right of
inspection, the stockholder concerned may
file an action for mandamus before the RTC.
*Can also claim damages.
MERGER AND CONSOLIDATION:
A. Concept of Merger and Consolidation
Merger is one where a corporation absorbs the
other and remains in existence while the others
are dissolved.
*There is a continuous flow of juridical
personality.
Examples:
A+B=B
A+B+C=C
A+B+C=A
A+B+C=B
Consolidation is one where a new corporation is
created, and consolidating corporations are
extinguished.
Examples:
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Maria Zarah Villanueva - Castro
A+B=C
A+B+C=D
A + B + C = ABC
A + B + C = XYZ
B. Requisites of and Procedure for Merger and
Consolidation
1. Approval by majority vote of the Board of
Directors of each corporation.
2. Approval of the stockholders of each
corporation representing 2/3 of the
outstanding capital stock.
3. Approval of SEC
Cases: Associated Bank v CA; Polyan v CA
Procedure:
1. The Board of each corporation shall draw up
a plan of merger/consolidation.
2. The plan of merger or consolidation shall be
approved by majority vote of each board of
the concerned corporations at separate
meetings.
3. The plan of merger/consolidation shall be
approved by the majority vote of the 2/3 of
the shareholders of the outstanding capital
stock or members in case of a non-stock
corporation.
4. Articles of Merger/Consolidation shall be
executed by each of the constituent
corporators, signed by the President or
Vice-President and certified by the secretary
or assistant secretary.
5. Four copies of the Articles of Merger or
Consolidation together with favorable
recommendation of a pertinent government
agency in certain cases shall be submitted
to the SEC for approval.
6. The SEC shall issue a certificate or merger if
it is satisfied that the merger or
consolidation of the corporations concerned
is not inconsistent with the provisions of
this Code and existing laws.
C. Effects of Merger or Consolidation
1. All property, real or personal, and all
receivables due to, and all other interest of
each constituent corporation, shall be
deemed transferred to and vested in such
surviving or consolidated corporation
without further act or deed.
2. The surviving or consolidated corporation
shall be responsible for all the liabilities and
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obligations of each of the constituent
corporations.
3. Any claim, action or proceeding pending by
or against any of the constituent
corporations may be prosecuted by or
against the surviving or consolidated
corporations.
4. The rights of the creditors or lien upon the
property of any of each constituent
corporation shall not be impaired by such
merger or consolidation.
5. Dissolution of other corporation leaving the
surviving or consolidated corporation exists.
Remedy of the dissenting stockholder: The
dissenting stockholder may exercise his
appraisal right.
RIGHT OF APPRAISAL:
A. Concept of Appraisal Right
Appraisal Right is the right to withdraw from
the corporation and demand payment of the
fair value of his shares after dissenting from
certain corporate acts involving fundamental
changes in corporate structure.
*Demanding for the reasonable return of
investment.
*Stockholders cannot exercise this right at his
pleasure.
Requisites:
1. The Stockholder has dissented
2. Corporate change must have been approved
by the SEC.
*Any changes that affect the stockholders
right.
*Any changes that concern the
corporations existence.
*Corporate changes that appraisal right can
be availed of.
3. There must have an unrestricted retained
earnings,
*It is not a matter of right.
Reason: If it is a matter of right it shall lead to
the diminution or depletion of corporate assets
which is violative of the Trust Fund Doctrine.
B. Instances of Appraisal Right
Sec. 81 of the Corporation Code provides that:
Any stockholder of a corporation shall have the
right to dissent and demand payment of the fair
value of his shares in the following instances: 1.
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Maria Zarah Villanueva - Castro
In case any amendment to the articles of
incorporation has the effect of changing or
restricting the rights of any stockholder or class
of shares, or of authorizing preferences in any
respect superior to those of outstanding shares
of any class, or of extending or shortening the
term of corporate existence; 2. In case of sale,
lease, exchange, transfer, mortgage, pledge or
other disposition of all or substantially all of the
corporate property and assets as provided in
the Code; and 3. In case of merger or
consolidation.
C. Requirements for a Valid Exercise of Appraisal
Right
Sec. 82 of the Corporation Code provides that:
The appraisal right may be exercised by any
stockholder who shall have voted against the
proposed corporate action, by making a written
demand on the corporation within 30 days after
the date on which the vote was taken for
payment of the fair value of his shares:
Provided, That failure to make the demand
within such period shall be deemed a waiver of
the appraisal right. If the proposed corporate
action is implemented or affected, the
corporation shall pay to such stockholder, upon
surrender of the certificate or certificates of
stock representing his shares, the fair value
thereof as of the day prior to the date on which
the vote was taken, excluding any appreciation
or depreciation in anticipation of such corporate
action. If within a period of 60 days from the
date the corporate action was approved by the
stockholders, the withdrawing stockholder and
the corporation cannot agree on the fair value
of the shares, it shall be determined and
appraised by 3 disinterested persons, one of
whom shall be named by the stockholder,
another by the corporation, and the third by the
two thus chosen. The findings of the majority of
the appraisers shall be final, and their award
shall be paid by the corporation within 30 days
after such award is made: Provided, That no
payment shall be made to any dissenting
stockholder unless the corporation has
unrestricted retained earnings in its books to
cover such payment: and Provided, further, That
upon payment by the corporation of the agreed
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or awarded price, the stockholder shall
forthwith transfer his shares to the
corporation.
Requisites:
1. Any of the instances set forth by law must
be present.
2. Dissenting stockholder must have voted
against the proposed action.
*Abstaining stockholder cannot claim or
exercise his appraisal right.
3. Demand for payment must be made within
30 days from the date vote is taken thereon.
Failure to make demand shall be deemed a
waiver.
4. Price must be based on fair value as of day
prior to date on which vote was taken
5. Submission by withdrawing stockholder of
his shares to the corporation for notation of
being a dissenting stockholder within 10
days from written demand.
6. Payment must be made only when the
corporation has unrestricted retained
earnings in its books.
7. Stockholder must transfer his shares to the
corporation upon payment by the
corporation.
D. Effects of Exercising Appraisal Right
Sec. 83 of the Corporation Code provides that:
From the time of demand for payment of the
fair value of a stockholders shares until either
the abandonment of the corporate action
involved or the purchase of the said shares by
the corporation, all rights accruing to such
shares, including voting and dividend rights,
shall be suspended in accordance with the
provisions of this Code, except the right of such
stockholder to receive payment of the fair value
thereof: Provided, That if the dissenting
stockholder is not paid the value of his shares
within 30 days after the award, his voting and
dividend rights shall immediately be restored.
Effects:
1. All rights accruing to such shares shall be
suspended from the time of demand for
payment of the fair value of the shares until
either the abandonment of the corporate
action.
2. The dissenting stockholder shall be entitled
to receive payment of the fair value of his
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Corporation Code
Maria Zarah Villanueva - Castro
shares as agreed upon between him and
the corporation or as determined by the
appraisers chosen by them.
*Sec. 86. The dissenting stock can be sold
during the pendency of its payment.
Remedy in case appraisal right cannot be
exercised: Dispose the shareholdings.
NON-STOCK CORPORATIONS:
A. Definition and Purposes of a Non-Stock
Corporation
Sec. 87 of the Corporation Code states that:
For the purposes of this Code, a non-stock is
one where no part of its income is distributable
as dividends to its members, trustees, or
officers, subject to the provisions of this Code
on dissolution: Provided, That any profit which a
non-stock corporation may obtain as an incident
to its operations shall, whenever necessary or
proper, be used for the furtherance of the
purpose or purposes for which the corporation
was organized, subject to the provisions of this
Title. The provisions governing stock
corporations, when pertinent, shall be
applicable to non-stock corporations, except as
may be covered by specific provisions of this
Title.
*Sec. 87 should be read in harmony with Sec.
94.
*A Non-stock corporation is not precluded from
engaging in profit-business related.
Sec. 88 of the Corporation Code provides that:
Non-stock corporations 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,
subject to the special provisions of this Title
governing particular classes of non-stock
corporations.
*The purpose of a non-stock corporation is
related to public welfare.
B. Distinguished from Stock Corporation
Non- stock Stock Corporation
Corporation
Public welfare For profit
Board of Trustees Board of directors
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Generally, the term of 1 year subject to hold- provide for the desired voting rights of
office of trustees is 3 over principle members including the number of votes.
years Sec. 90 of the Corporation Code provides that:
By-laws can provide City or municipality Membership in a non-stock corporation and all
for a different venue where the principal
rights arising therefrom are personal and non-
as long as it is within office is located
the Philippines transferable, unless the articles of incorporation
Member may be Proxy is allowed or the by-laws otherwise provide.
deprived of their right General Rule: Membership is non-transferable.
to designate proxies by Exception: If the Articles of Incorporation or the
provisions in the By-laws provide otherwise.
articles of Sec. 91 of the Corporation Code provides that:
incorporation or by-
Membership shall be terminated in the
laws
Reason: To promote manner and for the causes provided in the
camaraderie, articles of incorporation or the by-laws.
togetherness, unity Termination of membership shall have the effect
and familiarity. of extinguishing all rights of a member in the
Generally, members Election is vested upon corporation or in its property, unless otherwise
could directly elect Board of Directors provided in the articles of incorporation or the
officers. Except unless
by-laws.
AOI provides
otherwise. Rules on Place of Meeting:
General Rule: Sec. 51
Exception: Sec. 93
C. Membership in a Non-Stock Corporation
D. Rule on Distribution of Assets
Sec. 89 of the Corporation Code provides that: Sec. 94 of the Corporation Code provides that:
The right of the membership of any class or In case dissolution of a non-stock corporation
classes to vote may be limited, broadened or in accordance with the provisions of this Code,
denied to the extent specified in the articles of its assets shall be applied and distributed as
incorporation or the by-laws. Unless so limited, follows: 1. All liabilities and obligations of the
broadened or denied, each member, regardless corporation shall be paid, satisfied and
of class, shall be entitled to one vote. Unless discharged, or adequate provision shall be made
otherwise provided in the articles of therefor; 2. Assets held by the corporation upon
incorporation of the by-laws, a member may a condition requiring return, transfer or
vote by proxy in accordance with the provisions conveyance, and which condition occurs by
of this Code. Voting by mail or other similar reason of the dissolution, shall be returned,
means by members of non-stock corporations transferred or conveyed in accordance with
may be authorized by the by-laws of non-stock such requirements; 3. Assets received and held
corporations with the approval of, and under by the corporation subject to limitations
such conditions which may be prescribed by, the permitting their use only for charitable,
SEC. religious, benevolent, educational or similar
General Rule: Sec. 58 purposes, but not held upon a condition
Exception: Sec. 89. This provision allows denial requiring return, transfer or conveyance by
of proxy. reason of the dissolution, shall be transferred or
Reason: To promote camaraderie, togetherness, conveyed to one or more corporations, societies
unity and familiarity. or organizations engaged in activities in the
*A member is entitled to 1 vote. However, such Philippines substantially similar to those of the
right may be limited, broadened or denied in dissolving corporation according to a plan of
the Articles of Incorporation or By-Laws. Thus, distribution adopted pursuant to this Chapter;
the By-laws of a non-stock corporation may 4. Assets other than those mentioned in the
38

preceding paragraphs, if any, shall be
distributed in accordance with the provisions of
the articles of incorporation or the by-laws, to
the extent that the articles of incorporation or
the by-laws, determine the distributive rights of
members, or any class or classes of members, or
provide for distribution; and 5. In any other
case, assets may be distributed to such persons,
societies, organizations or corporations,
whether or not organized for profit, as may be
specified in a plan of distribution adopted
pursuant to this Chapter.
Order of distribution:
1. All its creditors shall be paid;
2. Assets held subject to return on dissolution,
shall be delivered back to their givers;
3. Assets held for charitable, religious
purposes, etc., without a condition for their
return on dissolution, shall be conveyed to
one or more organizations engaged in
similar activities as dissolved corporation;
and
4. All other assets shall be distributed to
members, as provided for in the Articles or
By-Laws.
Sec. 95 of the Corporation Code provides that:
A plan providing for the distribution of assets,
not inconsistent with the provisions of this Title,
may be adopted by a non-stock corporation in
the process of dissolution in the following
manner: The board of trustees shall, by majority
vote, adopt a resolution recommending a plan
of distribution and directing the submission
thereof to a vote at a regular or special meeting
of members having voting rights. Written notice
setting forth the proposed plan of distribution
or a summary thereof and the date, time and
place of such meeting shall be given to each
member entitled to vote, within the time and in
the manner provided in this Code for the giving
of notice of meetings to members. Such plan of
distribution shall be adopted upon approval of
at least 2/3 of the members having voting rights
present or represented by proxy at such
meeting.
Q: Would it be possible for a non-stock
corporation to be converted into a stock
corporation by mere amendment of the Articles
of Incorporation?
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Corporation Code
Maria Zarah Villanueva - Castro
A: NO. Because it would violate Section 87 of
the Corporation Code which prohibits
distribution of income as dividends to members.
Reason: Fraudulent to donors
Q: Can a stock corporation be converted to a
non-stock corporation by mere amendment of
the Articles of Incorporation?
A: YES.
Requirements:
1. Approval of 2/3 of the members
2. Approval of the SEC
Q: What was relinquished?
A: Proprietary rights.
*Appraisal right is available.
CLOSE CORPORATIONS:
A. Concept; Distinguished from Open Corporations
Sec. 96 of the Corporation Code states that: A
corporation, within the meaning of this Code, is
one whose articles of incorporation provide
that: (1) All the corporations issued stock of all
classes, exclusive of treasury shares, shall be
held of record by not more than a specified
number of persons, not exceeding 20; (2) all the
issued stock of all classes shall be subject to one
or more specified restrictions on transfer
permitted by this Title; and (3) The corporation
shall not list in any stock exchange or make any
public offering of any of its stock of any class.
Notwithstanding the foregoing, a corporation
shall not be deemed a close corporation when
at least 2/3 of its voting stock or voting rights is
owned or controlled by another corporation
which is not a close corporation within the
meaning of this Code. Any corporation may be
incorporated as a close corporation, except
mining or oil companies, stock exchanges,
banks, insurance companies, public utilities,
educational institutions and corporations
declared to be vested with public interest in
accordance with the provisions of this Code.
The provisions of this Title shall primarily govern
close corporations: Provided, That the
provisions of other Titles of this Code shall apply
suppletorily except insofar as this Title
otherwise provides.
*Whether open or close corporation depends
on its charter.
Case: San Juan Structural
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The following must be stated in the Articles of exceptions found in exceptions unless
Incorporation: Section 39 of the denied in the articles
1. Membership is limited to 20 Corporation Code
2. Transfer or disposition of shares is subject The appraisal right The appraisal right
to specified restrictions may be exercised by a may be exercised and
3. Prohibition against offering to the public of stockholder only in the compelled against the
the shares or listing in the stock exchange. cases provided in corporation by a
General Rule: Any corporation may be Sections 81 and 42 of stockholder for any
the Corporation Code reason
incorporated as close corporation.
Except as regards In case of an
Exceptions:
redeemable shares, arbitration of an
1. Mining or oil companies
the purchase by the intracorporate
2. Stock exchanges
corporation of its own deadlock by the SEC,
3. Banks
stock must always be the corporation may
4. Insurance companies
made from the be ordered to
5. Public utilities
unrestricted retained purchase its own
6. Educational institutions
earnings shares from the
7. Corporations declared to be vested with
stockholders
public interest regardless of the
availability of
Distinctions from Open Corporations:
unrestricted retained
earnings
Open Corporation Close Corporation
Arbitration of Arbitration of
Its articles of Its articles must
intracorporate intracorporate
incorporation need contain the special
deadlock by the SEC is deadlock by the SEC is
only contain the matters prescribed by
not a remedy in case an available remedy in
general matters Section 97 aside from
the directors or case the directors or
enumerated in Section the general matters in
stockholders are so stockholders are so
14 of the Corporation Section 14. Failure to
divided respecting the divided respecting the
Code do so precludes a de
management of the management of the
jure close corporation
corporation. corporation.
status
Its status as an 2/3 of its voting stock
ordinary stock or voting rights must
*In San Juan Structural Steel Fabricators v CA,
corporation is not not be owned or
the SC held that the circumstance that around
affected by the controlled by another
ownership of its voting corporation which is 99.86% of the total share holding of petitioner
stock or voting rights not a close corporation belongs to respondent would not justify
Its articles cannot Its articles may classify classification of the corporation as close.
classify its directors its directors
Business of the Business of the B. Permissive Provisions in the Articles of
corporation is corporation may be Incorporation
managed by the board managed by the Sec. 97 of the Corporation Code provides that:
of directors stockholders if the The articles of incorporation of a close
articles so provide, but corporation may provide: 1. For a classification
they are liable as
of shares or rights and the qualifications for
directors
owning or holding the same and restrictions on
The corporate officers Its articles may
and employees are provide that any or all their transfers as may be stated therein, subject
elected by a majority of the corporate to the provisions of the following section; 2. For
vote of all the officers or employees a classification of directors into one or more
members of the board may be elected or classes, each of whom may be voted for and
of directors appointed by the elected solely by a particular class of stock; and
stockholders
3. For a greater quorum or voting requirements
The pre-emptive right The pre-emptive right
in meetings of stockholders or directors than
is subject to the is subject to no
40

those provided in this Code. The articles of
incorporation of a close corporation may
provide that the business of the corporation
may provide that the business of the
corporation shall be managed by the
stockholders of the corporation rather than by a
board of directors. So long as this provision
continues in effect: 1. No meeting of
stockholders need be called to elect directors; 2.
Unless the context clearly requires otherwise,
the stockholders of the corporation shall be
deemed to be directors for the purpose of
applying the provisions of this Code; and 3. The
stockholders of the corporation shall be subject
to all liabilities of directors. The articles of
incorporation 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 board of
directors.
C. Restrictions on Transfer of Shares
Sec. 98 of the Corporation Code provides that:
Restrictions on the right to transfer shares
must appear in the articles of incorporation and
in the by-laws as well as in the certificate of
stock; otherwise, the same shall not be binding
on any purchaser thereof in good faith. Said
restrictions shall not be more onerous than
granting the existing stockholders or the
corporation the option to purchase the shares
of the transferring stockholder with such
reasonable terms, conditions or period stated
therein. If upon the expiration of said period,
the existing stockholders or the corporation fails
to exercise the option to purchase, the
transferring stockholder may sell his shares to
any third person.
Option Restriction this restriction provides
that no disposition of shares will be made
unless the shares are offered first to the
corporation or the stockholders.
*Pre-emptive right is exercisable or available.
*This restriction is valid and allowed.
Reason: it is the one contemplated by law.
*Restriction derogates private rights.
Consent Restriction this restriction provides
that no disposition of shares will be made
without the consent of directors.
*This restriction is not valid.
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Maria Zarah Villanueva - Castro
Reason: It is more onerous and burdensome.
CORPORATE DISSOLUTION/LIQUIDATION:
A. Methods of Voluntary Corporate Dissolution
and the Requirements therefor
Dissolution refers to the extinguishment of
franchise or termination of corporate existence.
Modes of Dissolution:
1. Voluntary dissolution
2. Involuntary dissolution
Methods of Voluntary Dissolution:
1. Voluntary dissolution where no creditors
are affected
2. Voluntary dissolution where creditors are
affected
3. Shortening of the corporate term by
amending the articles of incorporation
*Dissolution takes effect upon the coming
of the shortened term.
4. Expiration of corporate term
Voluntary dissolution where no creditors
are affected
Sec. 118 of the Corporation Code provides
that: If dissolution of a corporation does
not prejudice the rights of any creditor
having a claim against it, the dissolution
may be effected by majority vote of the
board of directors or trustees, and by a
resolution duly adopted by the affirmative
vote of the stockholders owning at least 2/3
of the outstanding capital stock or of at
least 2/3 of the members of a meeting to be
held upon call of the directors or trustees
after publication of the notice of time, place
and object of the meeting for 3 consecutive
weeks in a newspaper published in the
place where the principal office of said
corporation is located; and if no newspaper
is published in such place, then in a
newspaper of general circulation in the
Philippines, after sending such notice to
each stockholder or member either by
registered mail or by personal delivery at
least 30 days prior to said meeting. A copy
of the resolution authorizing the dissolution
shall be certified by a majority of the board
of directors or trustees and countersigned
by the secretary of the corporation. The SEC
41

shall thereupon issue the certificate of
dissolution.
Requisites:
1. A meeting must be held on the call of
the directors or trustees;
2. Notice of the meeting should be given
to the stockholders by personal delivery
or registered mail at least 30 days prior
to the meeting;
3. The notice of meeting should also be
published for 3 consecutive weeks in a
newspaper published in the place;
4. The resolution to dissolve must be
approved by the majority of the
directors/trustees and approved by the
stockholders representing at least 2/3
of the outstanding capital stock or 2/3
of members;
5. A copy of the resolution shall be
certified by the majority of the directors
or trustees and countersigned by the
secretary;
6. The signed and countersigned copy will
be filed with the SEC and the latter will
issue the certificate of dissolution
Voluntary dissolution where creditors are
affected
Sec. 119 of the Corporation Code provides
that: Where the dissolution of a
corporation may prejudice the rights of any
creditor, the petition for dissolution shall be
filed with the Securities and Exchange
Commission. The petition shall be signed by
a majority of its board of directors or
trustees or other officers having the
management of its affairs, verified by its
president or secretary or one of its directors
or trustees, and shall set forth all claims and
demands against it, and that its dissolution
was resolved upon by the affirmative vote
of the stockholders representing at least
two-thirds (2/3) of the outstanding capital
stock or by at least two-thirds (2/3) of the
members at a meeting of its stockholders or
members called for that purpose. If the
petition is sufficient in form and substance,
the Commission shall, by an order reciting
the purpose of the petition, fix a date on or
before which objections thereto may be
filed by any person, which date shall not be
less than thirty (30) days nor more than
sixty (60) days after the entry of the order.
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Before such date, a copy of the order shall
be published at least once a week for three
(3) consecutive weeks in a newspaper of
general circulation published in the
municipality or city where the principal
office of the corporation is situated, or if
there be no such newspaper, then in a
newspaper of general circulation in the
Philippines, and a similar copy shall be
posted for three (3) consecutive weeks in
three (3) public places in such municipality
or city. Upon five (5) day's notice, given
after the date on which the right to file
objections as fixed in the order has expired,
the Commission shall proceed to hear the
petition and try any issue made by the
objections filed; and if no such objection is
sufficient, and the material allegations of
the petition are true, it shall render
judgment dissolving the corporation and
directing such disposition of its assets as
justice requires, and may appoint a receiver
to collect such assets and pay the debts of
the corporation.
Requisites:
1. Approval of the stockholders
representing at least 2/3 of the
outstanding capital stock or 2/3 of
members in a meeting called for that
purpose;
2. Filing of a Petition with the SEC signed
by majority of directors or trustees or
other officers having the management
of its affairs verified by President or
Secretary or Director. Claims and
demands must be stated in the petition;
3. If petition is sufficient in form and
substance, the SEC shall issue an Order
fixing a hearing date for objections;
4. A copy of the Order shall be published
at least once a week for 3 consecutive
weeks in a newspaper of general
circulation or if there is no newspaper in
the municipality or city of the principal
office, posting for 3 consecutive weeks
in 3 public places is sufficient;
5. Objections must be filed no less than 30
days nor more than 60 days after the
entry of the order;
6. After the expiration of the time to file
objections, a hearing shall be conducted
upon prior 5 day notice to hear the
objections;
7. Judgment shall be rendered dissolving
the corporation and directing the
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disposition of assets; the judgment may
include appointment of a receiver.
C. Corporate Liquidation
Shortening of term of existence
Sec. 120 of the Corporation Code provides
that: A voluntary dissolution may be
effected by amending the articles of
incorporation to shorten the corporate term
pursuant to the provisions of this Code. A
copy of the amended articles of
incorporation shall be submitted to the
Securities and Exchange Commission in
accordance with this Code. Upon approval
of the amended articles of incorporation of
the expiration of the shortened term, as the
case may be, the corporation shall be
deemed dissolved without any further
proceedings, subject to the provisions of
this Code on liquidation.
B. Concept of Involuntary Dissolution and the
Grounds therefor
Sec. 121 of the Corporation Code provides that:
A corporation may be dissolved by the
Securities and Exchange Commission upon filing
of a verified complaint and after proper notice
and hearing on the grounds provided by existing
laws, rules and regulations.
*This must be done with substantive and
procedural due process.
Grounds:
1. Failure to submit by-laws within the
prescribed period
2. Fraud in the procurement of Certificate of
Registration
3. Misrepresentation as to the activities that
the corporation will undertake
4. Treasurers affidavit is false
5. Continued inoperation for 5 years
6. Failure to commence business transactions
within 2 years from issuance of certificate of
registration
7. To some cases, performance of ultra vires
act since it is a violation to the franchise but
depending on the seriousness or gravity of
the offense
8. Issuance of watered stocks
9. De facto status
10. Failure to keep corporate books and records
D. Methods of Liquidation or Winding Up
depending on the gravity or seriousness of
the offense
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Maria Zarah Villanueva - Castro
11. Violation of its charter
Liquidation is a process by which all the assets
of the corporation are converted into liquid
assets in order to facilitate the payment of
obligations to creditors, and the remaining
balance if any is to be distributed to the
stockholders.
*Liquidation takes place after dissolution.
Sec. 122 of the Corporation Code provides that:
Every corporation whose charter expires by its
own limitation or is annulled by forfeiture or
otherwise, or whose corporate existence for
other purposes is terminated in any other
manner, shall nevertheless be continued as a
body corporate for three (3) years after the time
when it would have been so dissolved, for the
purpose of prosecuting and defending suits by
or against it and enabling it to settle and close
its affairs, to dispose of and convey its property
and to distribute its assets, but not for the
purpose of continuing the business for which it
was established. At any time during said three
(3) years, the corporation is authorized and
empowered to convey all of its property to
trustees for the benefit of stockholders,
members, creditors, and other persons in
interest. From and after any such conveyance by
the corporation of its property in trust for the
benefit of its stockholders, members, creditors
and others in interest, all interest which the
corporation had in the property terminates, the
legal interest vests in the trustees, and the
beneficial interest in the stockholders,
members, creditors or other persons in interest.
Upon the winding up of the corporate affairs,
any asset distributable to any creditor or
stockholder or member who is unknown or
cannot be found shall be escheated to the city
or municipality where such assets are located.
Except by decrease of capital stock and as
otherwise allowed by this Code, no corporation
shall distribute any of its assets or property
except upon lawful dissolution and after
payment of all its debts and liabilities.
1. By Board of Directors
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2. Through a trustee to whom the properties
are conveyed
3. By management committee or rehabilitation
receiver
Q: Can the 3 year period be extended?
A: NO.
Reason: Beyond the 3 year period, there is no
corporate existence for all purposes subject to
doctrine of relation.
Remedy: Before the expiration of the 3 year
period, appoint a trustee/receiver.
Q: During the 3 year period, does the
corporation enjoy corporate existence?
A: YES. But for limited purpose only, i.e., for
liquidation purposes only. (Limited existence)
Q: May such corporation sue during the 3 year
period?
A: YES. But only when the subject matter is
related to liquidation and winding up of its
remaining affairs.
*In case trustee/receiver is appointed, he is not
bound by the 3 year period.
*In Gelano v CA, the SC held that the lawyer of
the corporation can be considered as trustee.
The term trustee must be considered in its
generic sense. Anyone who has been
designated by the corporation to act on its
behalf could be considered as trustee for
purposes of pursuing a claim for and on behalf
of the corporation. A lawyer falls within the
ambit of the word trustee.
*Appointment of trustee can be inferred from
the conduct of the corporation. This is by
Implication.
*If the corporation is the creditor appoint a
trustee. If the corporation is the debtor appoint
a receiver.
FOREIGN CORPORATIONS:
Q: What if the corporate properties have
already been distributed among the
shareholders without trustee/receiver?
A: Remedy: Run after the erring directors and
officers.
E. Concept of Rehabilitation; Effects of
Appointment of Management Committee or
Receiver
Rehabilitation connotes a reopening or
reorganization. Contemplates a continuance of
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Maria Zarah Villanueva - Castro
corporate existence in an effort to restore the
corporation to its former successful operation.
*This is a remedy expressly allowed under
Section 6 of PD 902-A.
Purpose: To make the corporation financially
viable again.
Substantive Grounds:
1. When there is imminent danger of
dissipation or wastage of corporate assets
2. Serious paralyzation of business which
would work to the prejudice of the
stockholders and creditors of the
corporation
*Mere misconduct of an officer is not a ground
for corporate rehabilitation.
*A corporation cannot ask for corporate
rehabilitation and at the same time dissolution.
*With the passage of RA8799, the remedy could
now be instituted with the proper RTC.
Effect: Stay Order - stops or suspends the
enforcement of all claims for money or
otherwise whether enforcement is by court or
not, until rehabilitation proceedings are
terminated.
Cases: PAL v Garcia; Sobrejuanite; Lingkod
Manggagawa ng Rubberworld v Rubberworld
Philippines; RCBC v IAC
*In PAL v Garcia, the SC held that stay order
suspends all enforcement in all stages of the
proceedings.
*In Lingkod Manggagawa sa Rubberworld v
Rubberworld Philippines, the SC held that labor
claims are likewise affected by the Stop order.
*In RCBC v IAC, the SC held that whether
creditors are secured or not, stay order will still
affect them. The preference still remains it is
just the enforcement that is suspended.
A. Concept of Foreign Corporation
Foreign Corporation is a corporation formed,
organized or existing under any law other than
those of the Philippines, and whose laws allow
Filipino citizens and corporations to do business
in its own country or state.
Sec. 123 of the Corporation Code provides that:
For the purposes of this Code, a foreign
corporation is one formed, organized or existing
under any laws other than those of the
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Philippines and whose laws allow Filipino
citizens and corporations to do business in its
own country or state. It shall have the right to
transact business in the Philippines after it shall
have obtained a license to transact business in
this country in accordance with this Code and a
certificate of authority from the appropriate
government agency.
Reciprocity Clause provides that the foreign
laws allow Filipino citizens and corporations to
do business in its own country or state.
B. Tests to Determine Nationality of a Corporation
1. Incorporation Test when the corporation
is incorporated, organized under the law of
other country.
2. Control Test for purposes of investment;
the citizenship of a particular corporation is
to be determined by the citizenship of the
controlling stockholders.
C. Concept of Doing Business and the License
Requirement therefor
Substance Test provides that: a foreign
corporation is doing business in the country if it
is continuing the body or substance of the
enterprise of business for which it was
organized.
Continuity Test provides that: doing business
implies a continuity of commercial dealings and
arrangements, and contemplates to some
extent the performance of acts or works or the
exercise of some functions normally incident to
and in progressive prosecution of, the purpose
and object of its organization.
*Foreign Corporation is required to obtain
license from the SEC to enable them to do
business in the Philippines.
*The foreign corporation must appoint a
resident agent so that court may acquire
jurisdiction over the foreign corporation
*License is essential if there is an intention to
maintain main or substance of the business in
the Philippines or to continue the same.
*Lack of license does not affect the validity of
the transaction.
*License is for regulatory purposes.
*License requirement does not prevent
performance of acts that are isolated from the
main business of the corporation and there is
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Maria Zarah Villanueva - Castro
no intent to continue the same in the
Philippines.
*If the foreign corporation is not licensed to do
business in the Philippines, General Rule: they
have no access in Philippine Courts
Exceptions:
1. Isolated transactions
2. Infringement of trademark
*International offense can be sued
anywhere.
Cases: Expert Travel Tours v CA; Home
Insurance v Eastern Shipping Lines
*In Expert Travel Tours v CA, the SC held that
resident agent is not with authority to execute a
certification of Forum shopping following Sec.
23 of the Corporation Code.
*In Home Insurance v Eastern Shipping Lines,
the SC held that if at the time the suit was
brought, the suing foreign entity already have
license to do business in the Philippines, the suit
will be allowed although at the time the
transaction was made it does not have the
requisite of a license to do so, the remedial
defect is cured.
Cases: Japan Airlines v CA
*In Japan Airlines v CA, the SC held that the
selling of tickets though there is no aircraft
landing in the Philippines constitute doing
business in the Philippines.
*In Ericks v CA, the SC held that license is
necessary in order the foreign corporation may
sue. In this case, the court considered the
continuity test, they found out that the foreign
corporation has the intent to continue business
in the Philippines.
*Credit is obtained to maintain longer
transactions.
D. Effects of Being Issued a License
1. They are placed under the jurisdiction of
the Philippine courts
2. They are placed under the same footing as
domestic corporations
3. The public is protected in dealing with
foreign corporations.
E. Revocation and Withdrawal of License
Grounds for Revocation:
1. Failure to file its annual report or pay any
fees as required by the Corporation Code
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Maria Zarah Villanueva - Castro

2. Failure to appoint and maintain a resident

agent in the Philippines as required by the
Corporation Code
3. Failure, after change of its resident agent or
his address, to submit to the SEC a
statement of such change as required by
the Corporation Code
4. Failure to submit to the SEC an
authenticated copy of any amendment to its
articles of incorporation or by-laws or of any
articles of merger or consolidation within
the time prescribed by the Corporation
Code
5. A misrepresentation of any material matter
in any application, report affidavit or other
document submitted by such corporation
pursuant to the provisions of the
Corporation Code
6. Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully
due to the Philippine Government or any of
its agencies or political subdivision
7. Transacting business in the Philippines
outside of the purpose or purposes for
which such corporation is authorized under
its license
8. Transacting business in the Philippines as
agent of or acting for and in behalf of any
foreign corporation or entity not duly
licensed to do business in the Philippines
9. Any other ground as would render it unfit to
transact business in the Philippines.

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