Effects of Non-use of Corporate Charter
Rule:
• Non-commencement of business within 5 years from the date of
incorporation
– Certificate of Incorporation shall be revoked
Effect of Continuous Inoperation
Rule:
• Started the business but subsequently becomes continuously
inoperative for a period of at least 5 consecutive years
– Corporation will be placed on delinquent status, after due notice
and hearing by SEC
• Failure to resume operation within 2 years
– Is a cause for revocation of the corporation’s certificate of
incorporation
DE FACTO CORPORATION
A corporation which actually exists for all practical purposes as a
corporation, but which has no legal right to corporate existence as against
the State.
It is one which has not complied with all the requirements necessary to be
a de jure corporation but has complied sufficiently to be accorded
corporate status as against third parties although not against the state.
Requisites of De Facto Corporation
1. The existence of a valid law under which it may be incorporated;
2. A bona fide attempt in good faith to incorporate under such law;
3. Actual use or exercise in good faith of corporate powers; and
4. Issuance of a certificate of incorporation by the SEC as a minimum
requirement of continued good faith.
Defects which Preclude the Creation of a De Facto Corporation
1. Absence of Articles of Incorporation
2. Failure to file articles of incorporation with SEC; and
3. Lack of certificate of incorporation from SEC
Defects which DO NOT Preclude the Creation of a De Facto Corporation
1. The name of the corporation closely resembles that of a pre-existing
corporation that it will tend to deceive the public;
2. The incorporators or certain number of them are not residents of the
Philippines
3. The acknowledgment of AOI is insufficient or defective in form, or it was
acknowledged before the wrong officer.
Validity of Corporate Existence of a De Facto Corporation
1. Existence of a corporate entity cannot be collaterally attacked or
questioned by private individuals
2. Its existence as a corporation can only be attacked by the State in a
direct proceeding (i.e. quo warranto)
Corporation by Estoppel
An unincorporated association which represented itself to be a corporation
will be estopped from denying its corporate capacity in a suit against it by a
third person who relied in good faith on such representation, liabilities and
damages incurred or arising as a result thereof.
Effect:
• A corporation by estoppel has no real existence in law.
• 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.
• 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 as a defense its lack of corporate
personality.
• A third party who, knowing an association to be unincorporated,
nonetheless treated it as a corporation and received benefits from it,
may be barred from denying its corporate existence in a suit brought
against the alleged corporation.
BOARD OF DIRECTORS AND TRUSTEES
Basic Rules:
1. Conducts all the business and controls and holds all the property of
corporation.
2. Composed of not more than 15 members elected from the
stockholders or members of corporation;
3. Elects the administrative officers of the corporation such as president,
treasurer, secretary, and such other officers as may be provided for in
the by-laws;
4. Directors or Trustees are elected to hold office for one (1) year and until
such time their successors are elected and qualified.
5. The directors are elected by cumulative shares.
6. The Directors or Trustees must act as a Board in order to bind the
corporation by their acts.
Exceptions:
a. Where the directors are themselves the sole stockholders
b. Where the contract is entered into by a corporate officer
authorized by the Board
c. Where the transaction is ratified at a subsequent meeting
d. Where all the stockholders or trustees consent
e. Where the corporation is guilty of estoppel
7. They cannot delegate discretionary powers vested exclusively in them
by law or by laws.
8. Cannot validly act by proxy as they are required to exercise their
personal judgment.
INDEPENDENT AUDITOR (ID)
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.
Corporations Required to have ID:
1. Corporations whose securities are registered with SEC
2. Banks and quasi-banks, NSSLA, pawnshops, corporations engaged in
money service business, pre-need, trust and insurance companies, and
other financial intermediaries; and
3. Other corporations engaged in business vested with public interest
similar to the above.
Election of Directors/Trustees
1. Owners of a majority of the outstanding capital stock/member, in
person or by their authorized representative as such by written proxy,
must be present at the election of the directors/trustees.
2. When authorized in the by-laws, or majority of the BOD, the
stockholders/members may also vote through remote communication
or in absentia.
3. The election must be by ballot, if requested by any voting stockholder
or member.
4. No delinquent stock shall be voted.
5. In stock corporation, the total number of votes cast shall not exceed
the number of shares owned by the stockholder multiplied by the
number of directors to be elected.
6. In non-stock corporation, members may not cast more than 1 vote for
1 candidate
7. Nominees receiving the highest number of votes shall be declared
elected
8. In case of failure to hold election, 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.
Methods of Voting
1. Straight voting – every stockholder may vote such number of shares for
as many persons as there are directors to be elected.
2. Cumulative Voting for One Candidate – a stockholder is allowed to
concentrate his votes and give one candidate as many votes as the
number of directors to be elected multiplied by the number of his
shares shall equal.
3. Cumulative Voting by Distribution – by this method, a stockholder may
cumulate his shares by multiplying also the number of his shares by the
number of directors to be elected and distribute the same among as
many candidates as he shall see fit.
Methods of Voting for Trustees in Non-Stock Corporation
1. The manner of voting provided in the articles of incorporation or in the
by-laws, otherwise
2. The members may cast as many votes as there are trustees to be
elected but may not cast more than one vote for one candidate.
Limitations on the Election of Directors/Trustees
1. At any meeting of stockholder or members called for the election of
directors or trustees, there must be present either in person or by
representative authorized to act by written proxy, the owners of the
majority of the outstanding capital stock or majority of the members
entitled to vote.
2. The election must be by ballot if requested by any voting stockholder
or member.
3. A stockholder cannot be deprived in the articles of incorporation or in
the by-laws of his statutory right to use any of the methods of voting in
the election of directors.
4. No delinquent stock shall be voted.
5. The candidates receiving the highest number of votes shall be declared
elected. A majority vote is not necessary. However, it is necessary that
there is a quorum. And in the absence thereof, election shall be
considered invalid.
Requisites for Board Meeting
Validity of a corporate act is predicated on the presence of the following
requisites:
• Meeting of the Directors or Trustees duly assembled as a board;
• Presence of quorum
• Decision of the majority of the quorum, or in other cases, a majority of
the entire board; and
• Meeting at the place, time, and in the manner provided for in the by-
laws.
Removal of Director or Trustee
Requisites:
1. The removal should take place at a regular or special meeting duly
called for the purpose;
2. The director or trustee can only be removed by at least 2/3 of the
outstanding capital stock or of the members entitle to vote;
3. There must be a previous notice to members or stockholders of the
corporation of the intention to propose such removal at the meeting.
4. The removal without cause may not be used to deprive minority
stockholders or members of the right to representation to which they
may be entitled under Sec. 23 of the Code.
Vacancies in the Board
1. Filled by the stockholders or members:
a. If the vacancy results from the removal by the stockholders or
members or the expiration of term;
b. If the vacancy occurs other than by removal or by expiration of term,
such as death, resignation, abandonment, or disqualification, if the
remaining directors or trustees do not constitute a quorum for the
purpose of filling the vacancy;
c. If the vacancy may be filled by the remaining directors or trustees
but the board refers the matter to stockholders or members; or
d. If the vacancy is created by reason of an increase in the number of
directors or trustees.
2. Filled by the members of the Board –
a. If still constituting a quorum, at least a majority of them are
empowered to fill any vacancy occurring in the board other than by
removal by the stockholders or members or by expiration of term.
Compensation of Board Members
General Rule:
Directors are not entitled to receive any compensation except for
reasonable per diems.
Exceptions:
1. When their compensation is fixed in the by-laws
2. When granted by the vote of stockholders representing at least a
majority of the outstanding capital stock at a regular or special meeting
3. When they are also officers of the corporation
CORPORATE OFFICERS
1. President
– Must be a member of the Board
– Cannot held the position of Corporate Secretary or Treasurer at the
same time
– Has general control and supervision over the affairs of the
corporation
2. Vice President
– To act in the absence of the president
– Conferred certain executive duties by the Board
3. Corporate Secretary
– Must be a resident and citizen of the Phils.
– Not allowed to act as Secretary and President at the same time
– Make and keep corporate records
– Make proper entries of vote
– Prepare resolutions and proceedings of the shareholders and
directors
4. Treasurer
– Must be resident of the Philippines
– Entrusted with the authority to receive and keep the money of the
corporation and to distribute them as he may be authorized
– Treasurer may not hold the position of the President at the same
time
– May or may not be a director
5. Such other officers as maybe provided for in the by-laws
6. In case of corporation is vested with public interest
– Must elect a Compliance Officer
Authority of Corporate Officers
Generally derived from:
1. Law
2. By-Laws
3. Authorization from the Board, either expressly or impliedly by habit,
custom or acquiescence in the general course of business.
Extent of Powers of Corporate Officers
1. The authority which he has by virtue of his office;
2. The authority which is expressly conferred upon him or is incidental to
the effectualness of such express authority;
3. As to third persons dealing with him without notice of any restriction
thereof, the authority which the corporation holds the officer out as
possessing or is estopped to deny.
4. The nature of the corporate business must also be taken into
consideration; and
5. The act of an officer though originally unauthorized may become
binding upon the corporation by a subsequent ratification
DOCTRINE OF APPARENT AUTHORITY
If a corporation, knowingly permits one of its officers, or any other agent, to
act within the scope of an apparent authority, it holds him out to the public
as in possession of the power to do those acts, and thus, the corporation
will, as against anyone who has in good faith dealt with it through such
agent, be estopped from denying the agent’s authority.
Liability of Director/Trustees
1. Willfully or knowingly votes or assents to patently unlawful acts of the
corporation
2. Guilty of gross negligence or bad faith in directing the affairs of the
corporation
3. He acquires any personal or pecuniary interest in conflict with his duty
as such director or trustee
4. Liable to account to the corporation for the profits obtained by him
from a business opportunity which should belong to the corporation
Rules on Contracts entered into by Directors/Trustees or Officers
1. Contracts of Self-dealing Directors, Trustees or Officers (Sec.31)
– Self-dealing directors, trustees or officers are those who
personally contract with the corporation in which they are
directors, trustees, or officers.
Self-dealing Transaction of a BOD
• Such contracts are VOIDABLE, at the option of the corporation unless:
– The presence of such director/trustee in the board meeting
approving the contract was not necessary to constitute a quorum
for such meeting;
– The vote of such director/trustee in the board meeting approving
the contract was not necessary for the approval of the contract;
– The contract is fair and reasonable under the circumstances;
– In the case of an officer, there was previous authorization by the
board of directors.
– In case of corporations vested with public interest, material
contracts are approved by at least 2/3 of the entire membership of
the board, with at least a majority of the independent directors
voting to approve the material contract;
Rules on Contracts entered into by Directors/Trustees or Officers
• Although not all conditions are present, the corporation may elect not
to attack or question the validity of the contract, without prejudice,
however, to the liability of the director/trustee for damages.
• Where any of the first two conditions is absent, said contract may be
ratified by the vote of the stockholders representing at least 2/3 of the
outstanding capital stock or 2/3 of the members in a meeting called in
for the purpose, provided that full disclosure of the adverse interest of
the director/trustee involved is made at such meeting and the contract
is fair and reasonable.
Contracts of Inter-locking Directors
A contract between 2 or more corporations having interlocking directors
shall not be invalidated on that ground alone.
These contracts are valid, provided that:
a. The contract is not fraudulent; and
b. The contract is fair and reasonable under the circumstances.
Doctrine of Corporate Opportunity
Under this doctrine, a director who, by virtue of his office, acquires for
himself a business opportunity which should belong to the corporation,
thereby obtaining profits to the prejudice of such corporation, is guilty of
disloyalty and should therefore, account all such profit by refunding the
same to the corporation, notwithstanding that he risk his funds in the
venture.
Applicability:
Unless his act is ratified, a director shall refund to the corporation all the
profits he realized on a business opportunity which:
1. The corporation is financially able to undertake;
2. From its nature, is in line with corporation’s business and is of practical
advantage to it; and
3. The corporation has an interest or a reasonable expectancy.
EXECUTIVE COMMITTEE
A body raised by the by-laws and composed of some members of the board
which, subject to the statutory limitations, has all the authority of the board
to the extent provided in the board resolution or by-laws.
Powers of Executive Committee
The executive committee has all the authority of the board to the extent
provided for in the resolution of the board or in the by-laws.
• May act by a majority vote of all of its members.
• If the executive committee is not validly constituted, the members
thereof may be considered as de facto officers.
• Its decisions are not subject to appeal to the board.
• However, if the resolution of the Executive Committee is invalid, i.e. not
one of the powers conferred to it, it may be ratified by the board.
Limitations on the Powers of the Executive Committee
It cannot act on the following:
1. Matters needing stockholder approval;
2. Filling up board vacancies;
3. Amendment, repeal or adoption of by-laws;
4. Amendment or repeal of any resolution of the Board which by its
express terms is not amendable or repealable; and
5. Cash dividend declaration.
Corporate Powers
The right or capacity of a corporation to perform all acts or things, except
only those forbidden by law and its articles of incorporation in furtherance
of its purpose or purposes.
Classification of Corporate Powers
1. Express – those expressly authorized by the Corporation Code and
other laws, and its Articles of Incorporation or Charter.
2. Incidental – those that are inherent to the existence of the corporation.
3. Implied – those that can be inferred from or necessary for the exercise
of the express powers.
General Power and Capacity
1. To sue and be sued;
2. Perpetual existence
3. To adopt and use of corporate seal;
4. To amend its Articles of Incorporation;
5. To adopt its by-laws;
6. For stock corporations: issue and sell stocks to subscribers and
treasury stocks; for non-stock corporations: admit members;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage and deal with real and personal property, securities and
bonds
8. To enter into merger or consolidation;
9. To make reasonable donations for public welfare, hospital, charitable,
cultural, scientific, civic or similar purposes, provided that no donation
is given to any (i) political party, (ii) candidate and (iii) partisan political
activity.
10. To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers, and employees.
11. To exercise other powers essential or necessary to carry out its
purposes
Other Corporate Powers
1. Extension/Shortening of Corporate Term (Sec. 36)
2. Power to Increase or Decrease Capital Stock (Sec. 37)
3. Power to Incur, Create or Increase Bonded Indebtedness (Sec. 37)
4. Power to Deny Pre-emptive Right (Sec. 38)