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Corporation Code
Corporation Code
Corporation Code
Maria Zarah Villanueva - Castro
CORPORATION CODE (BP BLG 68) - It exist by fiction of law only, hence it is
subject to limitations that are inherent
*Corporation Code is the general law on Private because of its nature
Corporation regarding to its creation, formation and - A corporation is a juridical person which
powers. exists by process of legal fiction
Doctrine of Corporate Entity/Doctrine
INTRODUCTION:
of Separate Personality - A corporation
A. Historical Background is a legal or juridical person with a
Effectivity: May 1, 1980 personality separate and apart from its
Article XII Section 16 of the 1987 Constitution: individual stockholders or members and
The Congress shall not, except by general law, from any other legal entities to which it
provide for the formation, organization, or may be connected
regulation of private corporations. Government- Consequences/Implications of
owned or controlled corporations may be Separate Personality:
created or established by special charters in the 1. It is entitled to own properties in its
interest of the common good and subject to the own name and its properties are
test of economic viability. not the properties of its
*Congress has limited powers in the formation, stockholders, directors and officers.
creation and regulation of a private corporation. Cases: Magsaysay-Labrador v CA;
Purposes: Sulo ng Bayan v Araneta
1. Uniformity *The interest of the stockholders
2. To avoid corruption over the properties of the
corporation is merely inchoate.
General Rule: Congress is prohibited to enact a *Merely inchoate because there are
law directly forming a private corporation. still condition precedents before the
Exception: GOCC may be created by special shareholders get their share, viz, in
charter. Asset, there are dissolution and
satisfaction of claims; in profit-
*GOCC is a private corporation with regard to
sharing, there are unrestricted
function and in the meantime a public
retained earnings and declaration
corporation with regard to ownership.
by the Board of Directors.
Twin Conditions must be present in forming a 2. It can incur obligations and its
GOCC: obligations are not the obligations
1. Interest in the common good of its stockholders, directors and
2. Subject to the test of economic viability officers.
- Means can survive alone in the market; Case: Francisco v CA
can generate income which they can 3. The rights belonging to the
use for their operating expenses corporation cannot be invoked by
the stockholders, directors and
CONCEPT AND ATTRIBUTES OF A CORPORATION: officers and vice versa.
4. Corporations are entitled to certain
A. Statutory definition of a Corporation
constitutional rights, i.e., right
Section 2 of the Corporation Code: A
against unreasonable searches and
corporation is an artificial being created by
seizure, due process clause.
operation of law, having the right of succession *It is not entitled to certain
and the powers, attributes and properties constitutional right, i.e., right
expressly authorized by law or incident to its against self-incrimination
existence. particularly production of corporate
B. Attributes of a Corporation documents.
Artificial Being
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2. Such control must have been used by the - Also known as Principle of Perpetual
defendant to commit fraud or wrong in Succession
contravention of plaintiffs legal rights; 3. The
Reason: To make the corporation more
aforesaid control and breach of duty must
proximately cause the injury or unjust loss stable
complained of. Creature of enumerated powers, attributes
Three cases of piercing the veil: and properties
1. Fraud Cases when a corporation is used as a Doctrine of Limited Capacity No
cloak to cover fraud, or to do wrong; corporation under the Corporation Code,
2. Alter Ego Cases when the corporate entity is shall possess or exercise any corporate
merely a farce since the corporation is an alter ego, powers, except those conferred by law, its
business conduit or instrumentality of a person or Articles of Incorporation, those implied
another corporation; from express powers and those as are
3. Equity cases when piercing the corporate fiction necessary or incidental to the exercise of
is necessary to achieve justice or equity. the powers so conferred. The corporations
Probative Factors of Identity: capacity is limited to such express, implied
1. Identical shareholders; and incidental powers.
2. Same set of officers, directors, or trustees; *Corporation may be restrained from
3. Use of same premises, properties, tools and engaging a particular transaction because it
equipments; is beyond their powers.
4. Engage practically in the same business; 5. The *General Capacity a corporation can
same manner of keeping books and records. perform any act for as long as it is lawful,
*The probative factors of identity are not conclusive moral and not contrary to public policy or
but may be considered as strong evidence. order.
Creature of Law Ultra Vires Doctrine Even if the act is
Article XII Section 16 of the 1987 lawful, moral and not contrary to public
Constitution: The Congress shall not, order or policy but such act is not within the
except by general law, provide for the express, implied and incidental powers of
formation, organization, or regulation of the corporation such act shall be void for
private corporations. Government-owned or being ultra vires.
controlled corporations may be created or *These doctrines are based on Section 2
established by special charters in the and Section 45 of the Corporation Code.
interest of the common good and subject to
C. Classification of Private Corporations:
the test of economic viability.
1. As to existence of Stocks:
Concession Theory It is a principle in the
Stock Corporation Corporations which have
creation of corporations, under which a
capital stock divided into shares and are
corporation is an artificial creature without
authorized to distribute to the holders of such
any existence until it has received the
shares dividends or allotments of the surplus
imprimatur of the State acting according to
profits on the basis of the shares held. (Sec. 3)
law, through the SEC. The life of the Non-stock Corporation A corporation where
corporation is a concession made by the no part of its income is distributable as
State. dividends to its members, trustees, or officers,
Right of Succession
subject to the provisions of this Code on
- Capacity to have continuity of existence
dissolution. (Sec. 87)
despite the changes on the persons
Q: Is it correct to say that a Non-stock
who compose it. Thus, the personality
corporation cannot generate income on their
continues despite the change of
own?
stockholders, members, board A: NO
members or officers; death or disability. 2. As to function/organizers:
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Public Corporation for public purpose and 1. The existence of a valid law under which
organized by the State. it may be incorporated;
Private Corporation for profit making 2. An attempt in good faith to incorporate;
functions and organized by private persons 3. Use of corporate powers;
alone or with the State 4. Filing of the Articles of Incorporation;
3. As to laws of Incorporation (Place of 5. Subsequent compliance with the
Incorporation) : requirement of law.
Domestic Corporation corporation formed,
*In both corporations, there must be a
organized or existing under the Philippine Laws.
certificate of registration issued.
Foreign Corporation corporation formed,
organized or existing under any laws other than Doctrine of Corporation by Estoppel All persons
those of the Philippines and whose laws allow who assume to act as a corporation knowing it to be
Filipino citizens and corporations to do business without authority to do so shall be liable as general
in its own country or state. (Sec. 123) partners for all debts, liabilities and damages
*License is necessary for; 1. Regulation incurred or arising as an result thereof: Provided,
purposes and 2. Access to local courts. however, that when any such ostensible corporation
4. As to legal status:
is sued on any transaction entered into by it as a
De Jure Corporation corporation created in
corporation or on any tort committed by it as such,
strict or substantial compliance with the
it shall not be allowed to use as a defense its lack or
mandatory requirements for incorporation and
corporate personality. (Sec. 21)
the right of which to exist as a corporation
- Group of persons which holds itself out
cannot be successfully attacked or questioned
as a corporation and enters into a
by any party even in a direct proceeding for that
contract with a third person on the
purpose by the state.
De Facto Corporation the due incorporation strength of such appearance cannot be
of any corporation claiming in good faith to be a permitted to deny its existence in an
corporation under the Corporation Code, and its action under said contract.
right to exercise corporate powers, shall not be Case: Lim Tong Lim v CA
inquired into collaterally in any private suit to *Lim is stopped because he benefited from
which such corporation may be a party. Such the transaction.
inquiry may be made by Solicitor General in a Remedy: To ran after those persons
quo warranto proceeding. (Sec. 20) responsible for the representations
- organized with a colourable compliance Essence: They are precluded from denying
with the requirements of a valid law their existence by their previous act or
and its existence cannot be inquired conduct
collaterally. Holding Corporation it is one which controls another
- There is an irregularity or defect in the as a subsidiary by the power to elect management. It is
constitution or organization. one that holds stocks in other companies for purposes
of control rather than for mere investment.
Can be compared to a voidable contract,
i.e., valid until annulled. Affiliate one related to another by owning or being
*Can be challenged by the State later on. owned by common management or by a long-term
Cases: Hall v Piccio; Seventh Adventist v lease of its properties or other control device. It may be
Northeastern Mindanao Mission the controlled or controlling corporation, or under
*The filing of the Articles of Incorporation common control.
and the issuance of the certificate of
Subsidiary Corporation one which is so related to
registration are the essential requisites for
another corporation that the majority of its directors
the existence of a de facto corporation.
can be elected either directly or indirectly by such other
Requisites:
corporation. It is always controlled.
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Open Corporation one which is open to any person name already protected by law or is
who may wish to become a stockholder or member patently deceptive, confusing or contrary
thereto. to existing laws. When a change in the
corporate name is approved, the
Close Corporation those whose shares of stock are Commission shall issue an amended
held by limited number of persons like the family or certificate of incorporation under the
other closely knit group. (Sec. 96) amended name.
SEC Guideline x x x b. In order to prevent
FORMATION AND ORGANIZATION OF A PRIVATE
confusion and difficulties of administration,
CORPORATION:
supervision and control, if the proposed
A. Submission of Articles of Incorporation; name contains a word already use as a part
contractual significance of the firm name or style of a registered
*The life of a corporation commences from the entity, the proposed name must contain
issuance of the Certificate of Registration by the two other words different and distinct from
SEC upon filing of the Articles of Incorporation the name of the company already registered
and other documents. or protected by law. x x x
Article of Incorporation is the charter of the Case: Ang Mga Kaanib Ni Jesus Cristo
corporation, and the contractual relationships *The phrase Ang Mga Kaanib are words
between the State and the corporation, the merely descriptive of membership while the
stockholder and the State, and between the phrase Sa Bansang Pilipinas are merely
corporation and its stockholders. descriptive of the place.
Contractual Significance: *Both parties are religious institutions
1. The issuance of a certificate of incorporation *Both use the acronym H.S.K.
signals the birth of the corporations juridical As a rule, generic name or descriptive word
personality; may be used as a corporate name.
2. It is an essential requirement for the Reason: public domain; can be used by
existence of a corporation, even a de facto one. anyone; public use.
Exception: Doctrine of Secondary Meaning
B. Contents and Form of the Articles of a word or phrase originally incapable of
Incorporation (Secs. 14 and 15) exclusive appropriation with reference to an
Contents of Articles of Incorporation: article on the market, because
1. Corporate Name; geographically or otherwise descriptive,
2. Purpose Clause; might nevertheless have been used so long
3. Principal office;
and so exclusively by one producer with
4. Term of existence;
5. Incorporators; reference to his article that in that trade and
6. Directors or trustees; to that branch of the purchasing public, the
7. Capitalization; word or phrase has come to mean that the
8. Shares of stock; article was his product.
9. Treasurers Affidavit. Requisites:
1. Period of use;
Corporate Name 2. The use must be exclusive.
Purpose: Identification Case: Lyceum of the Philippines
*Corporation can not adopt any name or *The exclusivity requirement was not
group of words at its pleasure because of satisfied by Lyceum of the Philippines.
statutory limitation, viz., Sec. 18 of the *In case of change of name, the corporation
Corporation Code which provides that: No is not dissolve nor create a new corporation;
corporate name may be allowed by the SEC it also does not extinguish the corporate
if the proposed name is identical or liability.
deceptively or confusingly similar to that *Change of name can be done by amending
of any existing corporation or to any other the Articles of Incorporation.
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*Any director who ceases to be the owner 2. expectancy on the share of assets in case
of at least one share of the capital stock of of dissolution/liquidation.
the corporation of which he is a director Political Value:
shall thereby cease to be a director. 1. vote
*Trustees of non-stock corporations must 2. control in the management of the
be members thereof. corporation.
*Initial directors/trustees shall hold office Doctrine of Equality of Shares Except as
for one year until their successors are otherwise provided in the articles of
elected and qualified. incorporation and stated in the certificate of
Capitalization stock, each share shall be equal in all
Section 14(8) states that: If it be a stock respects to every other share.
corporation, the amount of its authorized - Provides that where the Article of
capital stock in lawful money of the Incorporation do not provide for any
Philippines, the number of shares into distinction of the shares of stock, all shares
which it is divided, and in case the share are issued by the corporation are presumed to
par value shares, the par value of each, the be equal and enjoy the same rights and
names, nationalities and residences of the privileges and are also subject to the same
original subscribers, and the amount liabilities.
subscribed and paid by each on his Classes of Shares:
1. Par Value Share shares that have a
subscription, and if some or all of the shares
nominal value in the certificate of stock.
are without par value, such fact must be
Contractual Significance: The minimum
stated.
price at which the shares are to be
*It is required that at least 25% of the
issued.
subscribed capital must be paid and in no
*The price is fixed. It is stated in the
case may be paid-up capital be less than
Articles of Incorporation.
P5,000. 2. No Par Value Share those shares
Authorized Capital Stock the amount
which do not have nominal value.
fixed in the articles of incorporation to be
However, they have issued value stated
subscribed and paid by the stockholders of
in the certificate or articles of
the corporation.
incorporation.
*Shows the total number of shares
*There is flexibility in the price.
Subscribed Capital that portion of the
*The price is determined by the Board.
authorized capital stock that is covered by Limitations:
subscription agreements whether fully paid 1. No par value shares cannot have an
or not. issued price of less than P5.00;
Paid-Up Capital the portion of the 2. The entire consideration for its
authorized capital stock which has been issuance constitutes capital so that no
subscribed and actually paid. part of it should be distributed as
Outstanding Capital Stock the total shares dividends;
of stock issued to subscribers or 3. They cannot be used as preferred
stockholders, whether or not fully or stocks;
partially paid except treasury shares so long 4. They cannot be issued by banks, trust
as there is a binding subscription companies, insurance companies, public
agreement. utilities and building and loan
Shares of stock association (Reason: imbued with
Q: Why shares of stock? public interest);
A: Because there is a share on the 5. The articles of incorporation must
capitalization. state the fact that it issued no par value
Economic Value:
shares as well as the number of said
1. expectancy on the share in the profits
shares;
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6. Once issued, they are deemed fully thereof are entitled to a pro rata share
paid and non-assessable. in the profits of the corporation and in
3. Voting Shares shares with the right to its assets upon dissolution and, likewise,
vote. They have the right to participate in the management of its affairs without
in the management of the corporation preference or advantage whatsoever.
through the exercise of such right. 6. Preferred Shares- shares which enjoy
4. Non-voting Shares shares without the preference as to dividends or assets
right to vote. upon dissolution as stated in the
*Has only a limited right to vote. Articles of Incorporation.
General Rule: Shareholder owning non- Reason: To attract investors.
voting shares has no right to vote. *Preference does not give them a lien
Exceptions: upon the property nor make them
1. Amendment of the articles of
creditors of the corporation.
incorporation; *Characterized as redeemable shares.
2. Adoption and amendment of by-laws; Kinds:
3. Sale, lease, exchange, mortgage, 1. Preferred shares as to assets share
pledge or other disposition of all or which gives the holder thereof
substantially all of the corporate preference in the distribution of the
property; assets of the corporation in case of
4. Incurring, creating or increasing
liquidation;
bonded indebtedness; 2. Preferred shares as to dividends
5. Increase or decrease of capital stock;
share which gives the holder thereof
6. Merger or consolidation of the
preference in the distribution of the
corporation with another corporation or
dividends to the extent agreed upon
other corporations;
before any dividends at all are paid to
7. Investment of corporate funds in
the holders of common shares;
another corporation or business in
3. Participating preferred shares the
accordance with the Corporation Code;
holders thereof are still given the right
8. Dissolution of the corporation.
to participate with the common
*The exceptions are exclusive; the list is
stockholders in dividends beyond their
a closed list
stated preference;
Statutory Constraint: Sec. 6 of the
4. Non-participating preferred shares
Corporation Code
where there is no such participation;
*The corporation cannot provide for
5. Cumulative preferred shares the
shares with no voting right
shareholder is entitled to recover
General Rule: Only redeemable and
preferred shares are deprived of voting dividends in arrears. While dividend
declaration may not be compelled, once
right.
Exception: Common shares may be it is declared, the shareholder is entitled
denied of its voting right in the to the said arrears;
following instances: 1. Delinquent in 6. Non-cumulative preferred shares
not entitled to arrears only to present
paying the subscription; 2. If there was
a founders share where it was given dividends.
7. Redeemable Shares are those which
the right to vote exclusively for 5 years
permit the issuing corporation to
(Sec. 7).
redeem or purchase its own shares.
5. Common Shares the most common
Limitations:
type of shares which enjoy no
1. Redeemable shares may be issued
preference.
only when expressly provided for in the
*The basic class of stock ordinarily and
Articles of Incorporation;
usually issued without extraordinary
rights and privileges, and the owners
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associations, trust companies and other of filing for a cause not attributable to the
financial intermediaries, insurance companies, corporation.
public utilities, educational institutions, and
other corporations governed by special laws F. Effects of Non-Use of Corporate Charter
Sec. 22 of the Corporation Code states that: If
shall be accepted or approved by the
a corporation does not formally organize and
Commission unless accompanied by a
commence the transaction of its business or the
favourable recommendation of the appropriate
construction of its work within 2 years from the
government agency to the effect that such
date of its incorporation, its corporate powers
articles or amendment is in accordance with
cease and the corporation shall be deemed
law.
dissolved. However, if the corporation has
D. Commencement of Corporate Existence commenced the transaction of its business but
Sec. 19 of the Corporation Code states that A subsequently becomes continuously inoperative
private corporation formed or organized under for a period of at least 5 years, the same shall be
this Code commences to have corporate a ground for the suspension or revocation of its
existence and juridical personality and is corporate franchise or certificate of
deemed incorporated from the date the SEC incorporation. This provision shall not apply if
issues a certificate of incorporation under its the failure to organize, commence the
official seal; and thereupon the incorporators, transaction of its businesses or the construction
stockholders/members and their successors of its works, or to continuously operate is due to
shall constitute a body politic and corporate causes beyond the control of the corporation as
under the name stated in the articles of may be determined by the SEC.
incorporation for the period of time mentioned *The period must be counted from the issuance
therein, unless said period is extended or the of the Certificate of Incorporation.
corporation is sooner dissolved in accordance *Automatic dissolution is not contemplated
with law. under Section 22. (SEC Opinion).
*For purposes of determining whether a *Section 22 must be read in conjunction with
corporation enjoys the status of a de facto Sec 6(1) of PD 902-A which requires that the
corporation, it must have been at least issued a corporation must be given the opportunity to
certificate of registration. be heard in compliance with the requirement of
due process before the revocation of its license.
E. Amendment of the Articles of Incorporation
Sec. 16 of the Corporation Code states that:
Unless otherwise prescribed by this Code or by CONTROL AND MANAGEMENT OF A CORPORATION:
special law, and for legitimate purposes, any
A. Levels of Corporate Control
provision or matter stated in the articles of 1. By Stockholders/Shareholders;
incorporation may be amended by a majority 2. By Corporate Officers;
vote of the board of directors or trustees and 3. By Directors/Trustees
the vote or written assent of the stockholders
representing at least 2/3 of the outstanding B. Board of Directors/Trustees
General Powers of the Board
capital stock, without prejudice to the appraisal
Sec. 23 of the Corporation Code states that:
right of dissenting stockholders in accordance
Unless otherwise provided in this Code,
with the provisions of this Code, or the vote or
the corporate powers of all corporations
written assent of at least 2/3 of the members if
formed under this Code shall be exercised,
it be a non-stock corporation.
all business conducted and all property of
*It is effective upon the approval of the SEC.
*There may be an amendment by inaction. such corporations controlled and held by
Amendment by Inaction Upon filing with the the board of directors or trustees to be
SEC of the amendment and the Commission elected from among the holders of stocks,
failed to act on it within 6 months from the date or where there is no stock, from among the
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members of the corporation, who shall hold of the capital stock of the corporation of
office for one year until their successors are which he is a director, which share shall
elected and qualified. stand in his name on the books of the
Powers of the Board of Directors: corporation. Any director who ceases to be
1. Corporate Powers; the owner of at least one share of the
2. Manage the Corporation; and
capital stock of the corporation of which he
3. Control over and hold the properties of
is a director shall thereby cease to be a
the Corporation.
*Board of Directors/Trustees is the statutory director. Trustees of non-stock corporations
must be members thereof. A majority of the
representative of the corporation.
General Rule: All corporate powers directors or trustees of all corporations
emanate from the Board of organized under this Code must be
Directors/Trustees. residents of the Philippines.
Exception: Unless otherwise provided in *In order to be eligible as director, what is
this Code. (Limiting Clause) material is the legal title to and not
The limiting clause means that there are beneficial title or ownership of the stocks
certain corporate matters that cannot be appearing on the books of the corporation.
done by the Board by reason that such *The directors/trustees must be natural
matters fall upon the shareholders; or persons.
*They must also be of legal age.
corporate matters that cannot be resolved
*He must possess other qualifications as
by the Board alone, i.e., it must be done
may be prescribed in the by-laws of the
with the approval of the shareholders.
corporation.
Business Judgment Rule
*Under Sec. 27 of the Corporation Code:
Business Judgment Rule questions of
No person convicted by final judgment of
policy or management are left solely to the
an offense punishable by imprisonment for
honest decision of officers and directors of a
a period exceeding 6 years, or a violation of
corporation and the courts are without
this Code committed within 5 years prior to
authority to substitute their judgment for
the date of his election or appointment,
the judgment of the board of directors; the
shall qualify as a director, trustee or officer
board is the business manager of the
of any corporation.
corporation and so long as it acts in good
Reason: The position is based on trust and
faith its orders are not reviewable by the
confidence.
courts or the SEC.
*No citizenship requirement.
- A resolution or transaction pursued within
*The By-Laws may provide additional
the corporate powers and business
qualifications/disqualifications.
operations of the corporation, and passed in Election of the Board Members
good faith by the board of directors/trustee, Sec. 24 of the Corporation Code provides
is valid and binding, and generally the that: At all elections of directors or
courts have no authority to review the same trustees, there must be present, either in
and substitute their own judgment, even person or by representative authorized to
when the exercise of such power may cause act by written proxy, the owners of a
losses to the corporation or decrease the majority of the outstanding capital stock, or
profits of a department. if there be no capital stock, a majority of the
*Great respect is accorded to the decisions members entitled to vote. The election
of the Board of Directors/Trustees. must be by ballot if requested by any voting
*The directors are not liable to the
stockholder or member. In stock
stockholders in performing such acts.
corporations, every stockholder entitled to
Qualifications of the Board Members
vote shall have the right to vote in person or
Sec. 23 of the Corporation Code states that:
by proxy the number of shares of stock
Every director must have at least one share
standing, at the time fixed in the by-laws, in
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his own name on the stock books of the *It is not required that the candidate
corporation, or where the by-laws are silent received the majority vote, what the law
at the time of the election; and said provides is only plurality of votes.
stockholder may vote such number of *Majority number is required only for the
shares for as many persons as there are existence of a quorum.
directors to be elected or he may cumulate Not included in outstanding capital stocks:
said shares and give one candidate as many 1. Unissued stocks;
2. Non-voting stocks;
votes as the number of directors to be
3. Treasury Shares.
elected multiplied by the number of his Methods of Voting:
shares shall equal, or he may distribute 1. Straight Voting every stockholder may
them on the same principle among as many vote such number of shares for as many
candidates as he shall see fit: Provided, that persons as there are directors to be elected.
the total number of votes cast by him shall 2. Cumulative Voting for One Candidate a
not exceed the number of shares owned by stockholder is allowed to concentrate his
him as shown in the books of the votes and give one candidate as many votes
corporation multiplied by the whole as the number of directors to be elected
number of directors to be elected: Provided, multiplied by the number of his shares shall
however, that no delinquent stock shall be equal.
voted. Unless otherwise provided in the *Example: X has 10 shares in his name;
articles of incorporation or in the by-laws, there are 5 numbers of directors to be
members of the corporations which have no elected. X has 50 votes (10x5) available to
capital stock may cast as many votes as him. X may opt to concentrate all his 50
there are trustees to be elected but may not votes to a particular candidate.
cast more than one vote for one candidate. 3. Cumulative Voting by Distribution a
Candidates receiving the highest number of stockholder may cumulate his shares by
votes shall be declared elected. Any multiplying also the number of his shares by
meeting of the stockholders or members the number of directors to be elected and
called for an election may adjourn from day distribute the same among as many
to day or from time to time but not sine die candidates as he shall see fit.
or indefinitely if, for any reason, no election *Example: X has 10 shares in his name;
is held, or if there not present or there are 5 numbers of directors to be
represented by proxy, at the meeting, the elected. X has 50 votes available to him. X
owners of a majority of the outstanding may opt to distribute the votes to as many
capital stock, or if there be no capital stock, candidates as there are provided that the
a majority of the member entitled to vote. total number of votes does not exceed 50.
*It is the stockholders or corporators who Purpose of cumulative voting: To protect
elect members of the Board of Directors. the minority stockholders.
*The only procedure required by the Code *The elected officer must act as a body.
*In a stock corporation, cumulative voting is
is through Election. There can be no other
a statutory right whereas in a non-stock
modes.
*The election must be by ballot if requested corporation, cumulative voting is applicable
by any voting member or stockholder. if it is provided in the Article of
*A stockholder cannot be deprived in the Incorporation.
articles of incorporation or in the by-laws of Sec. 26 of the Corporation Code provides
his statutory right to use any of the that: Within 30 days after the election of
methods of voting in the election of the directors, trustees and officers of the
directors. corporation, the secretary, or any other
*No delinquent stock shall be voted. officer of the corporation, shall submit to
the SEC, the names, nationalities and
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residences of the directors, trustees and *For voting purposes, majority of the
officers elected. Should a director, trustee member present constituting a quorum.
or officer die, resign or in any manner cease Except: election of directors.
to hold office, his heirs in case of his death, Removal of Board Members
the secretary, or any other officer of the Sec. 28 of the Corporation Code states that:
corporation, or the director, trustee or Any director or trustee of a corporation
officer himself, shall immediately report may be removed from office by a vote of
such fact to the SEC. the stockholders holding or representing at
Term of Office least 2/3 of the outstanding capital stock, or
*The directors or trustees shall hold office if the corporation be a non-stock
for one (1) year subject to the hold over corporation, by a vote of at least 2/3 of the
principle, i.e., they continue in office until members entitled to vote: Provided, that
their successors are elected and qualified. such removal shall take place either at a
*The one year period does not apply to regular meeting of the corporation or at a
directors initially elected for purposes of special meeting called for the purpose, and
incorporation. in either case, after previous notice to
Quorum Requirement in Board Meetings stockholders or members of the corporation
Sec. 25 of the Corporation Code states that:
of the intention to propose such removal at
Unless the articles of incorporation or the
the meeting. A special meeting of the
by-laws provide for a greater majority, a
stockholders or members of a corporation
majority of the number of directors or
for the purpose of removal of directors or
trustees as fixed in the articles of
trustees, or any of them, must be called by
incorporation shall constitute a quorum for
the secretary on order of the president or
the transaction of corporate business, and
on the written demand of the stockholders
every decision of at least a majority of the
representing or holding at least a majority
directors or trustees present at a meeting at
of the outstanding capital stock, or, if it be a
which there is a quorum shall be valid as a
non-stock corporation, on the written
corporate act, except for the election of
demand of a majority of the members
officers which shall require the vote of a
entitled to vote. Should the secretary fail or
majority of all the members of the board.
refuse to call the special meeting upon such
Q: Is the director allowed to let a proxy
demand or fail or refuse to give the notice,
attend a board meeting in behalf for
or if there is no secretary, the call for the
himself?
meeting may be addressed directly to the
A: NO. Proxy prohibition.
Reason: Because of their personal stockholders or members by any
qualifications. stockholder or member of the corporation
*Quorum requirement should always be signing the demand. Notice of the time and
computed based on the number specified in place of such meeting, as well as of the
the Articles of Incorporation regardless of intention to propose such removal, must be
ensuing vacancies. given by publication or by written notice
*The basis is always the number specified in prescribed in this Code. Removal may be
the Articles of Incorporation. with or without cause: Provided, that
*The corporation can modify the number by removal without cause may not be used to
providing a different provision in the articles deprive minority stockholders or members
of incorporation, however, the law provides of the right of representation to which they
that the modification must be for a number may be entitled under Sec. 24 of this Code.
greater than that provided in the law. It Requisites:
cannot provide for a number less than the 1. It must take place either at a regular
general requirement of the code. meeting or special meeting of the
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stockholders or members called for the Exception: Vacancy occurring in the board
purpose; of directors or trustees other than by
2. There must be previous notice to the removal by the stockholders or members or
stockholders or member of the intention to by expiration of term may be filled by the
remove; vote of at least a majority of the remaining
3. The removal must be by a vote of the directors or trustees if still constituting a
stockholders representing 2/3 outstanding quorum.
capital stock or 2/3 of members; Compensation of Board Members
4. The director may be removed with or Sec. 30 of the Corporation Code provides
without cause unless he was elected by the that: In the absence of any provision in the
minority, in which case, it is required that by-laws fixing their compensation, the
there is cause for removal. directors shall not receive any
Reason: The functions of directors are compensation, as such directors, except for
fiduciary in nature. reasonable per diems: Provided, however,
Requisites for the removal of minority
that any such compensation other than per
directors are:
diems may be granted to directors by the
1. Justifiable cause;
2. Satisfaction of the voting requirements, vote of the stockholders representing at
i.e., 2/3 of OCS or members. least a majority of the outstanding capital
*It is the secretary of the corporation upon stock at a regular or special stockholders
order of the president or in case there is no meeting. In no case shall the total yearly
secretary, stockholder representing majority compensation of directors, as such
of the outstanding capital stocks or member directors, exceed 10% of the net income
signing the demand who may call a meeting before income tax of the corporation during
for the purpose of removal. the preceding year.
Vacancies in the Board General Rule: Directors are not entitled to
Sec. 29 of the Corporation Code provides receive compensation
that: Any vacancy occurring in the board of Exceptions:
1. When their compensation is fixed in the
directors or trustees other than by removal
by the stockholders or members or by by-laws;
2. If compensation is granted to directors by
expiration of term, may be filled by the vote
the vote of the stockholders representing at
of at least a majority of the remaining
least a majority of the outstanding capital
directors or trustees, if still constituting a
stock at a regular or special stockholders
quorum; otherwise, said vacancies must be
meeting.
filled by the stockholders in a regular or
Limitation: In no case shall the total yearly
special meeting called for that purpose. A
compensation of directors exceed 10% of
director or trustee so elected to fill a
the net income before income tax of the
vacancy shall be elected only or the
corporation during the preceding year.
unexpired term of his predecessor in office. Reason: In order to avoid temptation on the
A directorship or trusteeship to be filled by part of directors to abuse powers by
reason of an increase in the number of appropriating compensation packages since
directors or trustees shall be filled only by they are in control of corporate assets.
an election at a regular or at a special
meeting of stockholders or members duly C. Corporate Officers
called for the purpose, or in the same Concept of Corporate Officers
meeting authorizing the increase of *Corporate powers reside on the Board of
directors or trustees if so stated in the Directors; decision/policymaking resides on
notice of the meeting. them. Implementation of rules/policy lies
General Rule: Power to elect directors is on the corporate officers
vested in the stockholders Categories:
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more of its directors or trustees or officers is 2. The vote of such director or trustee was
voidable, at the option of such corporation, not necessary for the approval of the
unless all of the following conditions are contract;
present: 1. That the presence of such 3. The contract is fair and reasonable under
director or trustee in the board meeting in the circumstances;
which the contract was approved was not 4. In case of an officer, the contract has
necessary to constitute a quorum for such been previously authorized by the board of
meeting; 2. That the vote of such director or directors.
Reason: As presence in the board meeting
trustee was not necessary for the approval
might affect the status of the contract.
of the contract; 3. That the contract is fair
and reasonable under the circumstances; Self-Dealing Directors/Officers
and 4. That in case of an officer, the contract directors/officers who transact business
has been previously authorized by the with their own corporation.
board of directors. Where any of the first - This is not prohibited by law.
two conditions set forth in the preceding Interlocking Directors those who have
paragraph is absent, in the case of a been elected as directors in 2 or more
contract with a director or trustee, such different corporations.
contract may be ratified by the vote of the - May be prohibited by the By-Laws
stockholders representing at least 2/3 of the (Gokongwei case).
outstanding capital stock or of at least 2/3 -Not prohibited by law however there are
of the members in a meeting called for the consequences.
purpose: Provided, That full disclosure of Contracts involving Inter-locking Directors
Sec. 33 of the Corporation Code provides
the adverse interest of the directors or
that: Except in cases of fraud, and provided
trustees involved is made at such meeting:
the contract is fair and reasonable under
Provided, however, that the contract is fair
the circumstances, a contract between two
and reasonable under the circumstances.
Example: or more corporations having interlocking
In XYZ Corporation, A is a director. The directors shall not be invalidated on that
corporation acts through the Board of ground alone: Provided, That if the interest
Directors. XYZ Corporation and A entered of the interlocking director in one
into a lease contract. A as the lessor and corporation is substantial and his interest in
XYZ Corporation as lessee. The contract was the other corporation or corporations is
approved by the Board of Directors. merely nominal, he shall be subject to the
Q: What is the status of the contract? provisions of the preceding section insofar
General Rule: The contract is voidable. as the latter corporation or corporations are
Exception: If the requisites provided in Sec. concerned. Stockholdings exceeding 20% of
32 are present. the outstanding capital stock shall be
Exception to the Exception: If requirement
considered substantial for purposes of
number 1 or 2 is absent, in the case of a
interlocking directors.
contract with a director or trustee, such Example:
contract may be considered valid by the A is a director of two corporation, ABC
ratification of at least 2/3 of the outstanding Corporation and XYZ Corporation. XYZ
capital stock or 2/3 of the members. Corporation and ABC Corporation entered
Requisites: into a lease contract where ABC Corporation
1. The presence of such director or trustee
is the lessor and XYZ Corporation is the
in the board meeting in which the contract
lessee.
was approved was not necessary to Q: Can this contract be invalidated on the
constitute a quorum for such meeting; ground that there is an interlocking
director?
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purposes, any provision or matter stated in outstanding capital stock or by at least 2/3
the articles of incorporation may be of the members in case of non-stock
amended by a majority vote of the board of corporation. Written notice of the proposed
directors or trustees and the vote or written action and of the time and place of the
assent of the stockholders representing at meeting shall be addressed to each
least 2/3 of the outstanding capital stock, stockholder or member at his place of
without prejudice to the appraisal right of residence as shown on the books of the
dissenting stockholders in accordance with corporation and deposited to the addressee
the provisions of this Code, or the vote or in the post office with postage prepaid, or
written assent of at least 2/3 of the served personally: Provided, That in case of
members if it be a non-stock corporation. extension of corporate term, any dissenting
*The following are excluded in counting the stockholder may exercise his appraisal right
outstanding capital stock: 1. Treasury stock; under the conditions provided in this code.
2. Unissued shares. Increase or Decrease of Capital Stock/
*Aside from the votes of majority of the Incurrence, Creation or Increase of Bonded
board and assent of the 2/3 of the OCS, the Indebtedness
approval of the SEC is necessary for the Sec. 38 of the Corporation Code states that:
amendment of the AOI. No corporation shall increase or decrease
*There is an implied approval of the SEC, its capital stock or incur, create or increase
i.e., failure to act on the application filed by any bonded indebtedness unless approved
the corporation within 6 mos. by a majority vote of the board of directors
Q: How to get the approval of the and, at a stockholders meeting duly called
stockholders? for the purpose, 2/3 of the outstanding
A: 1. Call for a meeting; 2. Obtain the
capital stock shall favor the increase or
written assent of the stockholders.
diminution of the capital stock, or the
*In Tan v Sycip, the Supreme Court held that
incurring, creating or increasing of any
in case of a non-stock corporation,
bonded indebtedness. Written notice of the
membership is personal and non-
proposed increase or diminution of the
transferrable unless the by-laws provides
capital stock or of the incurring, creating, or
otherwise. The deceased member is not
increasing of any bonded indebtedness and
entitled to vote.
of the time and place of the stockholders
Four changes in Articles of Incorporation that require meeting at which the proposed increase or
the approval of the stockholders. diminution of the capital stock or the
1. Extension of corporate term; incurring or increasing of any bonded
2. Shortening of corporate term; indebtedness is to be considered , must be
3. Increase or Decrease of Capital Stock; addressed to each stockholder at his place
4. Increase or Decrease of Bonded indebtedness. of residence as shown on the books of the
*Approval of Stockholders is necessary in these changes corporation and deposited to the addressee
because they are necessary for the corporations in the post office with postage prepaid, or
existence. served personally. xxx.
Q: When the corporation increases its
Extension/Shortening of Corporate Term capital stock, is the 25% requirement
Sec. 37 of the Corporation Code states that: necessary? How can it be computed?
A private corporation may extend or A: YES. The SEC ruled that the 25% applies
shorten its term as stated in the articles of to the increase amount.
incorporation when approved by a majority *The corporation is required to maintain a
vote of the board of directors or trustees sinking fund.
and ratified at a meeting by the Q: What does bonded indebtedness mean?
stockholders representing at least 2/3 of the
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A: Requires longer time of payment; special *Pre-emptive right is satisfied as long as the
burden on the corporation; involves the corporation gives the stockholder the
important assets of the corporation. opportunity to buy the shares.
Denial of Pre-emptive Right *The offer must first be made to the
Sec. 39 of the Corporation Code states that: stockholders.
All stockholders of a stock corporation shall Sale or Disposition of Assets
enjoy pre-emptive right to subscribe to all Sec. 40 of the Corporation Code states that:
issues or disposition of shares of any class, Subject to the provisions of existing laws
in proportion to their respective on illegal combinations and monopolies, a
shareholdings, unless such right is denied by corporation may, by a majority vote of its
the articles of incorporation or an board of directors or trustees, sell, lease,
amendment thereto: Provided, That such exchange, mortgage, pledge or otherwise
pre-emptive right shall not extend to shares dispose of all or substantially all of its
to be issued in compliance with laws property and assets, including its goodwill,
requiring stock offerings or minimum stock upon such terms and conditions and for
ownership by the public; or to shares to be such consideration, which may be money,
issued in good faith with the approval of the stocks, bonds or other instruments for the
stockholders representing 2/3 of the payment of money or other property or
outstanding capital stock, in exchange for consideration, as its board of directors or
property needed for corporate purposes or trustees may deem expedient, when
in payment of a previously contracted authorized by the vote of the stockholders
debt. representing at least 2/3 of the outstanding
*Coming from the increased authorized capital stock, or in case of non-stock
capital stock. corporation by the vote of at least 2/3 of
* Similar to Right of First Refusal the members, in a stockholders or
*It is not a matter of right. It can be denied members meeting duly called for the
by the corporation through denial of such purpose. Written notice of the proposed
right in the articles of incorporation. action and of the time and place of the
Purposes:
meeting shall be addressed to each
1. In order that the stockholder may be able
stockholder or member at his place of
to maintain their relative proportional
residence as shown on the books of the
voting trend and control in the corporation;
corporation and deposited to the addressee
2. To avoid dilution of their proportionate
in the post office with postage prepaid, or
voting and control in the corporation.
served personally: Provided, That any
General Rule: Pre-emptive right is available
to stockholders. dissenting stockholder may exercise his
Exception: if it is denied in the Articles of appraisal right under the conditions
Incorporation or through amendment. provided in this Code. A sale or other
Exception to the Exception: Pre-emptive disposition shall be deemed to cover
right shall not extend to: substantially all the corporate property and
1. Shares to be issued in compliance with assets if thereby the corporation would be
laws requiring stock offerings or minimum rendered incapable of continuing the
stock ownership by the public; business or accomplishing the purpose for
2. Shares to be issued in good faith with the which it was incorporated. xxx.
approval of the stockholders representing Q: What makes the disposition peculiar?
2/3 of the outstanding capital stock, in A: The disposition is of all or substantially all
exchange for property needed for corporate of the corporations properties and assets.
purposes; and Q: What kind of disposition involve?
3. In payment of a previously contracted A: 1. Sell; 2. Lease; 3. Exchange; 4.
debt. Mortgage; 5. Pledge.
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Requisite:
General Rule: Majority vote of the OCS
Exception: 2/3 of the OCS C. Adoption of By-Laws; Effect of Non-Filing within
*SECs approval is not necessary the prescribed period
*When the corporation enters into a Sec. 46 of the Corporation Code states that:
management contract, appraisal right is Every corporation formed under this Code
NOT AVAILABLE to any dissenting must, within 1 month after receipt of official
stockholder. notice of the issuance of its certificate of
Reason: Sound business policy dictates that incorporation by the SEC, adopt a code of By-
it would be better for the corporation, at Laws for its government not inconsistent with
the inception of its operation, to be this Code. For the adoption of By-Laws by the
managed by a company who has been corporation the affirmative vote of the
experienced in a particular kind of business stockholders representing at least a majority of
if the managed corporation needs the the outstanding capital stock, or of at least a
technical expertise, skills, experiences, majority of the members in case of non-stock
background of another entity. corporations, shall be necessary. The By-Laws
shall be signed by the stockholders or members
CORPORATE BY-LAWS:
voting for them and shall be kept in the
A. Concept, Use and Nature of By-Laws principal office of the corporation, subject to
By-Laws relatively permanent and continuing the inspection of the stockholders or members
rules of action adopted by the corporation for during office hours. A copy thereof, duly
its own government and that of the individuals certified to by a majority of the directors or
composing it and those having the direction, trustees countersigned by the secretary of the
management and control of its affairs, in whole corporation, shall be filed with the SEC which
or in part, in the management and control of its shall be attached to the original articles of
affairs and activities. incorporation. Notwithstanding the provisions
Nature: Regulates internal affairs of the of the preceding paragraph, By-Laws may be
corporation. adopted and filed prior to incorporation; in such
case, such By-Laws shall be approved and signed
B. By-Laws in relation to Articles of Incorporation
by all the incorporators and submitted to the
Distinction between By-Laws and Articles of
SEC, together with the articles of incorporation.
Incorporation:
In all cases, By-Laws shall be effective only upon
By-Laws is a condition subsequent.
Articles of Incorporation is a condition the issuance by the SEC of a certification that
precedent. Essential for corporate existence. 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
ARTICLES OF BY-LAWS institution, building and loan association, trust
INCORPORATION company, insurance companies, public utility,
External affairs Internal Affairs educational institution or other special
Affects the status of Does not affect the
corporations governed by special laws, unless
existence of the status of the existence
corporation but has impact on the accompanied by a certificate of the appropriate
existence; failure to government agency to the effect that such By-
submit is a ground for Laws or amendments are in accordance with
disenfranchisement law.
Joint decision of the General Rule: joint *Submission of By-Law is not a requirement for
board and decision acquisition of corporate existence, however, for
stockholders Exception: Delegates the corporation to be able to continue its
the power to amend
corporate existence, the corporation is required
the By-Laws to the
Board to submit the corporate By-Law.
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*Non-submission of the By-Laws within the notice thereof; 7. The manner of election or
prescribed period allowed by law is a ground for appointment and the term of office of all
the dissolution of the corporation. officers other than directors or trustees; 8. The
*In Loyola Grandvillas Homeowners penalties for violation of the By-Laws; 9. In the
Association v CA, the SC held that failure to case of stock corporations, the manner of
adopt a set of By-Laws within the prescribed issuing stock certificates; and 10. Such other
period, notwithstanding the word used in the matters as may be necessary for the proper or
Code, the same would not result to automatic convenient transaction of its corporate business
dissolution of the corporation. The failure to file and affairs.
by-laws would not, by itself, amount to Requisites:
dissolution or extinguishment of the corporate 1. It must be consistent with Corporation
existence. Code, other pertinent laws and regulations.
*Section 46 of the Corporation Code must be 2. It must be consistent with the Articles of
read in conjunction with PD 902-A which Incorporation.
outlines the procedure to be followed before 3. It must be reasonable and not arbitrary or
the franchise/license of a private corporation oppressive.
4. It must not disturb vested rights, impair
may be suspended or revoked.
*Observance of Due Process is necessary. contract or property rights of stockholders
*In Sawadjaan v CA, the SC held that or members or create obligations unknown
meanwhile when the By-Laws is not yet to law.
submitted, the corporation, at that time, and
E. Amendment to By-Laws
the very least, may be considered as a De Facto
Sec. 48 of the Corporation Code provides that:
Corporation and therefore, its right to exist as
The board of directors or trustees, by a
such cannot be inquired into or cannot be
majority vote thereof, and the owners of at
collaterally attacked in a private suit. It is for the
least a majority of the outstanding capital stock,
State to initiate a proceeding questioning the
or at least a majority of the members of a non-
existence, on the ground of its non-submission
stock corporation, at a regular or special
of By-Laws, within the prescribed period.
meeting duly called for the purpose, may
D. Contents of By-Laws; Requisites of a Valid By- amend or repeal any By-Laws or adopt new By-
Law Provision Laws. The owners of 2/3 of the outstanding
Sec. 47 of the Corporation Code states that: capital stock or 2/3 of the members in a non-
Subject to the provisions of the Constitution, stock corporation may delegate to the board of
this Code, other special laws, and the articles of directors or trustees the power to amend or
incorporation, a private corporation may repeal any By-Laws or adopt new By-Laws:
provide in its By-Laws for: 1. The time, place and Provided, That any power delegated to the
manner of calling and conducting regular or board of directors or trustees to amend or
special meetings of the directors or trustees; 2. repeal any By-Laws or adopt new By-Laws shall
The time and manner of calling and conducting be considered as revoked whenever
regular or special meetings of the stockholders stockholders owning or representing a majority
or members; 3. The required quorum in of the outstanding capital stock or a majority of
meetings of stockholders or members and the the members in non-stock corporations, shall so
manner of voting therein; 4. The form for vote at a regular or special meeting. Whenever
proxies of stockholders and members and the any amendment or new By-Laws are adopted,
manner of voting them; 5. The qualifications, such amendment or new By-Laws shall be
duties and compensation of directors or attached to the original By-Laws in the office of
trustees, officers and employees; 6. The time for the corporation, and a copy thereof, duly
holding the annual election of directors or certified under oath by the corporate secretary
trustees and the mode or manner of giving and a majority of the directors or trustees, shall
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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 members provided that it is within the
anywhere in or outside of the Philippines unless Philippines and proper notice has been given.
the by-laws provide otherwise. Q: Is there a conflict between Section 51 and
*Notice of regular or special meetings stating Section 93?
the date, time and place of the meeting must be A: YES. There is conflict but this conflict may be
sent to every director or trustee at least 1 day reconciled. As a rule, the by-laws may provide a
prior to the scheduled meeting unless different place of meeting provided that it is
otherwise provided by the by-laws. within the Philippines and notice has been
given. As an exception, if the by-laws is silent of
B. Requirements of a Meeting the place of the meeting, section 51 applies.
1. It must be held at the proper place.
Sec. 52 of the Corporation Code provides that:
2. It must be held at the stated date and at the
Unless otherwise provided for in this Code or
appointed time or at a reasonable time
in the by-laws, a quorum shall consist of the
thereafter.
3. It must be called by the proper person. stockholders representing a majority of the
4. There must be a previous notice. outstanding capital stock or a majority of the
5. There must be a quorum. members in the case of non-stock
Sec. 51 of the Corporation Code provides that: corporations.
Stockholders or members meetings, whether General Rule: Majority of the OCS or Majority
regular or special, shall be held in the city or of the members
municipality where the principal office of the Exception: Unless otherwise provided by the
corporation is located, and if practicable in the Code or by the By-Laws.
principal office of the corporation: Provided, *In Tan v Sycip, deceased member is not
That Metro Manila shall, for purposes of this entitled to vote
section, be considered a city or municipality. Sec. 54 of the Corporation Code provides that:
Notice of meetings shall be in writing, and the The president shall preside at all meetings of
time and place thereof stated therein. All the directors or trustees as well as of the
proceedings had and any business transacted at stockholders or members, unless the by-laws
any meeting of the stockholders or members, if provide otherwise.
within the powers or authority of the
C. Right to Vote of Stockholders
corporation, shall be valid even if the meeting
Instances when voting right not available
be improperly held or called, provided all the
Sec. 6 of the Corporation Code provides
stockholders or members of the corporation are
that: Except as provided in the
present or duly represented at the meeting.
immediately preceding paragraph, the vote
*Applies to both stock and non-stock
necessary to approve a particular corporate
corporations.
act as provided in this Code shall be
General Rule: The meeting must be held in the
deemed to refer only to stocks with voting
city or municipality where the principal office is
rights.
located. Instances when voting right is not
Exception: Sec. 93 on non-stock corporations, available:
the By-Laws may provide different venue for 1. Delinquent shares
their meeting. 2. Treasury shares
*A casual reading of section 51 would say that a 3. Fractional shares
corporation cannot provide any other place for 4. Escrow shares
the meeting of stockholders. But in case of a Rules on:
1. Delinquent Shares
non-stock corporation, Section 93 of the
Sec. 71 of the Corporation Code
Corporation provides that the by-laws could
provides that: No delinquent stock
provide any place for the meeting of its
shall be voted for or be entitled to vote
or to representation at any
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agreement shall be cancelled and new ones law requires each and every director to have
shall be issued in the name of the trustee or legal, not beneficial title to at least one share.
trustees stating that they are issued pursuant to
E. Derivative Suit; Concept and Requisites
said agreement. In the books of the corporation,
Derivative Suit is a suit brought by any
it shall be noted that the transfer in the name of
stockholder, usually a minority shareholder, to
the trustee or trustees is made pursuant to said
redress a wrong committed against the
voting trust agreement. The trustee or trustees
corporation whenever the responsible officers
shall execute and deliver to the transferors
refuse to take any action thereon or are the very
voting trust certificates, which shall be
person to be sued.
transferable in the same manner and with the
*This prerogative is developed through
same effect as certificates of stock. The voting
jurisprudence.
trust agreement filed with the corporation shall *This is expressly mandated by Sec. 31 of the
be subject to examination by any stockholder of Corporation Code.
the corporation in the same manner as any Q: Why derivative?
other corporate book or record: Provided, That A: From the word derive. The one bringing the
both the transferor and the trustee or trustees suit derives the cause of action from the
may exercise the right of inspection of all corporation.
corporate books and records in accordance with Q: Who brings the suit?
the provisions of this Code. Any other A: Any stockholder/member usually minority
stockholder may transfer his shares to the same stockholder.
Q: Whose cause of action?
trustee or trustees upon the terms and
A: It is the corporations cause of action.
conditions stated in the voting trust agreement, Q: Are we in violation of the Code?
and thereupon shall be bound by all the A: No. Because the power to sue lies on the
provisions of said agreement. No voting trust board thus when the board refuses to take
agreement shall be entered into for the purpose action in order to protect the corporation
of circumventing the law against monopolies derivative suit may be allowed.
and illegal combinations in restraint of trade or Compelling Reason: Inaction of the officers.
used for purposes of fraud. Unless expressly Failure to discharge their responsibilities.
renewed, all rights granted in a voting trust Requisites:
agreement shall automatically expire at the end 1. The stockholder bringing the suit must be
of the agreed period, and the voting trust one of record as of the time the cause of
certificates as well as the certificates of stock in action accrues as well as of the time the
the name of the trustee or trustees shall action is brought unless the cause of action
thereby be deemed cancelled and new is a continuing offer.
certificates of stock shall be reissued in the *The stockholder must implead the real
name of the transferors. The voting trustee or party in interest, i.e. the corporation.
trustees may vote by proxy unless the *In Chua v CA, the SC held that the
agreement provides otherwise. corporation must be impleaded since it is
Consequence: The stockholder entering into a the real party in interest.
2. The action must be named under the
voting trust agreement ceases to be a
corporations name
stockholder of record.
3. General Rule: The stockholder bringing the
*In case of Lee v CA, the SC held that the
suit must have exhausted intra-corporate
stockholder concerned loses his legal title to the
remedies within the corporation.
shares so that if the stockholder is, at the same Exception: If the very person to be sued is
time, a director of the corporation, the responsible officers themselves.
automatically he is disqualified to continue **This is a condition precedent.
performing the duties of a director because the
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4. The suit is not intended to harass the be stipulated in the contract of subscription:
defendant, not a nuisance or harassment Provided, That no pre-incorporation
suit. subscription may be revoked after the
5. Appraisal right must not be an available submission of the articles of incorporation
remedy. to the SEC.
*Contracts between the subscribers.
Individual suit is a suit filed by the stockholder 2 Fold Characteristics:
because his personal right has been violated. a. It is a contract between subscribers.
The cause of action is personal to the b. May be regarded as continuing offer on
stockholder. The party injured is the stockholder the part of the subscriber concerned
himself. which the corporation may accept upon
acquisition of juridical personality.
Representative suit is a suit filed by a group of Reason: The corporation is not yet in
stockholders that suffered common injury. existence.
2. Post incorporation subscription one
SUBSCRIPTION CONTRACT:
entered into after the incorporation for the
A. Ways to become a Stockholder of a Corporation acquisition of unissued stock.
1. Subscription contract with the corporation. *Contracts between the subscribers and the
2. Purchase or acquisition of shares from corporation.
existing stockholders. *Creates a creditor-debtor relationship.
3. Purchase of treasury shares from the
D. Consideration for the Issuance of Shares
corporation.
Sec. 62 of the Corporation Code provides that:
*All of them involve shareholdings.
Stocks shall not be issued for a consideration
*Subscription is unique because it involves
less than the par or issued price thereof.
unissued shares.
Consideration for the issuance of stock may be
B. Concept of Subscription Contract any or a combination of any two or more of the
Subscription Contract is, under Sec. 60 of the following: 1. Actual cash paid to the
Corporation Code, any contract for the corporation; 2. Property, tangible or intangible,
acquisition of unissued stock in an existing actually received by the corporation and
corporation or a corporation still to be formed necessary or convenient for its use and lawful
shall be deemed a subscription within the purposes at a fair valuation equal to the par or
meaning of this Title, notwithstanding the fact issued value of the stock issued; 3. Labor
that the parties refer to it as a purchase or some performed for or services actually rendered to
other contract. the corporation; 4. Previously incurred
*This is strictly regulated by the Corporation indebtedness of the corporation; 5. Amounts
Code. transferred from unrestricted retained earnings
to stated capital; and 6. Outstanding shares
C. Kinds of Subscription
exchanged for stocks in the event of
1. Pre-incorporation subscription one
reclassification of conversion. Where the
entered into before incorporation.
consideration is other than actual cash, or
Sec. 61 of the Corporation Code provides
consists of intangible property such as patents
that: A subscription for shares of stock of a
of copyrights, the valuation thereof shall initially
corporation still to be formed shall be
be determined by the incorporators or the
irrevocable for a period of at least 6 months
board of directors, subject to the approval by
from the date of subscription, unless all of
the SEC. Shares of stock shall not be issued in
the other subscribers consent to the
exchange for promissory notes or future service.
revocation, or unless the incorporation of
The same considerations provided for in this
said corporation fails to materialize within
section, insofar as they may be applicable, may
said period or within a longer period as may
be used for the issuance of bonds by the
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corporation. The issued price of no-par value stated in the call made by the board. Failure
shares may be fixed in the articles of to pay on such date shall render the entire
incorporation or by the board of directors balance due and payable and shall make the
pursuant to authority conferred upon it by the stockholder liable for interest at the legal
articles of incorporation or the by-laws, or in the rate on such balance, unless a different rate
absence thereof, by the stockholders of interest is provided in the by-laws,
representing at least a majority of the computed from such date until full
outstanding capital stock at a meeting duly payment. If within 30 days from the said
called for the purpose. date no payment is made, all stocks covered
Valid considerations for the subscription by said subscription shall thereupon
agreements: become delinquent and shall be subject to
1. Cash sale as hereinafter provided, unless the
2. Property
board of directors orders otherwise.
3. Labor or services actually rendered to the
*If there was no date as to payment of
corporation
subscription stated in the subscription
4. Prior corporate obligations
5. Amounts transferred from unrestricted agreement, the board may call on all the
unpaid subscribers to pay the remaining
retained earnings to stated capital
6. Outstanding shares in exchange for stocks in balance of their subscription. Failure to pay
the event of reclassification or conversion. within 30 days from the said date, all stocks
covered by said subscription shall
E. Payment of Subscription thereupon become delinquent and shall be
Q When payment of the subscription is subject to sale unless the board of directors
made? orders otherwise.
A: Look into the subscription agreement. If
subscription agreement is silent as to when the F. Certificate of Stock
amount of subscription to be paid, the board of Certificate of Stock is a written evidence of the
directors may call on all the unpaid subscribers shares of stock but it is not the share itself.
to pay the remaining balance of their *Does not represent credit.
Q: How important is a stock certificate?
subscription.
A: It is an evidence of ownership of stocks.
Remedies to enforce payment of
Q: Who issue stock certificate?
subscription A: Stock certificates must be signed by the
1. By Extra-judicial sale at public auction.
president or vice-president, countersigned by
2. By judicial action.
3. Collection from cash dividends and the secretary or assistant secretary.
Q: When certificate of stock may be issued?
withholding of stock dividends.
A: Sec. 64 of the Corporation Code states that:
When shares are considered delinquent
Sec. 67 of the Corporation Code provides No certificate of stock shall be issued to a
that: Subject to the provisions of the subscriber until the full amount of his
contract of subscription, the board of subscription together with interest and
directors of any stock corporation may at expenses (in case of delinquent shares), if any is
any time declare due and payable to the due, has been paid.
Doctrine of Indivisibility of Subscription
corporation unpaid subscriptions to the
Contract
capital stock and may collect the same or
Doctrine of Indivisibility of Subscription
such percentage thereof, in either case with
Contract: Failure to pay any of the
accrued interest, if any, as it may deem
installments due would necessarily affect all
necessary. Payment of any unpaid
the other installments because the
subscription or any percentage thereof,
subscription is to be treated as one, whole,
together with the interest accrued, if any,
entire, indivisible contract. Upon default of
shall be made on the date specified in the
contract of subscription or on the date
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payment on any of the installment results to Sec. 73 of the Corporation Code provides that:
entire subscription due and demandable. The following procedure shall be followed for
*The Certificate of Stock cannot be divided the issuance by a corporation of new
into portions. certificates of stock in lieu of those which have
*No certificate of stock shall be issued until been lost, stolen or destroyed: 1. The registered
the full payment of the subscription. owner of a certificate of stock in a corporation
*The corporation has an automatic lien over
or his legal representative shall file with the
the shares.
corporation an affidavit in triplicate setting
Q: What will happen to the payment
forth, if possible, the circumstances as to how
already made by the subscriber?
A: The payment partially made shall be the certificate was lost, stolen or destroyed, the
number of shares represented by such
applied proportionately to all the shares
covered by the subscription. certificate, the serial number of the certificate
Example: and the name of the corporation which issued
P10 per share; payment made is P6000 the same. He shall also submit such other
covering 1000 shares. The P6000 shall be information and evidence which he may deem
allocated equally to all shares. P6 per share necessary; 2. After verifying the affidavit and
has been paid. P4 per share is the liability. other information and evidence with the books
Certificate of Stock, quasi-negotiable of the corporation, said corporation shall
Q: can the stock certificate be treated as publish a notice in a newspaper of general
negotiable instrument under NIL? circulation published in the place where the
A: No. The requisites are not complied corporation has its principal office, once a week
with. There is no engagement to pay in sum for 3 consecutive weeks at the expense of the
certain in money. registered owner of the certificate of stock
*Negotiable instrument represents credit.
which has been lost, stolen or destroyed. The
Creditor-debtor relationship arises.
notice shall state the name of said corporation,
Q: Are certificates of stock negotiable?
A: They are negotiable in certain extent. the name of the registered owner and the serial
That is why they are quasi-negotiable. number of said certificate, and the number of
*The title over the share can be assigned, shares represented by such certificate, and that
transferred by indorsement and delivery. after the expiration of 1 year from the date of
*Due course holding is not applicable. the last publication, if no contest has been
presented to said corporation regarding said
G. Transfer of Shares certificate of stock, the right to make such
If represented by a certificate, the following contest shall be barred and said corporation
must be strictly complied with: shall cancel in its books the certificate of stock
1. Delivery of the certificate;
which has been lost, stolen or destroyed and
2. Indorsement by the owner or his agent;
3. To be valid to third parties, the transfer must issue in lieu thereof new certificate of stock,
be recorded in the books of the corporation. unless the registered owner files a bond or
*If not represented by the certificate, the shares other security in lieu thereof as may be
may be transferred by means of a deed of required, effective for a period of 1 year, for
assignment and such is duly recorded in the such amount and in such form and with such
books of the corporation. sureties as may be satisfactory to the board of
*To make the transfer binding to the directors, in which case a new certificate may be
corporation and third person, the transfer must issued even before the expiration of the 1 year
be recorded in the stock and transfer book of period provided herein: Provided, That if a
the corporation. contest has been presented to said corporation
Q: Who is the owner of the share? or if an action is pending in court regarding the
A: The stockholder of record. ownership of said certificate of stock which has
been lost, stolen or destroyed, the issuance of
H. Lost and Destroyed Certificate of Stock
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the new certificate of stock in lieu thereof shall trustee, stockholder or member for damages,
be suspended until the final decision by the and in addition, shall be guilty of an offense
court regarding the ownership of said certificate which shall be punishable under Section 144 of
of stock which has been lost, stolen or this Code: Provided, That if such refusal is made
destroyed. Except in case of fraud, bad faith, or pursuant to a resolution or order of the board of
negligence on the part of the corporation and directors or trustees, the liability under this
its officers, no action may be brought against section for such action shall be imposed upon
any corporation which shall have issued the directors or trustees who voted for such
certificate of stock in lieu of those lost, stolen or refusal: and Provided, further, That it shall be a
destroyed pursuant to the procedure above- defense to any action under this section that
described. the person demanding to examine and copy
excerpts from the corporations records and
CORPORATE BOOKS AND RECORDS: minutes has improperly used any information
A. Books required to be kept by a Corporation secured through any prior examination of the
Sec. 74 of the Corporation Code provides that: records or minutes of such corporation or of any
Every corporation shall keep and carefully other corporation, or was not acting in good
preserve at its principal office a record of all faith or for a legitimate purpose in making his
business transactions and minutes of all demand. Stock corporations must also keep a
meetings of stockholders or members, or of the book to be known as the stock and transfer
board of directors or trustees, in which shall be book, in which must be kept a record of all
set forth in detail the time and place of holding stocks in the names of the stockholders
the meeting, how authorized, the notice given, alphabetically arranged; the installments paid
whether the meeting was regular or special, if and unpaid on all stock for which subscription
special its object, those present and absent, and has been made, and the date of payment of any
every act done or ordered done at the meeting. installment; a statement of every alienation,
Upon the demand of any director, trustee, sale or transfer of stock made, the date thereof,
stockholder or member, the time when any and by and to whom made; and such other
director, trustee, stockholder or member entries as the by-laws may prescribe. The stock
entered or left the meeting must be noted in and transfer book shall be kept in the principal
the minutes; and on a similar demand, the yeas office of the corporation or in the office of its
and nays must be taken on any motion or stock transfer agent and shall be open for
proposition, and a record thereof carefully inspection by any director or stockholder of the
made. The protest of any director, trustee, corporation at reasonable hours on business
stockholder or member on any action or days. No stock transfer agent or one engaged
proposed action must be recorded in full on his principally in the business of registering
demand. The records of all business transfers of stocks in behalf of a stock
transactions of the corporation and the minutes corporation shall be allowed to operate in the
of any meetings shall be open to inspection by Philippines unless he secures a license from the
any director, trustee, stockholder or member of SEC and pays a fee as may be fixed by the
the corporation at reasonable hours on business Commission, which shall be renewable annually:
days and he may demand, writing, for a copy of Provided, That a stock corporation is not
excerpts from said records or minutes, at his precluded from performing or making transfer
expense. Any officer or agent of the corporation of its own stocks, in which case all the rules and
who shall refuse to allow any director, trustee, regulations imposed on stock transfer agents,
stockholder or member of the corporation to except the payment of a license fee herein
examine and copy excerpts from its records or provided, shall be applicable.
minutes, in accordance with the provisions of *Keeping of books and records are mandatory.
Books required to be kept:
this Code, shall be liable to such director,
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or awarded price, the stockholder shall shares as agreed upon between him and
forthwith transfer his shares to the the corporation or as determined by the
corporation. appraisers chosen by them.
Requisites: *Sec. 86. The dissenting stock can be sold
1. Any of the instances set forth by law must during the pendency of its payment.
be present. Remedy in case appraisal right cannot be
2. Dissenting stockholder must have voted
exercised: Dispose the shareholdings.
against the proposed action.
*Abstaining stockholder cannot claim or NON-STOCK CORPORATIONS:
exercise his appraisal right.
3. Demand for payment must be made within A. Definition and Purposes of a Non-Stock
30 days from the date vote is taken thereon. Corporation
Failure to make demand shall be deemed a Sec. 87 of the Corporation Code states that:
waiver. For the purposes of this Code, a non-stock is
4. Price must be based on fair value as of day one where no part of its income is distributable
prior to date on which vote was taken as dividends to its members, trustees, or
5. Submission by withdrawing stockholder of officers, subject to the provisions of this Code
his shares to the corporation for notation of on dissolution: Provided, That any profit which a
being a dissenting stockholder within 10 non-stock corporation may obtain as an incident
days from written demand. to its operations shall, whenever necessary or
6. Payment must be made only when the proper, be used for the furtherance of the
corporation has unrestricted retained purpose or purposes for which the corporation
earnings in its books. was organized, subject to the provisions of this
7. Stockholder must transfer his shares to the Title. The provisions governing stock
corporation upon payment by the corporations, when pertinent, shall be
corporation. applicable to non-stock corporations, except as
may be covered by specific provisions of this
D. Effects of Exercising Appraisal Right
Sec. 83 of the Corporation Code provides that: Title.
*Sec. 87 should be read in harmony with Sec.
From the time of demand for payment of the
94.
fair value of a stockholders shares until either
*A Non-stock corporation is not precluded from
the abandonment of the corporate action
engaging in profit-business related.
involved or the purchase of the said shares by Sec. 88 of the Corporation Code provides that:
the corporation, all rights accruing to such Non-stock corporations may be formed or
shares, including voting and dividend rights, organized for charitable, religious, educational,
shall be suspended in accordance with the professional, cultural, fraternal, literary,
provisions of this Code, except the right of such scientific, social, civic service, or similar
stockholder to receive payment of the fair value purposes, like trade, industry, agricultural and
thereof: Provided, That if the dissenting like chambers, or any combination thereof,
stockholder is not paid the value of his shares subject to the special provisions of this Title
within 30 days after the award, his voting and governing particular classes of non-stock
dividend rights shall immediately be restored. corporations.
Effects: *The purpose of a non-stock corporation is
1. All rights accruing to such shares shall be
related to public welfare.
suspended from the time of demand for
payment of the fair value of the shares until B. Distinguished from Stock Corporation
either the abandonment of the corporate
action. Non- stock Stock Corporation
2. The dissenting stockholder shall be entitled Corporation
to receive payment of the fair value of his 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
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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
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those provided in this Code. The articles of Reason: It is more onerous and burdensome.
incorporation of a close corporation may
provide that the business of the corporation CORPORATE DISSOLUTION/LIQUIDATION:
may provide that the business of the A. Methods of Voluntary Corporate Dissolution
corporation shall be managed by the and the Requirements therefor
stockholders of the corporation rather than by a Dissolution refers to the extinguishment of
board of directors. So long as this provision franchise or termination of corporate existence.
continues in effect: 1. No meeting of Modes of Dissolution:
stockholders need be called to elect directors; 2. 1. Voluntary dissolution
Unless the context clearly requires otherwise, 2. Involuntary dissolution
the stockholders of the corporation shall be Methods of Voluntary Dissolution:
deemed to be directors for the purpose of 1. Voluntary dissolution where no creditors
applying the provisions of this Code; and 3. The are affected
2. Voluntary dissolution where creditors are
stockholders of the corporation shall be subject
to all liabilities of directors. The articles of affected
3. Shortening of the corporate term by
incorporation may likewise provide that all
amending the articles of incorporation
officers or employees or that specified officers
*Dissolution takes effect upon the coming
or employees shall be elected or appointed by
of the shortened term.
the stockholders, instead of by the board of 4. Expiration of corporate term
directors.
Voluntary dissolution where no creditors
C. Restrictions on Transfer of Shares are affected
Sec. 98 of the Corporation Code provides that: Sec. 118 of the Corporation Code provides
Restrictions on the right to transfer shares that: If dissolution of a corporation does
must appear in the articles of incorporation and not prejudice the rights of any creditor
in the by-laws as well as in the certificate of having a claim against it, the dissolution
stock; otherwise, the same shall not be binding may be effected by majority vote of the
on any purchaser thereof in good faith. Said board of directors or trustees, and by a
restrictions shall not be more onerous than resolution duly adopted by the affirmative
granting the existing stockholders or the vote of the stockholders owning at least 2/3
corporation the option to purchase the shares of the outstanding capital stock or of at
of the transferring stockholder with such least 2/3 of the members of a meeting to be
reasonable terms, conditions or period stated held upon call of the directors or trustees
therein. If upon the expiration of said period, after publication of the notice of time, place
the existing stockholders or the corporation fails and object of the meeting for 3 consecutive
to exercise the option to purchase, the weeks in a newspaper published in the
transferring stockholder may sell his shares to place where the principal office of said
any third person. corporation is located; and if no newspaper
Option Restriction this restriction provides
is published in such place, then in a
that no disposition of shares will be made
newspaper of general circulation in the
unless the shares are offered first to the
Philippines, after sending such notice to
corporation or the stockholders.
each stockholder or member either by
*Pre-emptive right is exercisable or available.
*This restriction is valid and allowed. registered mail or by personal delivery at
Reason: it is the one contemplated by law. least 30 days prior to said meeting. A copy
*Restriction derogates private rights. of the resolution authorizing the dissolution
Consent Restriction this restriction provides shall be certified by a majority of the board
that no disposition of shares will be made of directors or trustees and countersigned
without the consent of directors. by the secretary of the corporation. The SEC
*This restriction is not valid.
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shall thereupon issue the certificate of Before such date, a copy of the order shall
dissolution. be published at least once a week for three
Requisites: (3) consecutive weeks in a newspaper of
1. A meeting must be held on the call of general circulation published in the
the directors or trustees; municipality or city where the principal
2. Notice of the meeting should be given office of the corporation is situated, or if
there be no such newspaper, then in a
to the stockholders by personal delivery
newspaper of general circulation in the
or registered mail at least 30 days prior Philippines, and a similar copy shall be
to the meeting; posted for three (3) consecutive weeks in
3. The notice of meeting should also be three (3) public places in such municipality
published for 3 consecutive weeks in a or city. Upon five (5) day's notice, given
newspaper published in the place; after the date on which the right to file
4. The resolution to dissolve must be objections as fixed in the order has expired,
approved by the majority of the the Commission shall proceed to hear the
directors/trustees and approved by the petition and try any issue made by the
objections filed; and if no such objection is
stockholders representing at least 2/3
sufficient, and the material allegations of
of the outstanding capital stock or 2/3 the petition are true, it shall render
of members; judgment dissolving the corporation and
5. A copy of the resolution shall be directing such disposition of its assets as
certified by the majority of the directors justice requires, and may appoint a receiver
or trustees and countersigned by the to collect such assets and pay the debts of
secretary; the corporation.
6. The signed and countersigned copy will Requisites:
be filed with the SEC and the latter will 1. Approval of the stockholders
representing at least 2/3 of the
issue the certificate of dissolution
outstanding capital stock or 2/3 of
members in a meeting called for that
Voluntary dissolution where creditors are
purpose;
affected 2. Filing of a Petition with the SEC signed
Sec. 119 of the Corporation Code provides by majority of directors or trustees or
that: Where the dissolution of a other officers having the management
corporation may prejudice the rights of any of its affairs verified by President or
creditor, the petition for dissolution shall be Secretary or Director. Claims and
filed with the Securities and Exchange demands must be stated in the petition;
Commission. The petition shall be signed by 3. If petition is sufficient in form and
a majority of its board of directors or substance, the SEC shall issue an Order
trustees or other officers having the fixing a hearing date for objections;
management of its affairs, verified by its 4. A copy of the Order shall be published
president or secretary or one of its directors at least once a week for 3 consecutive
or trustees, and shall set forth all claims and weeks in a newspaper of general
demands against it, and that its dissolution circulation or if there is no newspaper in
was resolved upon by the affirmative vote the municipality or city of the principal
of the stockholders representing at least office, posting for 3 consecutive weeks
two-thirds (2/3) of the outstanding capital in 3 public places is sufficient;
stock or by at least two-thirds (2/3) of the 5. Objections must be filed no less than 30
members at a meeting of its stockholders or days nor more than 60 days after the
members called for that purpose. If the entry of the order;
petition is sufficient in form and substance, 6. After the expiration of the time to file
the Commission shall, by an order reciting objections, a hearing shall be conducted
the purpose of the petition, fix a date on or upon prior 5 day notice to hear the
before which objections thereto may be objections;
filed by any person, which date shall not be 7. Judgment shall be rendered dissolving
less than thirty (30) days nor more than the corporation and directing the
sixty (60) days after the entry of the order.
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2. Through a trustee to whom the properties corporate existence in an effort to restore the
are conveyed corporation to its former successful operation.
3. By management committee or rehabilitation *This is a remedy expressly allowed under
receiver Section 6 of PD 902-A.
Q: Can the 3 year period be extended? Purpose: To make the corporation financially
A: NO. viable again.
Substantive Grounds:
Reason: Beyond the 3 year period, there is no 1. When there is imminent danger of
corporate existence for all purposes subject to dissipation or wastage of corporate assets
doctrine of relation. 2. Serious paralyzation of business which
Remedy: Before the expiration of the 3 year would work to the prejudice of the
period, appoint a trustee/receiver. stockholders and creditors of the
Q: During the 3 year period, does the corporation
corporation enjoy corporate existence? *Mere misconduct of an officer is not a ground
A: YES. But for limited purpose only, i.e., for for corporate rehabilitation.
liquidation purposes only. (Limited existence) *A corporation cannot ask for corporate
Q: May such corporation sue during the 3 year rehabilitation and at the same time dissolution.
period? *With the passage of RA8799, the remedy could
A: YES. But only when the subject matter is now be instituted with the proper RTC.
related to liquidation and winding up of its Effect: Stay Order - stops or suspends the
remaining affairs. enforcement of all claims for money or
*In case trustee/receiver is appointed, he is not otherwise whether enforcement is by court or
bound by the 3 year period. not, until rehabilitation proceedings are
*In Gelano v CA, the SC held that the lawyer of terminated.
the corporation can be considered as trustee. Cases: PAL v Garcia; Sobrejuanite; Lingkod
The term trustee must be considered in its Manggagawa ng Rubberworld v Rubberworld
generic sense. Anyone who has been Philippines; RCBC v IAC
designated by the corporation to act on its *In PAL v Garcia, the SC held that stay order
behalf could be considered as trustee for suspends all enforcement in all stages of the
purposes of pursuing a claim for and on behalf proceedings.
of the corporation. A lawyer falls within the *In Lingkod Manggagawa sa Rubberworld v
ambit of the word trustee. Rubberworld Philippines, the SC held that labor
*Appointment of trustee can be inferred from claims are likewise affected by the Stop order.
the conduct of the corporation. This is by *In RCBC v IAC, the SC held that whether
Implication. creditors are secured or not, stay order will still
*If the corporation is the creditor appoint a affect them. The preference still remains it is
trustee. If the corporation is the debtor appoint just the enforcement that is suspended.
a receiver.
FOREIGN CORPORATIONS:
Q: What if the corporate properties have
already been distributed among the A. Concept of Foreign Corporation
shareholders without trustee/receiver? Foreign Corporation is a corporation formed,
A: Remedy: Run after the erring directors and organized or existing under any law other than
officers. those of the Philippines, and whose laws allow
Filipino citizens and corporations to do business
E. Concept of Rehabilitation; Effects of in its own country or state.
Appointment of Management Committee or Sec. 123 of the Corporation Code provides that:
Receiver For the purposes of this Code, a foreign
Rehabilitation connotes a reopening or corporation is one formed, organized or existing
reorganization. Contemplates a continuance of under any laws other than those of the
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Philippines and whose laws allow Filipino no intent to continue the same in the
citizens and corporations to do business in its Philippines.
own country or state. It shall have the right to *If the foreign corporation is not licensed to do
transact business in the Philippines after it shall business in the Philippines, General Rule: they
have obtained a license to transact business in have no access in Philippine Courts
this country in accordance with this Code and a Exceptions:
1. Isolated transactions
certificate of authority from the appropriate
2. Infringement of trademark
government agency. *International offense can be sued
Reciprocity Clause provides that the foreign
anywhere.
laws allow Filipino citizens and corporations to
Cases: Expert Travel Tours v CA; Home
do business in its own country or state.
Insurance v Eastern Shipping Lines
B. Tests to Determine Nationality of a Corporation *In Expert Travel Tours v CA, the SC held that
1. Incorporation Test when the corporation resident agent is not with authority to execute a
is incorporated, organized under the law of certification of Forum shopping following Sec.
other country. 23 of the Corporation Code.
2. Control Test for purposes of investment; *In Home Insurance v Eastern Shipping Lines,
the citizenship of a particular corporation is the SC held that if at the time the suit was
to be determined by the citizenship of the brought, the suing foreign entity already have
controlling stockholders. license to do business in the Philippines, the suit
will be allowed although at the time the
C. Concept of Doing Business and the License transaction was made it does not have the
Requirement therefor requisite of a license to do so, the remedial
Substance Test provides that: a foreign
defect is cured.
corporation is doing business in the country if it
Cases: Japan Airlines v CA
is continuing the body or substance of the
*In Japan Airlines v CA, the SC held that the
enterprise of business for which it was
selling of tickets though there is no aircraft
organized.
landing in the Philippines constitute doing
Continuity Test provides that: doing business
business in the Philippines.
implies a continuity of commercial dealings and
*In Ericks v CA, the SC held that license is
arrangements, and contemplates to some
necessary in order the foreign corporation may
extent the performance of acts or works or the
sue. In this case, the court considered the
exercise of some functions normally incident to
continuity test, they found out that the foreign
and in progressive prosecution of, the purpose
corporation has the intent to continue business
and object of its organization.
in the Philippines.
*Foreign Corporation is required to obtain
license from the SEC to enable them to do *Credit is obtained to maintain longer
transactions.
business in the Philippines.
*The foreign corporation must appoint a
D. Effects of Being Issued a License
resident agent so that court may acquire 1. They are placed under the jurisdiction of
jurisdiction over the foreign corporation the Philippine courts
*License is essential if there is an intention to 2. They are placed under the same footing as
maintain main or substance of the business in domestic corporations
the Philippines or to continue the same. 3. The public is protected in dealing with
*Lack of license does not affect the validity of foreign corporations.
the transaction.
*License is for regulatory purposes. E. Revocation and Withdrawal of License
*License requirement does not prevent Grounds for Revocation:
performance of acts that are isolated from the 1. Failure to file its annual report or pay any
main business of the corporation and there is fees as required by the Corporation Code
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