duty, or dishonest and unjust act in contravention of plaintiff’s legal right;
Corporation Law Reviewer Q and A
(Atty. Teresita Herbosa)
TITLE I
GENERAL PROVISIONS, DEFINITIONS AND
CLASSIFICATIONS
SEC. 2. Corporation Defined. – A corporation is an artificial being
created by operation of law, having the right of succession and the
powers, attributes, and properties expressly authorized by law or
incidental to its existence.
DOCTRINE OF SEPARATE JURIDICAL PERSONALITY
This doctrine enables to act as though it were a person. As an artificial being, it
may own properties, transact and commit acts expressly authorized by law or
incidental to its existence.
Q: DOES A CORPORATION HAVE A SEPARATE AND DISTINCT
PERSONALITY FROM ITS MEMBERS?
A: YES. A corporation is a juridical person distinct from the members
composing it. Properties registered in the name of the corporation are owned
by it as an entity separate and distinct from its members. While shares of
stock constitute personal property they do not represent property of the
corporation. (Stockholders of F Guanzon vs. RD [1962])
A corporation is a juridical entity with a legal personality separate and
distinct from those acting for and on its behalf and, in general, of the people
comprising it. Hence, the obligations incurred by the corporation, acting
through its officers such as in this case, are its sole liabilities. (Vda de
Roxas vs. OLFI, Mar. 6, 2013)
Q: DO THE HEIRS OF A SHAREHOLDER AUTOMATICALLY
BECOME STOCKHOLDERS WHEN THE SHAREHOLDER DIES?
A: NO. Upon the death of a shareholder, the heirs do not automatically
become stockholders of the corporation and acquire the rights and privileges
of the deceased as shareholder of the corporation. The stocks must be
distributed first to the heirs in estate proceedings, and the transfer of the
stocks must be recorded in the books of the corporation. Section 63 of the
Corporation Code provides that no transfer shall be valid, except as between
the parties, until the transfer is recorded in the books of the corporation.
(Puno vs. Puno Enterprises [2009])
Q: DOES OWNERSHIP BY A SINGLE STOCKHOLDER OF NEARLY
ALL CAPITAL STOCKS ENOUGH TO WARRANT PIERCING OF
THE CORPORATE VEIL?
A: NO. Mere ownership by a single stockholder or by another corporation of
all or nearly all of the capital stocks of a corporation is not of itself a sufficient
reason for disregarding the fiction of separate corporate personalities.
Moreover, to disregard the separate juridical personality of a corporation, the
wrongdoing cannot be presumed, but must be clearly and convincingly
established. (Mayor vs. Tiu, Nov. 23, 2016)
Q: WHEN IS A TRANSFER OF SHARES OF STOCKS VALID?
A: No transfer, x x x shall be valid, except as between the parties, until the
transfer is recorded in the books of the corporation showing the names of
the parties to the transaction, the date of the transfer, the number of the
certificate or certificates and the number of shares transferred. (Tee Ling
Kiat vs. Ayala Corp et al., Mar 7, 2018)
DOCTRINE OF PIERCING THE CORPORATE VEIL
The doctrine of piercing the corporate veil applies only in three (3) basic
instances, namely:
a) when the separate and distinct corporate personality defeats public
convenience, as when the corporate fiction is used as a vehicle for
the evasion of an existing obligation;
b) in fraud cases, or when the corporate entity is used to justify a wrong,
protect a fraud, or defend a crime; or
c) is used in alter ego cases, i.e., where a corporation is essentially a
farce, since it is a mere alter ego or business conduit of a person, or
where the corporation is so organized and controlled and its affairs so
conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation.
WHAT IS THE THREE-PRONGED TEST TO DETERMINE THE
APPLICATION OF THE ALTER EGO THEORY?
(1) Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its
own;
(2) Such control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal
and
(3) The aforesaid control and breach of duty must have proximately caused
the injury or unjust loss complained of. (PNB vs. Hydro Resources,
Mar. 13, 2013)
Q: IS CONTROL ENOUGH TO JUSTIFY PIERCING OF THE
CORPORATE VEIL?
A: Control, by itself, does not mean that the controlled corporation is a mere
instrumentality or a business conduit of the mother company. Even control
over the financial and operational concerns of a subsidiary company does
not by itself call for disregarding its corporate fiction. There must be a
perpetuation of fraud behind the control or at least a fraudulent or illegal
purpose behind the control in order to justify piercing the veil of corporate
fiction. Such fraudulent intent is lacking in this case. (Pacific Rehouse
Corp. et. al. vs. CA, Mar 24, 2014)
Q: WHAT FACTORS WILL JUSTIFY PIERCING OF THE
CORPORATE VEIL?
A: The Court also held that the confluence of the following factors will justify
the piercing of the corporate veil, to wit: (a) a first corporation is dissolved;
(b) the assets of the first corporation is transferred to a second corporation to
avoid a financial liability of the first corporation; and (c) both corporations are
owned and controlled by the same persons such that the second corporation
should be considered as a continuation and successor of the first
corporation. (Optyman Manufacturing Corp. vs. Security Bank, Dec. 3,
2014)
DISTINGUISH FROM SOLE PROPRIETORSHIP, PARTNERSHIP,
JOINT VENTURE AND COOPERATIVES
Q: WHAT IS A SOLE PROPRIETORSHIP?
A: A sole proprietorship does not possess a juridical personality separate
and distinct from the personality of the owner of the enterprise. The law
merely recognizes the existence of a sole proprietorship as a form of
business organization conducted for profit by a single individual and requires
its proprietor or owner to secure licenses and permits, register its business
name, and pay taxes to the national government. The law does not vest a
separate legal personality on the sole proprietorship or empower it to file or
defend an action in court. (Excellent Quality Apparel vs. Win Multiple
Rich Builders [2009])
A sole proprietorship has no juridical personality separate and
distinct from that of its owner, and need not be impleaded as a
party-plaintiff in a civil case. (SC Megaworld vs. Engr. Parada,
Sept. 11, 2013)
Q: WHAT IS A PARTNERSHIP?
A: Article 1767 of the Civil Code provides that by a contract of partnership,
two or more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profits among
themselves. Two or more persons may also form a partnership for the
exercise of a profession. Under Article 1771, a partnership may be
constituted in any form, except where immovable property or real rights are
contributed thereto, in which case a public instrument shall be necessary.
Article 1784, on the other hand, provides that a partnership begins from the
moment of the execution of the contract, unless it is otherwise stipulated.
(Saludo vs. PNB. August 20, 2018)
Q: WHAT IS A JOINT VENTURE?
A: Joint venture is defined as an association of persons or companies jointly
undertaking some commercial enterprise; generally all contribute assets and
share risks. It requires a community of interest in the performance of the
subject matter, a right to direct and govern the policy in connection
therewith, and duty, which may be altered by agreement to share both in
profit and losses. (Kilosbayan Inc. vs. Guingona [1994])
Q: WHEN IS A JOINT VENTURE ESTABLISHED?
A: The rule is that whether the parties to a particular contract have thereby
established among themselves a joint venture or some other relation
depends upon their actual intention which is determined in accordance with
the rules governing the interpretation and construction of contracts.
(Aurbach vs. Sanitary Wares [1989])
Q: WHAT ARE COOPERATIVES?
A: Autonomous and duly registered association of persons, with a common
bond of interest, who have voluntarily joined together to achieve their social,
economic and cultural needs and aspirations by making equitable
contributions to the capital required, patronizing their products and services
and accepting a fair share of risks and benefits of the undertaking in
accordance with universally accepted cooperative principles.
CAN A CORPORATION RECOVER MORAL DAMAGES?
GENERAL RULE: NO.
 The award of moral damages cannot be granted in favor of a corporation
because, being an artificial person and having existence only in legal
contemplation, it has no feelings, no emotions, no senses. It cannot,
therefore, experience physical suffering and mental anguish, which call be
experienced only by one having a nervous system. ( ABS-CBN vs. CA
[1999])
Moral damages are granted in recompense for physical suffering, mental
anguish, fright, serious anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation, and similar injury. A corporation, being an
artificial person and having existence only in legal contemplation, has no
feelings, no emotions, no senses; therefore, it cannot experience physical
suffering and mental anguish. Mental suffering can be experienced only by
one having a nervous system and it flows from real ills, sorrows, and griefs
of life — all of which cannot be suffered by respondent bank as an artificial
person. (NPC vs. Philipp Brothers Oceanic, Nov 20, 2001)
EXCEPTION: Article 2219(7) See FBNI case.
A juridical person is generally not entitled to moral damages. Nevertheless,
AMEC’s claim for moral damages falls under item 7 of Article 2219 of the
Civil Code. This provision expressly authorizes the recovery of moral
damages in cases of libel, slander or any other form of defamation. Article
2219(7) does not qualify whether the plaintiff is a natural or juridical person.
Therefore, a juridical person such as a corporation can validly complain for
libel or any other form of defamation and claim for moral damages.
(Filipinas Broadcasting Network vs. Ago Medical, January 17, 2005)
SEC. 3. Classes of Corporations. – Corporations formed or
organized under this Code may be stock or nonstock corporations.
Stock corporations are those which have capital stock divided into
shares and are authorized to distribute to the holders of such shares,
dividends, or allotments of the surplus profits on the basis of the
shares held. All other corporations are nonstock corporations.
Q: WHAT ARE THE TWO CLASSES OF CORPORATIONS?
A: The Constitution recognizes two classes of corporations. The first refers
to private corporations created under a general law. The second refers to
government-owned or controlled corporations created by special charters.
Section 16, Article XII of the Constitution provides:
Sec. 16. The Congress shall not, except by general law, provide
for the formation, organization, or regulation of private
corporations. Government-owned or controlled corporations
may be created or established by special charters in the interest
of the common good and subject to the test of economic
viability.
The Constitution authorizes Congress to create government-owned or
controlled corporations through special charters. Since private corporations
cannot have special charters, it follows that Congress can create
corporations with special charters only if such corporations are government-
owned or controlled. (Feliciano vs. Aranez, August 25, 2010)
STOCK V. NON-STOCK CORPORATIONS (ASSOCIATIONS,
FOUNDATIONS, MEMBERSHIP CLUBS)
CLOSE CORPORATIONS
SPECIAL CORPORATIONS (EDUCATIONAL, RELIGIOUS AND
ONE PERSON CORPORATIONS)
SEC. 4. Corporations Created by Special Laws or Charters. –
Corporations created by special laws or charters shall be governed
primarily by the provisions of the special law or charter creating them
or applicable to them, supplemented by the provisions of this Code,
insofar as they are applicable.
Q: IS A GOVERNMENT INSTRUMENTALITY REQUIRED TO PAY
DOCKET FEES?
A: NO. A government instrumentality is vested with corporate powers. As
such, it is exempt from the payment of docket fees.
RULE 14, SEC. 21. Government exempt. – The Republic of the
Philippines, its agencies and instrumentalities, are exempt from
paying the legal fees provided in this rule. Local governments and
government-owned or controlled corporations with or without
independent charters are not exempt from paying such fees.
(Bases Conversion And Dev Authority vs. CIR, June 20, 2018)
Q: IS THE PNRC A GOVERNMENT AGENCY? OR A PRIVATE
CORPORATION?
A: Neither. A National Society partakes of a sui generis character. It is a
protected component of the Red Cross movement under Articles 24 and 26
of the First Geneva Convention. These provisions require that the staff of a
National Society shall be respected and protected in all circumstances. Such
protection is not ordinarily afforded by an international treaty to ordinary
private entities or even non-governmental organisations (NGOs).
National societies are therefore organizations that are directly regulated by
international humanitarian law, in contrast to other ordinary private entities,
including NGOs.
The office of the PNRC Chairman is not a government office or an office in a
government-owned or controlled corporation for purposes of the prohibition
in Section 13, Article VI of the 1987 Constitution. The Court, however, further
declared void the PNRC Charter insofar as it creates the PNRC as a private
corporation and consequently ruled that the PNRC should incorporate under
the Corporation Code and register with SEC if it wants to be a private
corporation.
CHARTERED GOCCS V NON-CHARTERED GOCCS
UNDER SPECIAL LAWS – BOY SCOUTS OF THE PHILIPPINES,
PHILIPPINE NATIONAL RED CROSS
SEC. 5. Corporators and Incorporators, Stockholders and
Members. – Corporators are those who compose a corporation,
whether as stockholders or shareholders in a stock corporation or as
members in a nonstock corporation. Incorporators are those
stockholders or members mentioned in the articles of incorporation as
originally forming and composing the corporation and who are
signatories thereof.
INCORPORATORS
The individual/s who organizes the incorporation and arranges for the
Articles of Incorporation to be filed with the SEC.
Q: CAN CLAIM FOR LEGAL FEES AGAINST A CORPORATION BE
MADE AGAINST THE INCORPORATORS IN THEIR PERSONAL
CAPACITY?
NO. The personality of the corporation and those of its incorporators,
directors and officers in their personal capacities ought to be kept separate
in this case. The claim for legal fees against the concerned individual
incorporators, officers and directors could not be properly directed against
the corporation without violating basic principles governing corporations.
(Francisco Motors vs. CA, June 25, 1999)
Q: WHAT IS THE TRUST FUND DOCTRINE?
A: Trust fund doctrine is a principle of judicial invention which says that
corporate assets are held as a trust fund for the benefit of shareholders and
creditors and that the corporate officers have a fiduciary duty to deal with
them properly. (Halley vs. Printwell, May 30, 2011)
Q: WHAT IS THE SCOPE OF THE TRUST FUND DOCTRINE?
A: The trust fund doctrine is not limited to reaching the stockholder's unpaid
subscriptions. The scope of the doctrine when the corporation is insolvent
encompasses not only the capital stock, but also other property and assets
generally regarded in equity as a trust fund for the payment of corporate
debts. All assets and property belonging to the corporation held in trust for
the benefit of creditors that were distributed or in the possession of the
stockholders, regardless of full payment of their subscriptions, may be
reached by the creditor in satisfaction of its claim. Also, under the trust fund
doctrine, a corporation has no legal capacity to release an original
subscriber to its capital stock from the obligation of paying for his shares, in
whole or in part, without a valuable consideration, or fraudulently, to the
prejudice of creditors. The creditor is allowed to maintain an action upon any
unpaid subscriptions and thereby steps into the shoes of the corporation for
the satisfaction of its debt.
STAKEHOLDERS – CREDITORS, EMPLOYEES, SUPPLIERS,
CUSTOMERS
Q: WHO HAS JURISDICTION OVER INTRA-CORPORATE
CONTROVERSIES?
A: Controversies arising out of intra-corporate or partnership relations fall
under the exclusive jurisdiction of the SEC under Section 5(c) of P.D. 902-A
which includes controversies involving both election and appointment of
corporate directors, trustees, officers, and managers. (Nacpil vs. IBC
[2002])
Q: MAY THE BOARD OF DIRECTORS CREATE ADDITIONAL
OFFICERS UNDER THE BY-LAWS?
A: YES. Where a corporate office is not specifically indicated in the roster of
corporate offices in the by-laws of a corporation, the board of directors may
also be empowered under the by-laws to create additional officers as may
be necessary.
SEC. 6. Classification of Shares. – The classification of shares, their
corresponding rights, privileges, or restrictions, and their stated par
value, if any, must be indicated in the articles of incorporation. Each
share shall be equal in all respects to every other share, except as
otherwise provided in the articles of incorporation and in the certificate
of stock.
MUST BE INDICATED IN THE ARTICLES
EQUALITY OF SHARES -
Q: WHAT IS THE SCOPE OF THE 60% REQUIREMENT OF FILIPINO
OWNERSHIP IN CORPORATIONS UNDER THE CONSTITUTION?
A: Since the constitutional requirement of at least 60 percent Filipino
ownership applies not only to voting control of the corporation but also to the
beneficial ownership of the corporation, it is therefore imperative that such
requirement apply uniformly and across the board to all classes of shares,
regardless of nomenclature and category, comprising the capital of a
corporation.
The Constitution expressly declares as State policy the development of an
economy "effectively controlled" by Filipinos. Consistent with such State
policy, the Constitution explicitly reserves the ownership and operation of
public utilities to Philippine nationals, who are defined in the Foreign
Investments Act of 1991 as Filipino citizens, or corporations or associations
at least 60 percent of whose capital with voting rights belongs to Filipinos.
The FIA's implementing rules explain that "[f]or stocks to be deemed owned
and held by Philippine citizens or Philippine nationals, mere legal title is not
enough to meet the required Filipino equity. Full beneficial ownership of the
stocks, coupled with appropriate voting rights is essential." (Gamboa vs.
Teves, Oct 9, 2012)
Q: WHAT IS THE DOCTRINE OF EQUALITY OF SHARES?
A: Under the doctrine of equality of shares — all stocks issued by the
corporation are presumed equal with the same privileges and liabilities,
provided that the Articles of Incorporation is silent on such differences.
CLASSES OR SERIES OF SHARES (E.G. CLASS A, CLASS B,
ETC)
Class A – These are stocks that can be exclusively traded by Filipino
investors.
Class B – These are stocks that can be bought and sold by both
Filipino and foreign investors. Both classes have the same privilege
and receive the same amount of dividends.
VOTING V NON-VOTING SHARES (ONLY PREFERRED OR
REDEEMABLE)
No share may be deprived of voting rights except those classified and
issued as "preferred" or "redeemable" shares, unless otherwise
provided in this Code: Provided, That there shall be a class or series of
shares with complete voting rights.
WHEN NON-VOTING STOCKHOLDERS MAY VOTE
Holders of nonvoting shares shall nevertheless be entitled to vote on the
following matters;
(a) Amendment of the articles of incorporation;
(b) Adoption and amendment of bylaws;
(c) Sale, lease, exchange, mortgage, pledge, or other disposition of all or
substantially all of the corporate property;
(d) Incurring, creating, or increasing bonded indebtedness;
(e) Increase or decrease of authorized capital stock;
(f) Merger or consolidation of the corporation with another corporation or other
corporations;
(g) Investment of corporate funds in another corporation or business in
accordance with this Code; and
(h) Dissolution of the corporation.
PREFERRED SHARES – Preferred stocks are stocks which give
shareholders preference over common stockholders in terms of having
a fixed dividend rate and priority claim over earnings and assets in the
event of a company's liquidation. However, their potential for price
appreciation is lesser and have no voting rights, unless indicated.
WHAT SHARES MAY BE DEPRIVED OF VOTING RIGHTS?
General Rule: One of the rights of a stockholder is the right to participate in
the control and management of the corporation that is exercised through his
vote. The right to vote is a right inherent in and incidental to the ownership of
corporate stock, and as such is a property right. The stockholder cannot be
deprived of the right to vote his stock nor may the right be essentially
impaired, either by the legislature or by the corporation, without his consent,
through amending the charter, or the by-laws.
Exception: “Preferred” or “redeemable” shares. Under Section 6 of B.P. Blg.
68, the requirements and restrictions on voting rights were explicitly provided
for, such that "no share may be deprived of voting rights except those
classified and issued as "preferred" or "redeemable" shares, unless
otherwise provided in this Code" and that "there shall always be a class or
series of shares which have complete voting rights." (Castillo et al v
Balinghasay, Oct. 18, 2004)
PAR V NO PAR SHARES (NOT ALLOWED FOR CERTAIN
CORPORATIONS; NO PAR SHARES ARE FULLY PAID, NON-
ASSESSABLE/NOT LIABLE TO CORPORATION OR CREDITORS)
This is the total amount of shares a corporation is allowed to issue if
the shares have a par value. If the shares do not have a par value, the
corporation does not have an authorized capital stock but it has an
authorized number of shares it may issue.
SEC. 7. Founder’s Shares. – Founders’ shares may be given certain
rights and privileges not enjoyed by the owners of other stocks. Where
the exclusive right to vote and be voted for in the election of directors is
granted, it must be for a limited period not to exceed five (5) years from
the date of incorporation: Provided, That such exclusive right shall not
be allowed if its exercise will violate Commonwealth Act No. 108,
otherwise known as the “Anti-Dummy Law”; RA 7042, otherwise known
as the “Foreign Investments Act of 1991”; and other pertinent laws.
MAY HAVE EXCLUSIVE RIGHT TO VOTE SUBJECT TO 5 YEAR
LIMITATION (FROM DATE OF INCORPORATION)
Q: WHEN MAY A DERIVATIVE SUIT PROSPER?
A: For a derivative suit to prosper, it is required that the minority stockholder
suing for and on behalf of the corporation must allege in his complaint that
he is suing on a derivative cause of action on behalf of the corporation and
all other stockholders similarly situated who may wish to join him in the suit.
(Forest Hills Golf and Country Club Inc. vs. Fil-Estate Properties Inc.,
Jul 20, 2016)
SEC. 8. Redeemable Shares. – Redeemable shares may be issued
by the corporation when expressly provided in the articles of
incorporation. They are shares which may be purchased by the
corporation from the holders of such shares upon the expiration of a
fixed period, regardless of the existence of unrestricted retained
earnings in the books of the corporation, and upon such other terms
and conditions stated in the articles of incorporation and the certificate
of stock representing the shares, subject to rules and regulations
issued by the Commission.
Q: WHEN CAN REDEEMABLE SHARES BE REDEEMED?
A: Redeemable shares are shares usually preferred, which by their terms
are redeemable at a fixed date, or at the option of either issuing corporation,
or the stockholder, or both at a certain redemption price. A redemption by
the corporation of its stock is, in a sense, a repurchase of it for cancellation.
The present Code allows redemption of shares even if there are no
unrestricted retained earnings on the books of the corporation. This is a new
provision which in effect qualifies the general rule that the corporation cannot
purchase its own shares except out of current retained earnings. However,
while redeemable shares may be redeemed regardless of the existence of
unrestricted retained earnings, this is subject to the condition that the
corporation has, after such redemption, assets in its books to cover debts
and liabilities inclusive of capital stock. Redemption, therefore, may not be
made where the corporation is insolvent or if such redemption will cause
insolvency or inability of the corporation to meet its debts as they mature.
Q: WHO MAY REDEEM REDEEMABLE SHARES?
A: The redemption rests entirely with the corporation and the stockholder is
without right to either compel or refuse the redemption of its stock.
SEC RULES GOVERNING REDEEMABLE AND TREASURY
SHARES
SEC. 9. Treasury Shares. – Treasury shares are shares of stock
which have been issued and fully paid for, but subsequently reacquired
by the issuing corporation through purchase, redemption, donation, or
some other lawful means. Such shares may again be disposed of for a
reasonable price fixed by the board of directors.
WHEN AND HOW MAY A CORPORATION REACQUIRE ITS
SHARES – SEC 40
Section 40. Power to Acquire Own Shares. - Provided, That the
corporation has unrestricted retained earnings in its books to cover the shares to
be purchased or acquired, a stock corporation shall have the power to purchased
or acquired, a stock corporation shall have the power to purchase or acquire its
own shares for a legitimate corporate purpose or purposes, including the
following cases:
(a) To eliminate fractional shares arising out of stock dividends;
 (b) To collect or compromise an indebtedness to the corporation, arising
out of unpaid subscription, in a delinquency sale, and to purchase
delinquent shares sold during said sale; and
(c) To pay dissenting or withdrawing stockholders entitled to payment for
their shares under the provisions of this Code.
VOTING RIGHT FOR TREASURY SHARES – SEC 56
Section 56. Voting Right for Treasury Shares. - Treasury shares
shall have no voting right as long as such shares remain in the
Treasury.
NOT INCLUDED IN “OUTSTANDING CAPITAL STOCK” – SEC 173
Section 173. Outstanding Capital Stock Defined. - The term
"outstanding capital stock", as used in this Code, shall mean the total
shares of stock issued under binding subscription contracts to
subscribers or stockholders, whether fully or partially paid, except
treasury shares.
Q: WHAT SHOULD BE THE BASIS OF QUORUM FOR A
STOCKHOLDERS' MEETING — THE OUTSTANDING CAPITAL
STOCK AS INDICATED IN THE AOI OR THAT CONTAINED IN THE
COMPANY'S STOCK AND TRANSFER BOOK?
A: The outstanding capital stock as indicated in the Articles of Incorporation. A
stock and transfer book is necessary as a measure of precaution, expediency
and convenience since it provides the only certain and accurate method of
establishing the various corporate acts and transactions and of showing the
ownership of stock and like matters. However, a stock and transfer book, like
other corporate books and records, is not in any sense a public record, and thus
is not exclusive evidence of the matters and things which ordinarily are or should
be written therein. (Lanuza et. al. v CA, March 28, 2005)
TITLE II
INCORPORATION AND ORGANIZATION OF
PRIVATE CORPORATIONS
SEC. 10. Number and Qualifications of Incorporators. – Any
person, partnership, association or corporation, singly or jointly with
others but not more than fifteen (15) in number, may organize a
corporation for any lawful purpose or purposes: Provided, That natural
persons who are licensed to practice a profession, and partnerships or
associations organized for the purpose of practicing a profession, shall
not be allowed to organize as a corporation unless otherwise provided
under special laws. Incorporators who are natural persons must be of
legal age.
SEC. 11. Corporate Term. – A corporation shall have perpetual
existence unless its articles of incorporation provides otherwise.
x x x
1. DEFAULT TERM
2. NOTIFY SEC FOR A LIMITED TERM
3. CURATIVE PROVISION FOR CORPORATIONS WITH EXPIRED
TERM
Q: CAN A CORPORATION EXTEND ITS EXISTENCE DURING
LIQUIDATION PERIOD? (no longer relevant due to perpetual
existence)
GENERAL RULE: NO. A corporation cannot extend its corporate existence
during its liquidation period; it must extend its corporation before the expiry
of the term fixed in its articles of incorporation. (Alhambra Cigar v SEC 24
SCRA 269 [1968])
EXCEPTIONS: 1) The general rule does not apply where the delay is due to
the neglect of the officer with whom the certificate is required to be filed, or
to a wrongful refusal on his part to receive the application. In such case, the
amendments shall take effect from the date the documents were filed based
on Section 17 which requires SEC to give the incorporators a reasonable
time within which to correct or modify the objectionable portions of the
articles. (CRMD v Ching Bee Trading Corp., Nov. 12, 2014)
The corporation continues to be a body corporate for 3 years after its
dissolution for purposes of prosecuting and defending suits by and against it
and for enabling it to settle and close its affairs, culminating in the disposition
and distribution of its remaining assets. The termination of the life of a
juridical entity does not by itself cause the extinction or diminution of the
rights and liabilities of such entity nor those of its owners and creditors.
(Chua et al v People GR 216146 Aug 24, 2016)
Sec. 12. Minimum Capital Stock Not Required of Stock
Corporations. – Stock corporations shall not be required to have a
minimum capital stock, except as otherwise specifically provided by
special law.
1. See Sec 14 which retains Seventh Article
Seventh: That the authorized capital stock of the corporation is
______________ PESOS
(P________), divided into _____ shares with the par value of
____________ PESOS
(P_______________) per share. (In case all the shares are without par
value): That the capital
stock of the corporation is __________________________ shares
without par value.
2. See Sec 37 fourth par
Copies of the certificate shall be kept on file in the office of the corporation and
filed with the Commission and attached to the original articles of incorporation.
After approval by the Commission and the issuance by the Commission of its
certificate of filing, the capital stock shall be deemed increased or decreased and
the incurring, creating or increasing of any bonded indebtedness authorized, as
the certificate of filing may declare: Provided, That the Commission shall not
accept for filing any certificate of increase of capital stock unless accompanied by
a sworn statement of the treasurer of the corporation lawfully holding office at the
time of the filing of the certificate, showing that at least twenty-five percent (25%)
of the increase in capital stock has been subscribed and that at least twenty-five
percent (25%) of the amount subscribed has been paid in actual cash to the
corporation or that property, the valuation of which is equal to twenty-five percent
(25%) of the subscription, has been transferred to the corporation: Provided,
further, That no decrease in capital stock shall be approved by the Commission if
its effect shall prejudice the rights of corporate creditors.
SEC 13. Contents of Articles of Incorporation
1. Name; specific purpose; place of principal office; term;
names, nationalities and residence addresses of
incorporators; number of directors v trustees; authorized
capital stock, number of shares, subscribed, paid up; if non-
stock, amount of capital; other matters;
2. Arbitration
3. Electronic document
4. Pre-incorporation Agreement
5. Purpose Clause
Q: CAN THE CRMD (FORMERLY DIVISION OF ARCHIVES)
DETERMINE LAWFULNESS OF THE PURPOSE CLAUSE?
A: YES. The division of archives, through its officials, has authority to
determine not only the sufficiency as to form of the articles of incorporation
offered for registration, but also the lawfulness of the purposes of the
incorporation. (Asuncion v De Ynarte 28 Phil 67 [1914])
SEE SEC 34 FOR NON-STOCK CORPORATIONS
6. Principal Place of Business
SEC CIRCULAR NO 3, SERIES OF 2006
Q: WHERE IS THE PROPER VENUE OF THE PETITION FOR
VOLUNTARY INSOLVENCY?
A: The venue for a petition for voluntary insolvency proceeding under the
Insolvency Law is the CFI of the province or city where the insolvent debtor
resides. A corporation is considered a resident of the place where its
principal office is located as stated in its Articles. However, when it is
uncontroverted that the insolvent corporation abandoned the old principal
office, the corporation is considered a resident of the city where its actual
principal office is currently found.
To determine the venue of an insolvency proceeding, the residence of a
corporation should be the actual place where its principal office has been
located for six (6) months before the filing of the petition. If there is a conflict
between the place stated in the AOI and the physical location of the
corporation's main office, the actual place of business should control.
(Pilipinas Shell Petroleum Corp. v Royal Ferry Services Inc. Feb 1,
2017)
Q: WHERE IS THE PROPER VENUE FOR PERSONAL ACTIONS?
A: In personal actions, venue is fixed for the greatest possible convenience
of the plaintiff and his witnesses, and to promote the ends of justice. A
complaint for enforcement of contractual provisions and recovery of
damages, is in the nature of a personal action which, under Section 2, Rule
4 of the Rules of Court,7 shall be filed at the plaintiff’s residence. (Golden
Arches Dev Corp v St. Francis Square GR 183843 Jan 19, 2017)
Q: WHAT IS THE RESIDENCE OF A CORPORATION?
 A: The place of business of a corporation which for purposes of venue is
considered as its residence, because a corporation has a personality
separate and distinct from that of its officers and stockholders. (Sy v Tyson
Enterprises 119 SCRA 367 [1982])
7. Authorized capital stock
Central Textile Mills v NWPC, et al GR 104102 Aug 7, 1996
SEC 14 FORM OF ARTICLES OF INCORPORATION
1. Does data privacy apply? YES.
2. No more Treasurer’s Affidavit
3. Who signs the articles? Incorporators.
4. Undertaking to change name
SEC. 15 AMENDMENT OF ARTICLES OF INCORPORATION
1. A stock corporation’s articles may be amended into that of a non-
stock corporation provided all the requirements for the latter are
complied with
2. A stock corporation’s articles may be amended to convert into a One
Person Corporation and vice versa
3. Non-amendable items in the articles are the names of incorporators,
names of incorporating directors/trustees, names of original
subscribers, subscribed and paid up amounts, treasurer in trust,
members who contributed to the initial capital of NSNP, witnesses and
acknowledgment
SEC. 16 GROUNDS WHEN ARTICLES OF INCORPORATION OR
AMENDMENT MAY BE DISAPPROVED
1. Note that the SEC is obliged to give the incorporators a reasonable
time within which to correct or modify the objectionable portions of the
proposed articles or amendment.
2. Fraud in procuring registration – See Secs. 138 (d) and 164
3. Distinguish shell corporation and sham corporation from shelf
corporation
SEC. 17. CORPORATION NAME. - No corporate name shall be
allowed by the Commission if it is not distinguishable from that already
reserved or registered for the use if another corporation, or if such
name is already protected by law, rules and regulations.
A name is not distinguishable even if it contains one or more of the
following:
(a) The word "corporation", "company", incorporated", "limited", "limited
liability", or an abbreviation ofone if such words; and
(b) Punctuations, articles, conjunctions, contractions, prepositions,
abbreviations, different tenses, spacing, or number of the same word
or phrase.
The Commission upon determination that the corporate name is: (1)
not distinguishable from a name already reserved or registered for the
use of another corporation; (2) already protected by law; or (3) contrary
to law, rules and regulations, may summarily order the corporation to
immediately cease and desist from using such name and require the
corporation to register a new one. The Commission shall also cause
the removal of all visible signages, marks, advertisements, labels prints
and other effects bearing such coroporate name. Upon the approval of
the new corporate name, the Commission shall issue a certificate of
incorporation under the amended name.
If the corporation fails to comply with the Commission's order, the
Commission may hold the corporation and its responsible directors or
officers in contempt and/or hold them administratively, civilly and/or
criminally liable under this Code and other applicable laws and/or
revoke the registration of the corporation.
SEC REVISED GUIDELINES ON THE APPROVAL OF CORPORATE
AND PARTNERSHIP NAMES (MC No. 13-19)
1. The name of One Person Corporations (“OPC”) should contain the
word “OPC” either below or at the end of its name. A single
stockholder of an OPC may use his/her name, provided that the said
name shall be accompanied with descriptive words aside from the
suffix “OPC”, or the name of another person, provided consent was
given by the said person, or if deceased, his estate.
2. The requirement for corporate or partnership names is that it must
now be distinguishable from other corporate or partnership names, in
contract to MC No. 5-05, as amended, which provides that it must not
be identical, misleading or confusingly similar from other corporate or
partnership names.
3. Companies may now have more than one business or trade name,
provided, the same shall be indicated in the articles of incorporation or
partnership, in contrast to MC No. 5-05, as amended, which provides
that only one business or trade name may be registered for each
corporate or partnership name.
4. The use of the word “Philippines” or “Phil.” after the corporate name
of a subsidiary owned by a foreign corporation is no longer required.
5. The word “ASEAN” may not be used as part of a corporate or
partnership name.
6. The word “Investment(s)” may no longer be used by entities
organized as holding companies.
7. The name of a dissolved or revoked corporation or partnership
cannot be used within a period of five (5) years from the date of
approval of dissolution or revocation. The procedures for application
for re-registration of an expired corporation are provided in MC No. 13-
19.
8. A name, which was previously used by a corporation or partnership
but later amended, shall not be re-registered or used by another
corporation or partnership for a period of three (3) years from the date
of the approval of the adoption of the new corporate or partnership
name, unless consent is given by the corporation or partnership which
previously owned the used the same.
9. Names of absorbed/constituent corporations may not be used by
corporations or partnerships other than the surviving corporation,
unless, consent of the said surviving corporation is obtained.
Q: DISCUSS THE RIGHT OF A CORPORATION TO ITS
CORPORATE NAME
A: A corporation has an exclusive right to the use of its name, which may be
protected by injunction upon a principle similar to that upon which persons
are protected in the use of trademarks and tradenames . Such principle
proceeds upon the theory that it is a fraud on the corporation which has
acquired a right to that name and perhaps carried on its business
thereunder, that another should attempt to use the same name, or the same
name with a slight variation in such a way as to induce persons to deal with
it in the belief that they are dealing with the corporation which has given a
reputation to the name. (Philips Export BV v CA, Feb. 21, 1992)
Q: MAY A CORPORATION CHANGE ITS CORPORATE NAME?
A: YES. Section 18 explicitly permits the articles of incorporation to be
amended. x x x There is no prohibition against the change of name. The
inference is clear that such a change is allowed, for if the legislature had
intended to enjoin corporations from changing names, it would have
expressly stated so in this section or in any other provision of the law.
(Philippine First Ins Co v Hartigan, July 31, 1970)
Q: IS IT NECESSARY FOR A BANK TO FIRST NOTIFY ITS
DEBTORS BEFORE CHANGING ITS CORPORATE NAME?
A: NO. There is no requirement under a law or regulation ordering a bank
that changes its corporate name to formally notify all its debtors. This being
the case, this Court cannot impose on a bank that changes its corporate
name to notify a debtor of such change absent any law, circular or regulation
requiring it. Such act would be judicial legislation. The formal notification is,
therefore, discretionary on the bank. (PC Javier & Sons v CA, June 29,
2005)
Q: MAY A CORPORATION LEGALLY TERMINATE AN EMPLOYEE
ON THE GROUND OF ITS CHANGE OF CORPORATE NAME?
A: NO. The change of name did not give petitioner the license to terminate
employees of Zeta like San Miguel without just or authorized cause. The
situation was not similar to that of an enterprise buying the business of
another company where the purchasing company had no obligation to rehire
terminated employees of the latter. Petitioner, despite its new name, was the
mere continuation of Zeta’s corporate being, and still held the obligation to
honor all of Zeta’s obligations, one of which was to respect San Miguel’s
security of tenure. The dismissal of San Miguel from employment on the
pretext that petitioner, being a different corporation, had no obligation to
accept him as its employee, was illegal and ineffectual.
FIRST IN TIME, FIRST IN RIGHT
Q: WHAT IS THE “FIRST IN TIME, FIRST IN RIGHT” DOCTRINE?
HOW DO YOU REMEDY THE PROHIBITION IN SUCH DOCTRINE?
A: Whoever incorporates or used the corporate name first has prior right
over use of the corporate name.
Section 3 states that if there be identical, misleading or confusingly similar
name to one already registered by another corporation or partnership with
the SEC, the proposed name must contain at least one distinctive word
different from the name of the company already registered. (GSIS Family
Bank v BPI Family Bank, Sep. 23, 2015)
Q: WHAT IS THE TEST IN DETERMINING SIMILARITY IN
CORPORATE NAMES?
A: It is settled that to determine the existence of confusing similarity in
corporate names, the test is whether the similarity is such as to mislead a
person, using ordinary care and discrimination. In so doing, the court must
examine the record as well as the names themselves. Proof of actual
confusion need not be shown. It suffices that confusion is probably or likely
to occur. (Indian Chamber of Commerce Phils, Inc v Filipino Indian
Chamber of Commerce in the Philippines, Inc. GR 184008 Aug 3, 2016)
Q: WHO HAS JURISDICTION OVER DISPUTES ON CORPORATE
NAMES?
A: SEC has the authority to de-register at all times and under all
circumstances corporate names which in its estimation are likely to spawn
confusion. It is the duty of the SEC to prevent confusion in the use of
corporate names not only for the protection of the corporations involved but
more so for the protection of the public.
CORPORATE NAME V BUSINESS NAME OR BRAND
GENERIC OR DESCRIPTIVE
WHY SHOULD “DISTINGUISHABILITY” BE THE SOLE
CRITERION? It is no longer just the confusingly/deceptively similar.
Can the name reasonable mislead a person using ordinary care and
discretion? Read the cases.
SEC 159 USE OF UNAUTHORIZED CORPORATE NAME
SEC 18 REGISTRATION, INCORPORATION AND
COMMENCEMENT OF CORPORATE EXISTENCE
1. Reserve corporate name that is distinguishable from a
name already reserved or registered by another, not
protected by law nor contrary to law, rules and
regulations
2. Submit articles
3. Issue certificate of incorporation
4. Commence existence from date of issuance of
certificate
SEC. 19. DE FACTO CORPORATIONS. – The due incorporation of
any corporation claiming in good faith to be a corporation under this
Code, and its right to exercise corporate powers, shall not be inquired
into collaterally in any private suit to which such corporation may be a
party. Such inquiry may be made by the Solicitor General in a quo
warranto proceeding
SEC. 20. CORPORATION BY ESTOPPEL. – All persons who assume
to act as a corporation knowing it to be without authority to do so shall
be liable as general partners for all debts, liabilities and damages
incurred or arising as a result thereof: Provided, however, That when
any such ostensible corporation is sued on any transaction entered by
it as a corporation or on any tort committed by it as such, it shall not be
allowed to use its lack of corporate personality as a defense. Anyone
who assumes an obligation to an ostensible corporation as such
cannot resist performance thereof on the ground that there was in fact
no corporation.
1. Persons involved are liable as general partners for all debts
and damages
2. Lack of corporate personality is not a defense by said persons
3. Counterparty cannot resist performance of obligation in favor
of corp by estoppel
SEC. 21. EFFECTS OF NON-USE OF CORPORATE CHARTER AND
CONTINUOUS INOPERATION. – If a corporation does not formally
organize and commence its business within five (5) years from the
date of its incorporation, its certificate of incorporation shall be deemed
revoked as of the day following the end of the five (5)-year period.
However, if a corporation has commenced its business but
subsequently becomes inoperative for a period of at least five (5)
consecutive years, the Commission may, after due notice and hearing,
place the corporation under delinquent status.
A delinquent corporation shall have a period of two (2) years to resume
operations and comply with all requirements that the Commission shall
prescribe. Upon compliance by the corporation, the Commission shall
issue an order lifting the delinquent status. Failure to comply with the
requirements and resume operations within the period given by the
Commission shall cause the revocation of the corporation’s certificate
of incorporation.
1. Distinguish between non-use and inoperation
2. Distinguish between revocation and being placed in delinquent
status
3. Remedies of the revoked or delinquent corporation
4. Grounds for involuntary dissolution
TITLE III
BOARD OF DIRECTORS/ TRUSTEES/ OFFICERS
SEC 22 THE BOARD OF DIRECTORS OR TRUSTEES
1. Doctrine of centralized management; source of
corporate powers; the Board must act as one body to
bind the corporation
Q. ARE ALL ACTS OF THE OFFICERS OF THE CORPORATION
BINDING ON THE LATTER?
A: NO. Since a corporation can act only through its officers and agents, "all
acts within the powers of said corporation may be performed by agents of its
selection; and, except so far as limitations or restrictions may be imposed by
special charter, by-law, or statutory provisions, the same general principles
of law which govern the relation of agency for a natural person govern the
officer or agent of a corporation, of whatever status or rank, in respect to his
power to act for the corporation; and agents when once appointed, or
members acting in their stead, are subject to the same rules, liabilities and
incapacities as are agents of individuals and private persons." (Yao Ka Sin
Trading v CA et. al., June 15, 1992)
Q: MAY THE OFFICER REPRESENT THE CORPORATION EVEN
WITHOUT WRITTEN AUTHORITY?
A: YES. Under the doctrine of apparent authority, the authority to act for and to
bind a corporation may be presumed from acts of recognition in other instances,
wherein the power was in fact exercised without any objection from its board or
shareholders.
A corporate officer or agent may represent and bind the corporation in
transactions with third persons to the extent that [the] authority to do so has been
conferred upon him, and this includes powers which have been intentionally
conferred, and also such powers as, in the usual course of the particular
business, are incidental to, or may be implied from, the powers intentionally
conferred, powers added by custom and usage, as usually pertaining to the
particular officer or agent, and such apparent powers as the corporation has
caused persons dealing with the officer or agent to believe that it has conferred.
(People’s Aircargo v CA 297 SCRA 170)
Q: ARE FAMILY CORPORATIONS REQUIRED TO STRICTLY
COMPLY WITH THE PROVISION OF THE CORPORATION CODE?
A: YES. All corporations, big or small, must abide by the provisions of the
Corporation Code. Being a simple family corporation is not an exemption.
Such corporations cannot have rules and practices other than those
established by law. (Torres v CA 278 SCRA 793)
2. The Board may delegate authority in favor of corporate
officers
Q: WHO EXERCISES CORPORATE POWERS?
A: Under Corporation Code, unless otherwise provided by said Code,
corporate powers, such as the power; to enter into contracts; are exercised
by the Board of Directors. However, the Board may delegate such powers to
either an executive committee or officials or contracted managers. The
delegation, except for the executive committee, must be for specific
purposes, 47 Delegation to officers makes the latter agents of the
corporation; accordingly, the general rules of agency as to the bindings
effects of their acts would. (ABS-CBN Broadcasting v CA 301 SCRA 572
[1999])
3. Business Judgment Rule
Q: WHAT IS THE BUSINESS JUDGMENT RULE?
A: The directors hold such office charged with the duty to act for the
corporation according to their best judgment, and in so doing they cannot be
controlled in the reasonable exercise and performance of such duty.
Whether the business of a corporation should be operated at a loss during
depression, or close down at a smaller loss, is a purely business and
economic problem to be determined by the directors of the corporation and
not by the court. It is a well-known rule of law that questions of policy or of
management are left solely to the honest decision of officers and directors of
a corporation, and the court is without authority to substitute its judgment of
the board of directors; the board is the business manager of the corporation,
and so long as it acts in good faith its orders are not reviewable by the
courts. (Montelibano v Bacolod Murcia Milling Co., 5 SCRA 36 [1962])
Q: WILL THE DIRECTORS BE LIABLE FOR BUSINESS
JUDGMENT RESULTING TO LOSSES? WHEN ARE THEY LIABLE?
A: NO. If the cause of the losses is merely error in business judgment, not
amounting to bad faith or negligence, directors and/or officers are not liable.
For them to be held accountable, the mismanagement and the resulting
losses on account thereof are not the only matters to be proven; it is likewise
necessary to show that the directors and/or officers acted in bad faith and
with malice in doing the assailed acts. Bad faith does not simply connote bad
judgment or negligence; it imports a dishonest purpose or some moral
obliquity and conscious doing of a wrong, a breach of a known duty through
some motive or interest or ill-will partaking of the nature of fraud. (Filipinas
Port Service v Go 518 SCRA 453 [2007])
4. CORPORATIONS VESTED WITH PUBLIC INTEREST
a. Enumeration
The board of the following corporations vested with public interest shall
have independent directors constituting at least twenty percent (20%)
of such board:
a) Corporations covered by Section 17.2 of Republic Act No.
8799, otherwise known as “The Securities Regulation Code”,
namely those whose securities are registered with the
Commission, corporations listed with an exchange or with
assets of at least Fifty million pesos (P50,000,000.00) and
having two hundred (200) or more holders of shares, each
holding at least one hundred (100) shares of a class of its
equity shares;
b) Banks and quasi-banks, NSSLAs, pawnshops, corporations
engaged in money service business, pre-need, trust and
insurance companies, and other financial intermediaries; and
c) Other corporations engaged in business vested with public
interest similar to the above, as may be determined by the
Commission, after taking into account relevant factors which
are germane to the objective and purpose of requiring the
election of an independent director, such as the extent of
minority ownership, type of financial products or securities
issued or offered to investors, public interest involved in the
nature of business operations, and other analogous factors.
(Sec. 22)
B. GOOD CORPORATE GOVERNANCE IS A
FUNCTION OF BOARD POLICIES, ACTIONS AND
CONDUCT – SEE SEC CODE OF CORPORATE
GOVERNANCE FOR PUBLICLY LISTED
COMPANIES AND THE I-ACGR
REQUIRED PERCENTAGE OF INDEPENDENT DIRECTORS
DEFINITION OF “INDEPENDENT DIRECTOR”
QUALIFICATIONS OF AN INDEPENDENT DIRECTOR
An independent director is a person who, apart from shareholdings and
fees received from the corporation, is independent of management and
free from any business or other relationship which could, or could
reasonably be perceived to materially interfere with the exercise of
independent judgment in carrying out the responsibilities as a director.
Independent directors must be elected by the shareholders present or
entitled to vote in absentia during the election of directors. Independent
directors shall be subject to rules and regulations governing their
qualifications, disqualifications, voting requirements, duration of term
and term limit, maximum number of board memberships and other
requirements that the Commission will prescribe to strengthen their
independence and align with international best practices. (Sec. 22)
c. Other applicable provisions – Secs. 6, 23, 24, 29, 73 and 177
SEC. 23. ELECTION OF DIRECTORS OR TRUSTEES. – Except
when the exclusive right is reserved for holders of founders’ shares
under Section 7 of this Code, each stockholder or member shall have
the right to nominate any director or trustee who possesses all of the
qualifications and none of the disqualifications set forth in this Code.
At all elections of directors or trustees, there must be present, either in
person or through a representative authorized to act by written proxy,
the owners of majority of the outstanding capital stock, or if there be no
capital stock, a majority of the members entitled to vote. When so
authorized in the bylaws or by a majority of the board of directors, the
stockholders or members may also vote through remote
communication or in absentia: Provided, That the right to vote through
such modes may be exercised in corporations vested with public
interest, notwithstanding the absence of a provision in the bylaws of
such corporations.
A stockholder or member who participates through remote
communication or in absentia, shall be deemed present for purposes of
quorum.
The election must be by ballot if requested by any voting stockholder
or member.
In stock corporations, stockholders entitled to vote shall have the right
to vote the number of shares of stock standing in their own names in
the stock books of the corporation at the time fixed in the bylaws or
where the bylaws are silent, at the time of the election. The said
stockholder may: (a) vote such number of shares for as many persons
as there are directors to be elected; (b) cumulate said shares and give
one (1) candidate as many votes as the number of directors to be
elected multiplied by the number of the shares owned; or (c) distribute
them on the same principle among as many candidates as may be
seen fit: Provided, That the total number of votes cast shall not exceed
the number of shares owned by the stockholders as shown in the
books of the corporation multiplied by the whole number of directors to
be elected: Provided, however, That no delinquent stock shall be
voted. Unless otherwise provided in the articles of incorporation or in
the bylaws, members of nonstock corporations may cast as many
votes as there are trustees to be elected but may not cast more than
one (1) vote for one (1) candidate. Nominees for directors or trustees
receiving the highest number of votes shall be declared elected.
If no election is held, or the owners of majority of the outstanding
capital stock or majority of the members entitled to vote are not present
in person, by proxy, or through remote communication or not voting in
absentia at the meeting, such meeting may be adjourned and the
corporation shall proceed in accordance with Section 25 of this Code.
The directors or trustees elected shall perform their duties as
prescribed by law, rules of good corporate governance, and bylaws of
the corporation.
1. Cumulative voting /straight voting /cumulative voting by distribution
Cumulative voting not for non-stock corporations unless provided in the
by-laws such that straight voting is the default mode under Sec 92
Q: IS A PROVISION IN A NON-STOCK CORPORATION PROVIDING
FOR THE MANNER OF ELECTION DIFFERENT FROM SEC. 24
VALID?
A: YES. In any case, the stipulation in the By-Laws is not contrary to the
Corporation Code. Section 89 of the Corporation Code pertaining to non-
stock corporations provides that "the right of the members of any class or
classes (of a non-stock corporation) to vote may be limited, broadened or
denied to the extent specified in the articles of incorporation or the by-laws."
This is an exception to Section 6 of the same code where it is provided that
"no share may be deprived of voting rights except those classified and
issued as ‘preferred’ or ‘redeemable’ shares, unless otherwise provided in
this Code." The stipulation in the By-Laws providing for the election of the
Board of Directors by districts is a form of limitation on the voting rights of
the members of a non-stock corporation as recognized under the aforesaid
Section 89. Section 24, which requires the presence of a majority of the
members entitled to vote in the election of the board of directors, applies
only when the directors are elected by the members at large, such as is
always the case in stock corporations by virtue of Section 6. (Rev. Ao-As, et
al, v CA, GR 128464)
Q: IS THE HOLDOVER PERIOD PART OF THE TERM OF OFFICE
OF A MEMBER OF THE BOARD OF DIRECTORS?
A: NO. The holdover period is not part of the term of office of a member of
the board of directors

The word "term" has acquired a definite meaning in jurisprudence. In several
cases, we have defined "term" as the time during which the officer may claim
to hold the office as of right, and fixes the interval after which the several
incumbents shall succeed one another.7 The term of office is not affected by
the holdover.8 The term is fixed by statute and it does not change simply
because the office may have become vacant, nor because the incumbent
holds over in office beyond the end of the term due to the fact that a
successor has not been elected and has failed to qualify.
Term is distinguished from tenure in that an officer’s "tenure" represents the
term during which the incumbent actually holds office. The tenure may be
shorter (or, in case of holdover, longer) than the term for reasons within or
beyond the power of the incumbent.
Q: CAN THE REMAINING DIRECTORS OF A CORPORATION’S
BOARD, STILL CONSTITUTING A QUORUM, ELECT ANOTHER
DIRECTOR TO FILL IN A VACANCY CAUSED BY THE
RESIGNATION OF A HOLD-OVER DIRECTOR?
A: NO. When Section 239 of the Corporation Code declares that "the board
of directors…shall hold office for one (1) year until their successors are
elected and qualified," it means that the term of the members of the board of
directors shall be only for one year; their term expires one year after election
to the office. The holdover period – that time from the lapse of one year from
a member’s election to the Board and until his successor’s election and
qualification – is not part of the director’s original term of office, nor is it a
new term; the holdover period, however, constitutes part of his tenure.
Corollary, when an incumbent member of the board of directors continues to
serve in a holdover capacity, it implies that the office has a fixed term, which
has expired, and the incumbent is holding the succeeding term.
As correctly pointed out by the RTC, when remaining members of the VVCC
Board elected Ramirez to replace Makalintal, there was no more unexpired
term to speak of, as Makalintal’s one-year term had already expired.
Pursuant to law, the authority to fill in the vacancy caused by Makalintal’s
leaving lies with the VVCC’s stockholders, not the remaining members of its
board of directors. (Valle Verde Country Club Inc. v Africa 598 SCRA 202
[2009])
Q: IS PERMANENT REPRESENTATION ALLOWED IN THE BOARD
OF DIRECTORS?
A: NO. The board of directors of corporations must be elected from among
the stockholders or members directors every year. Estoppel does not set in
to legitimize what is wrongful.
It is probable that, in allowing petitioner’s representative to sit on the
board, the members of the association were not aware that this was contrary
to law. It should be noted that they did not actually implement the provision
in question except perhaps insofar as it increased the number of directors
from 11 to 15, but certainly not the allowance of petitioner’s representative
as an unelected member of the board of directors. It is more accurate to say
that the members merely tolerated petitioner’s representative and tolerance
cannot be considered ratification.
Nor can petitioner claim a vested right to sit in the board on the basis of
"practice." Practice, no matter how long continued, cannot give rise to any
vested right if it is contrary to law. Even less tenable is petitioner’s claim that
its right is "co-terminus with the existence of the association. (Grace
Christian High School v. CA, G.R. No. 108905, Oct. 23, 1997)
SEC. 24. CORPORATE OFFICERS. – Immediately after their election,
the directors of a corporation must formally organize and elect: (a) a
president, who must be a director; (b) a treasurer, who must be a
resident; (c) a secretary, who must be a citizen and resident of the
Philippines; and (d) such other officers as may be provided in the
bylaws. If the corporation is vested with public interest, the board shall
also elect a compliance officer. The same person may hold two (2) or
more positions concurrently, except that no one shall act as president
and secretary or as president and treasurer at the same time, unless
otherwise allowed in this Code.
The officers shall manage the corporation and perform such duties as
may be provided in the bylaws and/or as resolved by the board of
directors.
1. CORPORATE OFFICERS MUST BE EXPRESSLY MENTIONED IN
THE BYLAWS
Q: WHO ARE CORPORATE OFFICERS?
A: Corporate officers are those officers of a corporation who are given that
character either by the Corporation Code or by the corporation's by-laws.
Section 24 of the Corporation Code specifically enumerated who are these
corporate officers, to wit:
(1) president;
(2) secretary;
(3) treasurer; and
(4) such other officers as may be provided for in the by-laws. (Marc II
Marketing v Joson 662 SCRA 35 [2011])
2. MANDATORY CORPORATE OFFICERS
Q: CAN A CORPORATE OFFICER UNILATERALLY BIND THE
CORPORATION?
A: NO. An officer who acts beyond the scope of his authority cannot bind the
corporation. Under Article 1898 of the Civil Code, the acts of an agent
beyond the scope of his authority do not bind the principal unless the latter
ratifies the same expressly or impliedly. It also bears emphasizing that when
the third person knows that the agent was acting beyond his power or
authority, the principal cannot be held liable for the acts of the agent. If the
said third person is aware of such limits of authority, he is to blame, and is
not entitled to recover damages from the agent, unless the latter undertook
to secure the principal’s ratification. (Safic Alcan v Imperial Vegetable 355
559 [2001])
Q: MAY THE VEIL OF CORPORATE FICTION BE PIERCED ON THE
MERE GROUND THAT ALMOST ALL OF THE SHARES OF STOCK
OF THE CORPORATION ARE OWNED BY AN OFFICER?
A: NO. When the fiction is used as a means of perpetrating a fraud or an
illegal act or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, the achievement or perfection of a monopoly or
generally the perpetration of knavery or crime, the veil with which the law
covers and isolates the corporation from the members or stockholders who
compose it will be lifted to allow for its consideration merely as an
aggregation of individuals. However, it must be proven with certainty. (San
Juan Structural v CA 296 SCRA 631)
3. DOCTRINE OF APPARENT AUTHORITY
Q: WHAT IS THE APPARENT AUTHORITY OF A PRESIDENT?
A: The general rule is that, in the absence of authority from the board of
directors, no person, not even its officers, can validly bind a corporation.
However, the authority to act for and to bind a corporation may be presumed
from acts of recognition in other instances, wherein the power was in fact
exercised without any objection from its board or shareholders. (People’s
Aircargo and Warehousing v CA [1998])
If a private corporation intentionally or negligently clothes its officers or
agents with apparent power to perform acts for it, the corporation will be
estopped to deny that such apparent authority is real, as to innocent third
persons dealing in good faith with such officers or agents. (Francisco v
GSIS 7 SCRA 577 [1963])
Q: WHAT ARE THE ELEMENTS OF THE DOCTRINE OF
APPARENT AUTHORITY?
A: For the principle of apparent authority to apply, the petitioner was burdened to
prove the following:
(a) the acts of the respondent justifying belief in the agency by the
petitioner;
(b) knowledge thereof by the respondent which is sought to be held; and,
(c) reliance thereon by the petitioner consistent with ordinary care and
prudence. (Woodchild Holdings Inc v. Roxas Electric
Construction 436 SCRA 235 [2004])
4. ELECTION AND APPOINTMENT
Q: WHAT IS THE NATURE OF AN APPOINTMENT BY THE BOARD
OF DIRECTORS?
A: An appointment held at the pleasure of the appointing power is in
essence temporary in nature. It is co-extensive with the desire of the Board
of Directors. Hence, when the Board opts to replace the incumbent,
technically there is no removal but only an expiration of term and in an
expiration of term, there is no need of prior notice, due hearing or sufficient
grounds before the incumbent can be separated from office. (Mita Pardo de
Tavera vs. Philippine Tuberculosis Society, Inc.)
5. REMOVAL OF A CORPORATE OFFICER FOR CAUSE IS A
POWER TO BE EXERCISED BY THE BOARD
Q: WHO EXERCISES POWER TO REMOVE A CORPORATE
OFFICER?
A: A corporation exercises its powers through its board of directors and/or its
duly authorized officers and agents, except in instances where the
Corporation Code requires stockholders' approval for certain specific acts.
(Nectarina Raniel v Paul Jochico, G.R. No. 153413, Mar. 1, 2007)
6. SERVICE OF SUMMONS ON A CORPORATION
RULE 14, SECTION 11. SERVICE UPON DOMESTIC PRIVATE
JURIDICAL ENTITY. — When the defendant is a corporation,
partnership or association organized under the laws of the Philippines
with a juridical personality, service may be made on the president,
managing partner, general manager, corporate secretary, treasurer, or
in-house counsel.
Q: MAY OTHER OFFICERS/PERSONS OTHER THAN THOSE
UNDER RULE 14, SECTION 11 OF ROC RECEIVE SUMMONS FOR
A CORPORATION?
A: The enumeration of persons to whom summons may be served is
"restricted, limited and exclusive". The designation of persons or officers
who are authorized to accept summons for a domestic corporation or
partnership is now limited and more clearly specified in Section 11, Rule 14
of the 1997 Rules of Civil Procedure. The rule now states "general manager"
instead of only "manager" ; "corporate secretary" instead of "secretary" ; and
"treasurer" instead of "cashier." The phrase "agent, or any of its directors" is
conspicuously deleted in the new rule. (EB Villarosa & Partner v Benito
312 SCRA 65 [1999])
SEC. 25. REPORT OF ELECTION OF DIRECTORS, TRUSTEES
AND OFFICERS, NON-HOLDING OF ELECTION AND CESSATION
FROM OFFICE. – Within thirty (30) days after the election of the
directors, trustees and officers of the corporation, the secretary, or any
other officer of the corporation, shall submit to the Commission, the
names, nationalities, shareholdings, and residence addresses of the
directors, trustees, and officers elected.
The non-holding of elections and the reasons therefor shall be reported
to the Commission within thirty (30) days from the date of the
scheduled election. The report shall specify a new date for the election,
which shall not be later than sixty (60) days from the scheduled date.
If no new date has been designated, or if the rescheduled election is
likewise not held, the Commission may, upon the application of a
stockholder, member, director or trustee, and after verification of the
unjustified non-holding of the election, summarily order that an election
be held.
The Commission shall have the power to issue such orders as may be
appropriate, including orders directing the issuance of a notice stating
the time and place of the election, designated presiding officer, and the
record date or dates for the determination of stockholders or members
entitled to vote.
Notwithstanding any provision of the articles of incorporation or bylaws
to the contrary, the shares of stock or membership represented at such
meeting and entitled to vote shall constitute a quorum for purposes of
conducting an election under this section.
Should a director, trustee or officer die, resign or in any manner cease
to hold office, the secretary, or the director, trustee or officer of the
corporation, shall, within seven (7) days from knowledge thereof, report
in writing such fact to the Commission.
1. REPORT BY WAY OF THE OR GIS TO THE SEC
2. SEC Supervised Election
a. When – upon application of stockholder, member, director
or trustee
b. Why – non-holding of election was unjustified; no date set
or rescheduled election not held
c. How – SEC issues order; special quorum rule
Q: CAN “CORPORATE OFFICERS” WHO ARE NOT REPORTED IN
THE GIS AT THE TIME AN ACTION IS MADE ON BEHALF OF THE
CORPORATION BIND THE LATTER?
A: NO. In the absence of an authority from the board of directors, no person,
not even the officers of the corporation, can validly bind the corporation.
(Premium Marble Resources v CA 264 SCRA 11 [1996])
SEC. 26. DISQUALIFICATION OF DIRECTORS, TRUSTEES OR
OFFICERS. – A person shall be disqualified from being a director,
trustee or officer of any corporation if, within five (5) years prior to the
election or appointment as such, the person was:
(a) Convicted by final judgment:
(1) Of an offense punishable by imprisonment for a period
exceeding six (6) years;
(2) For violating this Code; and
(3) For violating Republic Act No. 8799, otherwise known
as “The Securities Regulation Code”;
(b) Found administratively liable for any offense involving
fraudulent acts; and
(c) By a foreign court or equivalent foreign regulatory authority
for acts, violations or misconduct similar to those
enumerated in paragraphs (a) and (b) above.
The foregoing is without prejudice to qualifications or other
disqualifications, which the Commission, the primary regulatory
agency, or the Philippine Competition Commission may impose in its
promotion of good corporate governance or as a sanction in its
administrative proceedings.
Q: IS THE DIRECTOR REQUIRED TO BE A REGISTERED
STOCKHOLDER AT THE TIME OF ELECTION?
A: YES. The director must be a registered stockholder at time of election; if
he ceases to own at least one share, he ceases to be a director (Lee v CA
205 SCRA 752 [1992])
EXPANDED GROUNDS FOR DISQUALIFICATION AND NEW
RECKONING DATE
Q: CAN THE AMENDED BY-LAWS OF A CORPORATION OF
DISQUALIFYING A COMPETITOR FROM NOMINATION OR
ELECTION TO THE BOARD OF DIRECTORS BE VALID?
A: YES, due to the fiduciary nature of their positions. Although in the strict
and technical sense, directors of a private corporation are not regarded as
trustees, there cannot be any doubt that their character is that of a fiduciary
insofar as the corporation and the stockholders as a body are concerned. As
agents entrusted with the management of the corporation for the collective
benefit of the stockholders, "they occupy a fiduciary relation, and in this
sense the relation is one of trust."
Q: WHAT IS THE DOCTRINE OF “CORPORATE OPPORTUNITY”?
A: The doctrine of "corporate opportunity" is precisely a recognition by the
courts that the fiduciary standards could not be upheld where the fiduciary
was acting for two entities with competing interests. This doctrine rests
fundamentally on the unfairness, in particular circumstances, of an officer or
director taking advantage of an opportunity for his own personal profit when
the interest of the corporation justly calls for protection. (Gokongwei v SEC
89 SCRA 336 [1979])
OTHER GROUNDS FOR QUALIFICATION AND
DISQUALIFICATION MAY BE SET BY SEC, PRIMARY
REGULATORY AGENCY AND THE PHILIPPINE COMPETITION
COMMISSION
a. For promotion of corporate governance or
b. As sanction in an administrative proceedings (see Sec 158)
SEC. 27 REMOVAL OF DIRECTORS OR TRUSTEES. – Any director
or trustee of a corporation may be removed from office by a vote of the
stockholders holding or representing at least two-thirds (2/3) of the
outstanding capital stock, or in a nonstock corporation, by a vote of at
least two-thirds (2/3) of the members entitled to vote: Provided, That
such removal shall take place either at a regular meeting of the
corporation or at a special meeting called for the purpose, and in either
case, after previous notice to stockholders or members of the
corporation of the intention to propose such removal at the meeting. A
special meeting of the stockholders or members for the purpose of
removing any director or trustee must be called by the secretary on
order of the president, or upon written demand of the stockholders
representing or holding at least a majority of the outstanding capital
stock, or a majority of the members entitled to vote. If there is no
secretary, or if the secretary, despite demand, fails or refuses to call
the special meeting or to give notice thereof, the stockholder or
member of the corporation signing the demand may call for the
meeting by directly addressing the stockholders or members. Notice of
the time and place of such meeting, as well as of the intention to
propose such removal, must be given by publication or by written
notice prescribed in this Code. Removal may be with or without cause:
Provided, That removal without
cause may not be used to deprive minority stockholders or members of
the right of representation to which they may be entitled under Section
23 of this Code.
The Commission shall, motu proprio or upon verified complaint, and
after due notice and hearing, order the removal of a director or trustee
elected despite the disqualification, or whose disqualification arose or
is discovered subsequent to an election. The removal of a disqualified
director shall be without prejudice to other sanctions that the
Commission may impose on the board of directors or trustees who,
with knowledge of the disqualification, failed to remove such director or
trustee.
1. This requires a stockholders regular or special meeting called for the
purpose with notice
2. A director representing minority stockholders under Sec 23 may be
removed only for cause
3. The Board has no power to discipline or remove one of their own
4. Consequences of a disqualified director being elected or becoming
disqualified after election: removal and permanent disqualification;
sanction on the other directors (See also Sec 160)
SEC. 28. VACANCIES IN THE OFFICE OF DIRECTOR OR
TRUSTEE
Q: RULES ON VACANCIES
1. If a vacancy is due to causes other than removal or expiration of
term:
 may be filled by the vote of the majority of the directors at a
Board meeting with a quorum; otherwise, by the stockholders in
a regular or special meeting called for the purpose to serve the
unexpired term (Tan v Sycip 499 SCRA 216 [2006])
 Election must be held no later than forty-five (45) days from the
time the vacancy arose. A director or trustee elected to fill a
vacancy shall be referred to as replacement director or trustee
and shall serve only for the unexpired term of the predecessor
in office.
2. If a vacancy is due to term expiration:
 Election shall be held no later than the day of such expiration at
a meeting called for that purpose
3. If a vacancy is due to removal by the stockholders or members:
 Election may be held on the same day of the meeting
authorizing the removal and this fact must be so stated in the
agenda and notice of said meeting.
4. Vacancy must be filled up by a replacement director within definite
periods of time subject to the procedure in Sections 23 and 26
5. Emergency board - when the vacancy prevents the remaining
directors from constituting a quorum and emergency action is
required to prevent grave, substantial, and irreparable loss or
damage to the corporation, the vacancy may be temporarily filled
from among the officers of the corporation by unanimous vote of the
remaining directors or trustees. The action by the designated director
or trustee shall be limited to the emergency action necessary, and the
term shall cease within a reasonable time from the termination of the
emergency or upon election of the replacement director or trustee,
whichever comes earlier. The corporation must notify the
Commission within three (3) days from the creation of the emergency
board, stating therein the reason for its creation.
SEC. 29. COMPENSATION OF DIRECTORS OR TRUSTEES
Q: RULES ON COMPENSATION OF DIRECTORS OR TRUSTEES
1. Unless in the bylaws, directors are entitled only to reasonable per
diems;
2. Majority of stockholders may grant compensation (not only per diems)
as long as total on an annual basis does not exceed 10% of net income
before tax of preceding year;
3. Directors or trustees shall not participate in determination of their own
per diems or compensation
4. Corporations vested with public interest shall submit to shareholders
and SEC an annual report of the total compensation of each of their
directors or trustees. See Sec 177 (last par)
SEC. 30. LIABILITY OF DIRECTORS, TRUSTEES OR OFFICERS. –
Directors or trustees who willfully and knowingly vote for or assent to
patently unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict with their duty as
such directors or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.
A director, trustee, or officer shall not attempt to acquire, or acquire
any interest adverse to the corporation in respect of any matter which
has been reposed in them in confidence, and upon which, equity
imposes a disability upon themselves to deal in their own behalf;
otherwise the said director, trustee, or officer shall be liable as a
trustee for the corporation and must account for the profits which
otherwise would have accrued to the corporation.
Q: WHEN CAN A DIRECTOR OR OFFICER OF A CORPORATION
BE HELD SOLIDARILY OBLIGATED WITH THE LATTER FOR A
CORPORATE LIABILITY?
A: As a general rule, a corporation, being a juridical entity, may act only
through its directors, officers and employees. Obligations incurred by them,
acting as such corporate agents, are not theirs but the direct accountabilities
of the corporation they represent. However, solidary liabilities may at times
be in the ff. cases:
1. When directors and trustees or, in appropriate cases, the officers of a
corporation —
(a) vote for or assent to patently unlawful acts of the corporation;
(b) act in bad faith or with gross negligence in directing the corporate
affairs;
(c) are guilty of conflict of interest to the prejudice of the corporation,
its stockholders or members, and other persons.
2. When a director or officer has consented to the issuance of watered
stocks or who, having knowledge thereof, did not forthwith file with the
corporate secretary his written objection thereto.
3. When a director, trustee or officer has contractually agreed or stipulated
to hold himself personally and solidarily liable with the Corporation.
4. When a director, trustee or officer is made, by specific provision of law,
personally liable for his corporate action. (MAM Realty Dev Corp v NLRC
GR 114787 Jun 2, 1995)
1. Sec 30 applies to directors, officers and trustees
2. Duties and liabilities of directors and corporate officers
 It is basic that a corporation is invested by law with a personality separate
and distinct from those of the persons composing it as wen as from that of
any other legal entity to which it may be related. As a general rule, a
corporation may not be made to answer for acts or liabilities of its
stockholders or those of the legal entities to which it may be connected
and vice versa. However, the veil of corporate fiction may be pierced
when it is used as a shield to further an end subversive of justice; or for
purposes that could not have been intended by the law that created it; or
to defeat public convenience, justify wrong, protect fraud, or defend crime;
or to perpetuate fraud or confuse legitimate issues; or to circumvent the
law or perpetuate deception; or as an alter ego, adjunct or business
conduit for the sole benefit of the stockholders. (Palay Inc v Clave 124
SCRA 638 [1983])
 Personal liability of a corporate director, trustee or officer along (although
not necessarily) with the corporation may so validly attach, as a rule, only
when —
(1) He assents (a) to a patently unlawful act of the corporation, or (b)
for bad faith, or gross negligence in directing its affairs, or (c) for
conflict of interest, resulting in damages to the corporation, its
stockholders or other persons;
(2) He consents to the issuance of watered stocks or who, having
knowledge thereof, does not forthwith file with the corporate
secretary his written objection thereto;
(3) He agrees to hold himself personally and solidarily liable with the
corporation; or
(4) He is made, by a specific provision of law, to personally answer for
his corporate action. (Tramat Mercantile v CA)
3. Stockholder’s right to file derivative suit; see SC Rules of Procedure
on Intra-Corporate Controversies
Q: WHAT IS A DERIVATIVE SUIT?
A: A derivative action is a suit by a shareholder to enforce a corporate cause
of action. Under the Corporation Code, where a corporation is an injured
party, its power to sue is lodged with its board of directors or trustees. But an
individual stockholder may be permitted to institute a derivative suit on
behalf of the corporation in order to protect or vindicate corporate rights
whenever the officials of the corporation refuse to sue, or are the ones to be
sued, or hold control of the corporation. In such actions, the corporation is
the real party-in-interest while the suing stockholder, on behalf of the
corporation, is only a nominal party.
Q: WHAT IS THE BASIS OF THE STOCKHOLDER’S RIGHT TO
FILE A DERIVATIVE SUIT?
A stockholder's right to institute a derivative suit is not based on any express
provision of the Corporation Code, or even the Securities Regulation Code,
but is impliedly recognized when the said laws make corporate directors or
officers liable for damages suffered by the corporation and its stockholders
for violation of their fiduciary duties.
Q: WHAT ARE THE REQUIREMENTS FOR THE VALIDITY OF A
DERIVATIVE SUIT?
A: The jurisprudential requirements were incorporated in Section 1, Rule 8
of the Interim Rules of Procedure Governing Intra-Corporate Controversies
under Republic Act No. 8799. Section 1 reads:
(1) The person filing the suit must be a stockholder or member at the
time the acts or transactions subject of the action occurred and the
time the action was filed;
(2) He must have exerted all reasonable efforts, and alleges the same
with particularity in the complaint, to exhaust all remedies available
 under the articles of incorporation, by-laws, laws or rules governing
the corporation or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of;
and
(4) The suit is not a nuisance or harassment suit.
Q: ARE ALL SUITS FILED ON BEHALF OF THE CORPORATION A
DERIVATIVE SUIT?
A: NO. Not every suit filed on behalf of the corporation is a derivative suit.
For a derivative suit to prosper, the minority stockholder suing for and on
behalf of the corporation must allege in his complaint that he is suing on a
derivative cause of action on behalf of the corporation and all other
stockholders similarly situated who may wish to join him in the suit.
It is a condition sine qua non that the corporation be impleaded as party in a
derivative suit. (BSP v Vicente Jose Campa et al GR 185979 Mar 16,
2016)
SEC. 31. DEALINGS OF DIRECTORS, TRUSTEES OR OFFICERS
WITH THE COORPORATION. – A contract of the corporation with (1)
one or more of its directors, trustees, officers or their spouses and
relatives within the fourth civil degree of consanguinity or affinity is
voidable, at the option of such corporation, unless all the following
conditions are present:
(a) The presence of such director or trustee in the board meeting
in which the contract was approved was not necessary to
constitute a quorum for such meeting;
(b) The vote of such director or trustee was not necessary for the
approval of the contract;
(c) The contract is fair and reasonable under the circumstances;
(d) In case of corporations vested with public interest, material
contracts are approved by at least two-thirds (2/3) of the entire
membership of the board, with at least a majority of the
independent directors voting to approve the material contract;
and
(e) In case of an officer, the contract has been previously
authorized by the board of directors.
Where any of the first three (3) conditions set forth in the preceding
paragraph is absent, in the case of a contract with a director or trustee,
such contract may be ratified by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock or
of at least two-thirds (2/3) of the members in a meeting called for the
purpose: Provided, That full disclosure of the adverse interest of the
directors or trustees involved is made at such meeting and the contract
is fair and reasonable under the circumstances.
1. Self-dealing director includes his spouse, relatives within the
fourth civil degree of consanguinity or affinity
2. Transaction is voidable, at the option of the corporation, unless all
conditions present: his vote was not necessary for approval nor
his presence for the quorum; the contract was fair and reasonable
and where the self-dealing officer was previously authorized by
the Board
3. Corporations vested with public interest: transaction approved by
at least 2/3 of entire board and majority of independent directors
4. Transaction may be ratified by stockholders under certain
circumstances – full disclosure and contract is fair and reasonable
5. There is no need for the corporation to suffer damage or injury
from the contract
6. Self-dealing director must recuse from participating in
meeting/approval of the transaction
7. See SEC Rules on Related Party Transactions for PLCs April
2019
SEC. 32. CONTRACTS BETWEEN CORPORATIONS WITH
INTERLOCKING DIRECTORS. – Except in cases of fraud, and
provided the contract is fair and reasonable under the circumstances, a
contract between two (2) or more corporations having interlocking
directors shall not be invalidated on that ground alone: Provided, That
if the interest of the interlocking director in one (1) corporation is
substantial and the interest in the other corporation or corporations is
merely nominal, the contract shall be subject to the provisions of the
preceding section insofar as the latter corporation or corporations are
concerned.
Stockholdings exceeding twenty percent (20%) of the outstanding
capital stock shall be considered substantial for purposes of
interlocking directors.
1. The general rule is the contract is valid except if there was fraud and
provided the contract is fair and reasonable. (DBP v CA 363 SCRA
307 [2001])
SEC. 33 DISLOYALTY OF A DIRECTOR. – Where a director, by
virtue of such office, acquires a business opportunity which should
belong to the corporation, thereby obtaining profits to the prejudice of
such corporation, the director must account for and refund to the latter
all such profits, unless the act has been ratified by a vote of the
stockholders owning or representing at least twothirds (2/3) of the
outstanding capital stock. This provision shall be applicable,
notwithstanding the fact that the director risked one’s own funds in the
venture.
1. Director takes advantage of an opportunity belonging to the
corporation for his own personal profit;
2. Director’s loyalty is violated regardless of director using his own
funds;
3. There must be prejudice to the corporation which the director must
account for or refund
4. Transaction is voidable if conditions for validity not complied but may
be ratified
SEC. 34. EXECUTIVE, MANAGEMENT, AND OTHER SPECIAL
COMMITTEES. – If the bylaws so provide, the board may create an
executive committee composed of at least three (3) directors. Said
committee may act, by majority vote of all its members, on such
specific matters within the competence of the board, as may be
delegated to it in the bylaws or by majority vote of the board, except
with respect to the: (a) approval of any action for which shareholders’
approval is also required; (b) filling of vacancies in the board; (c)
amendment or repeal of bylaws or the adoption of new bylaws; (d)
amendment or repeal of any resolution of the board which by its
express terms is not amendable or repealable; and (e) distribution of
cash dividends to the shareholders.
The board of directors may create special committees of temporary or
permanent nature and determine the members’ term, composition,
compensation, powers, and responsibilities.
TITLE IV
POWERS OF CORPORATIONS
SEC. 35. CORPORATE POWERS AND CAPACITY
1. Theory of General or Specific Capacity (express, implied or
incidental); See also Sec 46 of the Civil Code
NCC, Article 46. Juridical persons may acquire and possess property
of all kinds, as well as incur obligations and bring civil or criminal
actions, in conformity with the laws and regulations of their
organization.
Q: WHO CAN SIGN FOR THE COMPANY WITHOUT THE NEED OF
A BOARD RESOLUTION:
A: The following officials or employees of the company can sign the
verification and certification without the need of a board resolution:
1. Chairperson of the Board
2. President of the corporation
3. General Manager or Acting General Manager
4. Personnel Officer
5. Employment Specialist in a labor case (Cagayan Valley Drug
Corp v CIR 545 SCRA 10)
2. Sue and be sued
Q: CAN THE CORPORATE OFFICER OF A CORPORATION IS
INCAPACITATED TO FILE A SUIT TO RECOVER A CORPORATE
PROPERTY BECAUSE IT HAS A DULY-APPOINTED
REHABILITATION RECEIVER?
A: NO. There is nothing in the concept of corporate rehabilitation that would
ipso facto deprive the Board of Directors and corporate officers of a debtor
corporation of control such that it can no longer enforce its right to recover its
property from an errant lessee. (Umale, et al v ASB Realty Corporation
GR 181126 Jun 15, 2011)
Q: CAN A HOMEOWNERS ASSOCIATION (NOT REGISTERED)
SUE IN ITS OWN NAME:
 A: NO. The Rules of Court mandates that only natural or juridical persons, or 1. All issuances or dispositions of shares of any class including
entities authorized by law may be parties in a civil action. Non-compliance re-issuance of treasury shares in proportion to respective
with this requirement renders a case dismissible on the ground of lack of shareholding;
legal capacity to sue, which refers to "a plaintiff's general disability to sue,
such as on account of minority, insanity, incompetence, lack of juridical
2. The period to exercise this right should be in accord with the
personality or any other general disqualifications of a party." articles or the by laws but where both are silent, as the Board may
fix; and
Jurisprudence provides that an unregistered association, having no separate 3. The price shall not be less than par value.
juridical personality, lacks the capacity to sue in its own name. (Alliance of
QC Homeowners’ Association Inc. v The QC Government et al, GR 230651 SEC. 39. SALE OR OTHER DISPOSITION OF ASSETS. – Subject to
Sep 18, 2018) the provisions of Republic Act No. 10667, otherwise known as
“Philippine Competition Act”, and other related laws, a corporation
3. Power of succession
may, by a majority vote of its board of directors or trustees, sell, lease,
4. Adopt a corporate seal
exchange, mortgage, pledge, or otherwise dispose of its property and
5. Amend articles
assets, upon such terms and conditions and for such consideration,
6. Adopt, repeal or amend by laws
which may be money, stocks, bonds, or other instruments for the
7. Issue stocks to subscribers and sell treasury shares; to admit
payment of money or other property or consideration, as its board of
members in a non-stock corporation
directors or trustees may deem expedient.
8. Exercise rights of ownership over properties for lawful business
9. Enter into merger or consolidation
A sale of all or substantially all of the corporation’s properties and
10. Make donations (except foreign corporations in aid of any political
assets, including its goodwill, must be authorized by the vote of the
party or candidate or for purposes of partisan political activity)
stockholders representing at least two-thirds (2/3) of the outstanding
11. Establish pension, retirement and other benefits for officers and
capital stock, or at least two-thirds (2/3) of the members, in a
employees
stockholders’ or members’ meeting duly called for the purpose.
12. Others – inherent powers; incidental powers; implied or necessary
powers [e.g. issue checks -Atrium Management Corp v CA 353 SCRA
In nonstock corporations where there are no members with voting
23 (2001); perform other acts pertinent to purchase of shares of
rights, the vote of at least a majority of the trustees in office will be
another corporation - Inter Asia Investments v CA 403 SCRA 452
sufficient authorization for the corporation to enter into any transaction
(2003)]
authorized by this section.
SEC. 36. POWER TO EXTEND OR SHORTEN CORPORATE TERM.
The determination of whether or not the sale involves all or
– A private corporation may extend or shorten its term as stated in the
substantially all of the corporation’s properties and assets must be
articles of incorporation when approved by a majority vote of the board
computed based on its net asset value, as shown in its latest financial
of directors or trustees, and ratified at a meeting by the stockholders or
statements. A sale or other disposition shall be deemed to cover
members representing at least two-thirds (2/3) of the outstanding
substantially all the corporate property and assets if thereby the
capital stock or of its members. Written notice of the proposed action
corporation would be rendered incapable of continuing the business or
and the time and place of the meeting shall be sent to stockholders or
accomplishing the purpose for which it was incorporated.
members at their respective place of residence as shown in the books
of the corporation, and must either be deposited to the addressee in
Written notice of the proposed action and of the time and place for the
the post office with postage prepaid, served personally, or when
meeting shall be addressed to stockholders or members at their places
allowed in the bylaws or done with the consent of the stockholder, sent
of residence as shown in the books of the corporation and deposited to
electronically in accordance with the rules and regulations of the
the addressee in the post office with postage prepaid, served
Commission on the use of electronic data messages. In case of
personally, or when allowed by the bylaws or done with the consent of
extension of corporate term, a dissenting stockholder may exercise the
the stockholder, sent electronically: Provided, That any dissenting
right of appraisal under the conditions provided in this Code.
stockholder may exercise the right of appraisal under the conditions
provided in this Code.
1. Since default term is perpetual, shortening the corporate term
may be resorted to more than extending it.
After such authorization or approval by the stockholders or members,
the board of directors or trustees may, nevertheless, in its discretion,
SEC. 37. POWER TO INCREASE OR DECREASE CAPITAL
abandon such sale, lease, exchange, mortgage, pledge, or other
STOCK; INCUR, CREATE OR INCREASE BONDED
disposition of property and assets, subject to the rights of third parties
INDEBTEDNESS
under any contract relating thereto, without further action or approval
1. Reasons to generate more working capital, to acquire more assets,
by the stockholders or members.
or to have shares to cover declaration of dividends; but, there are other
ways to increase capital without amending such additional
Nothing in this section is intended to restrict the power of any
subscription, advances from stockholders or payment of unpaid
corporation, without the authorization by the stockholders or members,
subscription
to sell, lease, exchange, mortgage, pledge, or otherwise dispose of
2. Requires majority vote of directors and stockholders representing
any of its property and assets if the same is necessary in the usual and
2/3 of OCS;
regular course of business of the corporation or if the proceeds of the
3. Needs SEC prior approval, and PCC’s where appropriate
sale or other disposition of such property and assets shall be
4. Requires application to be filed within 6 months from date of
appropriated for the conduct of its remaining business.
approval of board and stockholders subject to extension for just
reasons
Q: WHAT IS THE NELL DOCTRINE? WHAT ARE THE
5. Retains the 25%/25% requirement for subscribed and paid up
EXCEPTIONS TO SUCH DOCTRINE?
6. Follows trust fund doctrine in that increase shall not prejudice rights A: Generally where one corporation sells or otherwise transfers all of its
of corporate creditors assets to another corporation, the latter is not liable for the debts and
liabilities of the transferor, except: (1) where the purchaser expressly or
SEC. 38. POWER TO DENY PREEMPTIVE RIGHT. – All stockholders impliedly agrees to assume such debts; (2) where the transaction amounts
of a stock corporation shall enjoy preemptive right to subscribe to all to a consolidation or merger of the corporations; (3) where the purchasing
issues or disposition of shares of any class, in proportion to their corporation is merely a continuation of the selling corporation; and (4) where
respective shareholdings, unless such right is denied by the articles of the transaction is entered into fraudulently in order to escape liability for such
debts. (Nell v Pacific Farms Inc, 15 SCRA 415)
incorporation or an amendment thereto: Provided, That such
preemptive right shall not extend to shares issued in compliance with
1. Subject to Philippine Competition Act and other related laws
laws requiring stock offerings or minimum stock ownership by the
(Bulk Sales Act)
public; or to shares issued in good faith with the approval of the
2. Net asset value in latest financial statements v business
stockholders representing two-thirds (2/3) of the outstanding capital
enterprise theory
stock, in exchange for property needed for corporate purposes or in
3. Requires ratification
payment of a previously contracted debt.
4. Revisit the trust fund doctrine
SEC. 40. POWER TO ACQUIRE OWN SHARES. – Provided that the
corporation has unrestricted retained earnings in its books to cover the
shares to be purchased or acquired, a stock corporation shall have the
power to purchase or acquire its own shares for a legitimate corporate
purpose or purposes, including the following cases:
(a) To eliminate fractional shares arising out of stock dividends;
(b) To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares sold
during said sale; and
(c) To pay dissenting or withdrawing stockholders entitled to
payment for their shares under the provisions of this Code
Q: WHETHER OR NOT A SUIT BROUGHT BY A WITHDRAWING
STOCKHOLDER AGAINST THE CORPORATION TO ENFORCE
PAYMENT OF THE BALANCE DUE ON THE CONSIDERATION
FOR SURRENDER OF HIS SHARES OF STOCK AND INTERESTS
IN THE CORPORATION, INVOLVES AN INTRA-CORPORATE
DISPUTES?
A: This case involves an intra-corporate controversy because the parties are
a stockholder and the corporation. (Boman Environmental Dev Corp v CA)
1. Solely for legitimate purposes and subject to existence of
unrestricted retained earnings to cover shares acquired; otherwise,
may run counter to the trust fund doctrine.
2. Instances when this power may be exercised:
a. Make fractional shares whole
b. Settle indebtedness of a delinquent stockholder
c. Redeem redeemable shares
3. Exercise right of appraisal
Q: WHAT IS THE RIGHT OF APPRAISAL?
A: It allows a stockholder who dissents and votes against a proposed
corporate action to withdraw from the corporation by demanding payment of
the fair value of his shares.
This right is expressly recognized in Section 81 of the Corporation Code, to
wit: Section 81. Instances of appraisal right. - Any stockholder of a
corporation shall have the right to dissent and demand payment of the fair
value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect
of changing or restricting the rights of any stockholder or class of
shares, or of authorizing preferences in any respect superior to those of
outstanding shares of any class, or of extending or shortening the term
of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and assets
as provided in the Code; and
3. In case of merger or consolidation.
Clearly, the right of appraisal may be exercised when there is a fundamental
change in the charter or AOI substantially prejudicing the rights of the
stockholders. It does not vest unless objectionable corporate action is taken.
Now, however, a corporation can purchase its own shares, provided
payment is made out of surplus profits and the acquisition is for a legitimate
corporate purpose. (Turner v Lorenzo Shipping Corp 636 SCRA 12)
SEC. 41. POWER TO INVEST CORPORATE FUNDS IN ANOTHER
CORPORATION OR BUSINESS OR FOR ANY OTHER PURPOSE. –
Subject to the provisions of this Code, a private corporation may invest
its funds in any other corporation, business, or for any purpose other
than the primary purpose for which it was organized, when approved
by a majority of the board of directors or trustees and ratified by the
stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, or by at least two thirds (2/3) of the members in the case
of nonstock corporations, at a meeting duly called for the purpose.
Notice of the proposed investment and the time and place of the
meeting shall be addressed to each stockholder or member at the
place of residence as shown in the books of the corporation and
deposited to the addressee in the post office with postage prepaid,
served personally, or sent electronically in accordance with the rules
and regulations of the Commission on the use of electronic data
message, when allowed by the bylaws or done with the consent of the
stockholders: Provided, That any dissenting stockholder shall have
appraisal right as provided in this Code: Provided, however, That
where the investment by the corporation is reasonably necessary to
accomplish its primary purpose as stated in the articles of
incorporation, the approval of the stockholders or members shall not
be necessary.
Within primary purpose; outside of secondary purposes
SEC. 42. POWER TO DECLARE DIVIDENDS. – The board of
directors of a stock corporation may declare dividends out of the
unrestricted retained earnings which shall be payable in cash,
property, or in stock to all stockholders on the basis of outstanding
stock held by them: Provided, That any cash dividends due on
delinquent stock shall first be applied to the unpaid balance on the
subscription plus costs and expenses, while stock dividends shall be
withheld from the delinquent stockholders until their unpaid
subscription is fully paid: Provided, further, That no stock dividend shall
be issued without the approval of stockholders representing at least
two-thirds (2/3) of the outstanding capital stock at a regular or special
meeting duly called for the purpose.
Stock corporations are prohibited from retaining surplus profits in
excess of one hundred percent (100%) of their paid-in capital stock,
except: (a) when justified by definite corporate expansion projects or
programs approved by the board of directors; or (b) when the
corporation is prohibited under any loan agreement with financial
institutions or creditors, whether local or foreign, from declaring
dividends without their consent, and such consent has not yet been
secured; or (c) when it can be clearly shown that such retention is
necessary under special circumstances obtaining in the corporation,
such as when there is need for special reserve for probable
contingencies.
Q: WHAT IS A STOCK DIVIDEND?
A: A "stock dividend" is any dividend payable in shares of stock of the
corporation declaring or authorizing such dividend. It is, what the term itself
implies, a distribution of the shares of stock of the corporation among the
stockholders as dividends. A stock dividend of a corporation is a dividend
paid in shares of stock instead of cash, and is properly payable only out of
surplus profits. So, a stock dividend is actually two things: (1) a dividend,
and (2) the enforced use of the dividend money to purchase additional
shares of stock at par.16 When a corporation issues stock dividends, it
shows that the corporation's accumulated profits have been capitalized
instead of distributed to the stockholders or retained as surplus available for
distribution, in money or kind, should opportunity offer. Far from being a
realization of profits for the stockholder, it tends rather to postpone said
realization, in that the fund represented by the new stock has been
transferred from surplus to assets and no longer available for actual
distribution. Thus, it is apparent that stock dividends are issued only to
stockholders. This is so because only stockholders are entitled to dividends.
They are the only ones who have a right to a proportional share in that part
of the surplus which is declared as dividends. A stock dividend really adds
nothing to the interest of the stockholder; the proportional interest of each
stockholder remains the same. If a stockholder is deprived of his stock
dividends - and this happens if the shares of stock forming part of the stock
dividends are issued to a non-stockholder — then the proportion of the
stockholder's interest changes radically. Stock dividends are civil fruits of the
original investment, and to the owners of the shares belong the civil fruits.
SEC. 43. POWER TO ENTER INTO MANAGEMENT CONTRACT. –
No corporation shall conclude a management contract with another
corporation unless such contract is approved by the board of directors
and by stockholders owning at least the majority of the outstanding
capital stock, or by at least a majority of the members in the case of a
nonstock corporation, of both the managing and the managed
corporation, at a meeting duly called for the purpose: Provided, That
(a) where a stockholder or stockholders representing the same interest
of both the managing and the managed corporations own or control
more than one-third (1/3) of the total outstanding capital stock entitled
to vote of the managing corporation; or (b) where a majority of the
members of the board of directors of the managing corporation also
constitute a majority of the members of the board of directors of the
managed corporation, then the management contract must be
approved by the stockholders of the managed corporation owning at
least two-thirds (2/3) of the total outstanding capital stock entitled to
vote, or by at least two-thirds (2/3) of the members in the case of a
nonstock corporation.
These shall apply to any contract whereby a corporation undertakes to
manage or operate all or substantially all of the business of another
corporation, whether such contracts are called service contracts,
operating agreements or otherwise: Provided, however, That such
service contracts or operating agreements which relate to the
exploration, development, exploitation or utilization of natural
resources may be entered into for such periods as may be provided by
the pertinent laws or regulations.

No management contract shall be entered into for a period longer than

five (5) years for any one (1) term.

Stockholders ratification may be required

There must be a justification for entering into a management
contract

SEC. 44. ULTRA VIRES ACTS OF CORPORATIONS. – No

corporation shall possess or exercise corporate powers other than
those conferred by this Code or by its articles of incorporation and
except as necessary or incidental to the exercise of the powers
conferred.

Q: WHAT ARE ULTRA VIRES ACTS BY THE CORPORATION?

WHEN IS THERE ULTRA VIRES ACTS BY THE A) BOD AND B)
CORPORATE OFFICERS?
A: There is an ultra vires act on the part of the corporation when it performs
acts which are not provide in its express, implied or incidental powers. There
is ultra vires act on the part of the board of directors when it performs acts
which are not delegated to it by the articles of incorporation or the bylaws.
There is ultra vires act on the part of the corporate officers when they
perform acts which are not authorized by the bya laws and the articles of
incorporation or not delegated to them by the board of directors.

Q: WHAT ARE THE EFFECTS OF AN ULTRA VIRES ACT?

A: Ultra vires acts entered into by the board of directors binds the
corporation and the courts will not interfere unless terms are oppressive and
unconscionable.

Pirovano v De la Rama Steamship Co 96 Phil 335 (1954)

Yasuma v Heirs of Cecilio de Villa 499 SCRA 466 (2006)