REVISED CORPORATION CODE
266-268 cited
Part II JGA Medina Bus. Org II, 2019-2020
Philippine Law School
Pedro is the owner of 99% of the shares of Pedro Penduko
Inc., (PPI) and is the president and board chairman thereof.
His wife, Petra, is the owner of the remaining 1% of the
shares of PPI and is its secretary and treasurer. In 2017, it
entered into a lease agreement with Samie for a warehouse
space. However, in 2019, PPI fell behind on its lease in the
amount of PhP3.5million. In December of 2019, Samie files
suit against PPI, Pedro, and Petra for the collection of the
unpaid rentals and damages.
As the lawyer of Pedro and Petra, comment on the suit filed
by Samie.
(15 mns.)
POWERS of a CORPORATION
Section 35. Corporate powers and capacity. –
a. To sue and be sued in its corporate name;
b. Perpetual Existence unless provided otherwise;
c. To adopt and use a corporate seal;
d. To amend its articles of incorporation;
e. To adopt, amend or repeal by-laws;
f. To issue or sell stocks, sell treasury stocks, or admit
members if a non-stock;
g. To deal with real and personal property, including
securities and bonds of other corporations as the transaction
of the lawful business of the corporation may reasonably
and necessarily require,;
h. To enter into partnership, joint venture , merger or
consolidation with other corporations;
i. To make reasonable donations, except that foreign
corporations prohibited from giving donations to political
parties or candidates;
j. To establish pension, retirement plans;
k. To exercise powers essential or necessary to carry
out its purpose as stated in the articles.
The test to be applied is whether the act in question:
• is in direct and immediate furtherance of the
corporation's business,
• fairly incident to the express powers, and
• reasonably necessary to their exercise.
If so, the corporation has the power to do it; otherwise, not.
(Fletcher Cyc. Corp., Vol. 6, Rev. Ed. 1950, pp.
in Montelibano v. Bacolod-Murcia Milling Co., Inc., G.R. No.
L-15092, May 18, 1962.
Business Judgment Rule Ong Yong v. Tiu, G.R. Nos. 144476 &
144629, April 8, 2003
. . . (C)ontracts intra vires entered into by the board of
directors are binding upon the corporation and courts will
not interfere unless such contracts are so unconscionable
and oppressive as to amount to wanton destruction to the
rights of the minority, as when plaintiffs aver that the
defendants (members of the board), have concluded a
transaction among themselves as will result in serious injury
to the plaintiffs stockholders.
SEC. 44. Ultra Vires Acts of Corporations
• Corporation shall possess or exercise corporate
powers conferred by this law, or by its articles of
incorporation and those necessary or incidental to
the exercise of the powers conferred.
• The language of the Code appears to confine the
term ultra vires to an act outside or beyond
express, implied and incidental corporate powers.
Nevertheless, the concept can also include those
acts that may ostensibly be within such powers but
are, by general or special laws, either proscribed or
declared illegal. Ultra vires acts or acts which are
clearly beyond the scope of one's authority are null
and void and cannot be given any effect. (Querubin
v. Commission on Elections)
Section 36. Power to extend or shorten corporate term. –
• May extend or shorten its term when approved by a
majority vote of the board of directors or trustees
and ratified at a meeting by two-thirds (2/3) vote.
• In case of extension of corporate term, any
dissenting stockholder may exercise his appraisal
right.
Section 37. Power to increase or decrease capital stock;
incur, create or increase bonded indebtedness.
• Majority of Board and two-thirds (2/3) vote of
stockholders.
• With treasurer’s affidavit showing at least twenty-
five (25%) percent of such increased capital stock
has been subscribed and that at least twenty-five
(25%) percent of the amount subscribed has been
paid.
• Require prior approval of the Securities and
Exchange Commission.
• No decrease shall be approved if its effect shall
prejudice rights of corporate creditors.
• Bonds issued by a corporation shall be registered
with the SEC.
Section 38. Power to deny pre-emptive right.
All stockholders of a stock corporation shall enjoy pre-
emptive right to subscribe to all issues or disposition of
shares of any class, in proportion to their respective
shareholdings, unless denied by the articles of incorporation.
Pre-emptive right shall not extend to shares to be issued:
 in compliance with laws requiring stock offerings or
minimum public stock ownership; or
 in good faith with stockholders (2/3) vote in
exchange for property needed for corporate
purposes or in payment of a previously contracted
debt.
• The stockholder must be given a reasonable time
within which to exercise their preemptive rights.
Upon the expiration of said period, any stockholder
who has not exercised such right will be deemed to
have waived it. Jose Campos, Jr. & Maria Clara L.
Campos, THE CORPORATION CODE: COMMENTS,
NOTES AND SELECTED CASES, Vol. II (1990 ed.), p.
58.
Section 39. Sale or other disposition of assets.
• Subject to the provisions of Competition Act, by a
majority vote of its board, may sell lease, exchange,
mortgage, pledge or otherwise dispose its
properties and assets for money, stocks, bonds, or
other property or consideration as board may deem
expedient.
• If sale is all or substantially all of assets including
goodwill, that is, would be rendered incapable of
continuing business or accomplishing the purpose,
2/3 vote of SH required.
• After such authorization board may in its discretion,
abandon such sale, lease, exchange.
Dissenting stockholder may exercise appraisal right.
Exception: Sell, lease, exchange, mortgage, pledge or
otherwise dispose of any of its property and assets if
necessary in the usual and regular course of business or if
the proceeds of the sale or other disposition will be
appropriated for the conduct of its remaining business.
Nell Doctrine vis-à-vis Business Enterprise Transfer –
• Where one corporation sells or otherwise transfers
all of its assets to another corporation, the latter is
not liable for the debts and liabilities of the
transferor, except if purchaser expressly or
impliedly agrees to assume debts, transaction
amounts to a consolidation or merger of the
corporations or is entered into fraudulently in order
to escape liability for such debts, or the purchasing
corporation is merely a continuation of the selling
corporation (Nell Doctrine).
• Section 40 (now 39) suitably reflects the Business-
Enterprise Transfer under the exception of the Nell
Doctrine because the purchasing or transferee
corporation necessarily continued the business of
the selling or transferor corporation. Given that the
transferee corporation acquired not only the assets
but also the business of the transferor corporation,
then the liabilities of the latter are inevitably
assigned to the former. The litmus test to
determine the applicability of Section 40 (39) would
be the capacity of the corporation to continue its
business after the sale of all or substantially all its
assets. (Y-I Leisure Philippines)
Section 40. Power to acquire own shares
• Must have unrestricted retained earnings and for a
legitimate corporate purpose or purposes including:
1. To eliminate fractional shares arising out of stock
dividends;
2. To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares sold
during said sale; and
3. To pay dissenting or withdrawing stockholders
entitled to payment for their shares under the provisions of
this Code.
• Example of legitimate purpose: Acquisition of listed
shares held by the public in case of delisting from
the Stock Exchange.
• Shares acquired become treasury shares.
• Treasury Shares:
• Treasury shares are stocks issued and fully paid for
and re-acquired by the corporation either by
purchase, donation, forfeiture or other means.
They are therefore issued shares, but being in the
treasury they do not have the status of outstanding
shares. Consequently, although a treasury share,
not having been retired by the corporation re-
acquiring it, may be re-issued or sold again, such
share, as long as it is held by the corporation as a
treasury share, participates neither in dividends,
because dividends cannot be declared by the
corporation to itself, nor in the meetings of the
corporations as voting stock, for otherwise equal
distribution of voting powers among stockholders
will be effectively lost and the directors will be able
to perpetuate their control of the corporation
though it still represent a paid — for interest in the
property of the corporation. CIR v. Manning, G.R.
No. L-28398, Aug. 6, 1975.
• The Trust Fund Doctrine: subscriptions to the
capital stock of a corporation constitute a fund to
which the creditors have a right to look for the
satisfaction of their claims. This doctrine is the
underlying principle in the procedure for the
distribution of capital assets, embodied in the
 Corporation Code, which allows the distribution of
corporate capital only in three instances:
• (1) amendment of the Articles of
Incorporation to reduce the authorized capital
stock,
• (2) purchase of redeemable shares by the
corporation, regardless of the existence of
unrestricted retained earnings, and
• (3) dissolution and eventual liquidation of the
corporation.
• Furthermore, the doctrine is articulated in Section
41 on the power of a corporation to acquire its own
shares and in Section 122 on the prohibition against
the distribution of corporate assets and property
unless the stringent requirements therefor are
complied with.
•
• Ong Yong v. Tiu, G.R. No. 144476, 144629, April 8,
2003.
Section 41. Invest corporate funds in another corporation
or business or other purpose. –
• May invest its funds in any other corporation or
business for any purpose upon vote by majority of
the board and ratified by two-thirds (2/3) SH vote.
• 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.
• Dissenting stockholder shall have appraisal right.
Section 42. Power to declare dividends. –
• By board of directors out of the unrestricted
retained earnings payable in cash, in property, or in
stock to all stockholders on the basis of outstanding
stock held by them.
• Cash dividends: first applied to the unpaid balance
on the subscription plus costs and expenses.
• Stock dividend: 2/3 SH vote. Stock dividends
withheld from the delinquent stockholder until
unpaid subscription is fully paid.
• Stock corporations are prohibited from retaining
surplus profits in excess of one hundred (100%)
percent of their paid-in capital stock, except:
1. when justified by definite corporate expansion
projects or programs;
2. prohibited under any loan agreement with any
financial institution or creditor unless consent
secured;
3. it can be clearly shown that such retention is
necessary under special circumstances such as
probable contingencies.
SEC. 43. Power to Enter into Management Contract.
• Approved by majority board and SH of both
managing and managed corps.
• 2/3 vote of SH of both managing and managed
corps. if:
i. SH 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
ii. 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
• No management contract shall be entered into for a
period longer than five years per term.
• Service contracts or operating agreements relating
exploration, development, exploitation or utilization
of natural resources may be subject to periods
provided by laws or regulations.
APPRAISAL RIGHTS
SEC. 80. When the Right of Appraisal May Be Exercised.
Any stockholder of a corporation shall have the right to
dissent and demand payment of the fair value of the shares
in the following instances:
(a) Amendment to the articles of incorporation will
change or restrict the rights of any stockholder or class of
shares, or of authorizes preferences in any respect superior
to those of outstanding shares of any class, or of extending
or shortening the term of corporate existence;
(b) 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 this Code;
(c) In case of merger or consolidation; and
(d) In case of investment of corporate funds for any
purpose other than the primary purpose of the corporation.
SEC. 81. How Right is Exercised.
• Written demand on the corporation for payment of
the fair value of the shares within 30 days from
vote. Failure to make the demand within 30 day
period shall be deemed a waiver of the appraisal
right.
• Corporation shall pay to such stockholder, upon
surrender of the stock certificates, the fair value
thereof as of the day prior to the date on which the
vote was taken, excluding any appreciation or
depreciation.
 • If within sixty (60) days from the date of the vote,
there is no agreement on the fair value of the
shares, it shall be determined by three (3)
disinterested persons and their award shall be paid
within thirty (30) days after such award.
• No payment shall be made to any dissenting
stockholder unless the corporation has unrestricted
retained earnings in its books to cover such
payment.
SEC. 82. Effect of Demand and Termination of Right
• All rights accruing to such shares, including voting
and dividend rights, shall be suspended
• If the dissenting stockholder is not paid the value of
the said shares within thirty (30) days after the
award, the voting and dividend rights shall
immediately be restored.
SEC. 83. When Right to Payment Ceases.
• No demand for payment may be withdrawn
without consent of corporation.
• If demand allowed to be withdrawn, or corporate
action is abandoned or rescinded, or disapproved
by the Commission, or where Commission
determines that stockholder is not entitled to the
appraisal right, then the status of the stockholder
shall be restored, and all dividend distributions
which accrued will be paid.
SEC. 84. Who Bears Costs of Appraisal.
The costs and expenses of appraisal shall be borne by the
corporation. If appraisal value is approximately the same as
the price the corporation offered. stockholder, shall bear
appraisal costs. In the case of an action to recover fair value,
all costs and expenses shall be assessed against the
corporation, unless the refusal of the stockholder to receive
payment was unjustified.
• Section 85. Notation on certificates; rights of
transferee.
• Within ten (10) days after demanding payment for
his shares, submit the certificates of stock
representing his shares to the corporation for
notation as dissenting shares. His failure to do so
shall, at the option of the corporation, terminate
appraisal rights.
• If shares represented by the certificates bearing
such notation are transferred, the rights of the
dissenting stockholder shall cease and the
transferee shall have all the rights of a regular
stockholder; and all dividend distributions which
would have accrued shall be paid to transferee.
No payment shall be made to any dissenting stockholder
unless the corporation has unrestricted retained earnings in
its books to cover the payment.
The trust fund doctrine backstops the requirement of
unrestricted retained earnings to fund the payment of the
shares of stocks of the withdrawing stockholders. Under the
doctrine, the capital stock, property, and other assets of a
corporation are regarded as equity in trust for the payment
of corporate creditors, who are preferred in the distribution
of corporate assets. The creditors of a corporation have the
right to assume that the board of directors will not use the
assets of the corporation to purchase its own stock for as
long as the corporation has outstanding debts and liabilities.
There can be no distribution of assets among the
stockholders without first paying corporate debts. Thus, any
disposition of corporate funds and assets to the prejudice of
creditors is null and void.
Turner v. Lorenzo Shipping Corp., G.R. No. 157479,
November 24, 2010
MANAGEMENT and CONTROL
SEC. 22. The Board of Directors or Trustees of a Corporation
• exercise the corporate powers, conduct all business,
and control all properties of the corporation.
• Directors a term of one 1 year, trustees a term not
exceeding three (3) years. Must be shareholder or
member
• The board of the 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 "The
Securities Regulation Code“
(b) Banks and quasi-banks, nonstock savings and loan
associations, pawnshops, money service business, preneed,
trust and insurance companies, & other financial
intermediaries; and
(c) Other corporations engaged in businesses vested
with public interest similar to the above, as may be
determined by the Commission,
Independent Directors (Sec. 22):
• 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.
• The board of directors is the directing and
controlling body of the corporation. It is a creation
of the stockholders and derives its power to control
and direct the affairs of the corporation from them.
The board of directors, in drawing to itself the
power of the corporation, occupies a position of
trusteeship in relation to the stockholders, in the
sense that the board should exercise not only care
and diligence, but utmost good faith in the
management of the corporate affairs.
• The underlying policy of the Corporation Code is
that the business and affairs of a corporation must
be governed by a board of directors whose
members have stood for election, and who have
actually been elected by the stockholders, on an
annual basis. Only in that way can the continued
accountability to shareholders, and the legitimacy
of their decisions that bind the corporation's
stockholders, be assured. The shareholder vote is
critical to the theory that legitimizes the exercise of
power by the directors or officers over the
properties that they do not own.
Bernas v. Cinco, G.R. Nos. 163356-57 & 163368-69, July 1,
2015
• A corporation is a juridical person separate and
distinct from its stockholders or members. The
property of the corporation is not the property of
its stockholders or members and may not be sold by
the stockholders or members without express
authorization from the corporation's board of
directors.
• A corporation may act only through its board of
directors or, when authorized either by its bylaws or
by its board resolution, through its officers or
agents in the normal course of business. The
general principles of agency govern the relation
between the corporation and its officers or agents,
subject to the articles of incorporation, bylaws, or
relevant provisions of law.
• Persons dealing with an assumed agent, whether
the assumed agency be a general or special one, are
bound at their peril, if they would hold the principal
liable, to ascertain not only the fact of agency but
also the nature and extent of authority, and in case
either is controverted, the burden of proof is upon
them to establish it.
• As a general rule, the acts of corporate officers
within the scope of their authority are binding on
the corporation. But when these officers exceed
their authority, their actions "cannot bind the
corporation, unless it has ratified such acts or is
estopped from denying it.
San Juan Structural and Steel Fabricators, Inc. v. Court of
Appeals, G.R. No. 129459, September 29, 1998:
The general principles of agency govern the relationship
between a corporation and its representatives. Law and
jurisprudence recognize actual authority and apparent
authority as the two (2) types of authorities conferred upon
a corporate officer or agent in dealing with third persons.
Express actual authority refers to the power delegated to the
agent by the corporation, while an agent's implied authority
can be measured by his or her prior acts ratified by the
corporation or whose benefits have been accepted by the
corporation.
Apparent authority is based on the principle of estoppel,
determined by the acts of the principal and not by the acts
of the agent.
• An agent's apparent authority from the principal
may also be ascertained through:
(1) the general manner by which the corporation holds
out an officer or agent as having power to act, or
(2) the acquiescence in his acts of with actual or
constructive knowledge thereof, whether within or without
the scope of his ordinary powers.
• The doctrine of apparent authority provides that
even if no actual authority has been conferred on
an agent, his or her acts, as long as they are within
his or her apparent scope of authority, bind the
principal. However, the principal's liability is limited
to third persons who are reasonably led to believe
that the agent was authorized to act for the
principal due to the principal's conduct.
Calubad v. Ricarcen Development Corp., G.R. No. 202364,
August 30, 2017
• Inasmuch as a corporate president is often given
general supervision and control over corporate
operations, the strict rule that said officer has no
inherent power to act for the corporation is slowly
giving way to the realization that such officer has
certain limited powers in the transaction of the
usual and ordinary business of the corporation. In
the absence of a charter or by[-]law provision to the
contrary, the president is presumed to have the
authority to act within the domain of the general
objectives of its business and within the scope of his
or her usual duties.
• It has been held in other jurisdictions that the
president of a corporation possesses the power to
enter into a contract for the corporation, when the
'conduct on the part of both the president and the
corporation [shows] that he had been in the habit
of acting in similar matters on behalf of the
company and that the company had authorized him
so to act and had recognized, approved and ratified
his former and similar actions.
• Furthermore, a party dealing with the president of a
corporation is entitled to assume that he has the
authority to enter, on behalf of the corporation,
 into contracts that are within the scope of the
powers of said corporation and that do not violate
any statute or rule on public policy.”
Colegio Medico-Farmaceutico De Filipinas, Inc. v. Lim, G.R.
No. 212034, July 2, 2018
SEC. 23. Election of Directors or Trustees.
• Each stockholder or member shall have the right to
nominate any director or trustee.
• There must be present owners of majority of the
outstanding capital stock, or majority of the
members entitled to vote. When so authorized in
the bylaws or by a majority of the board of
directors, may 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 even in the
absence of provision in the bylaws of such
corporations.
• The election must be by ballot if requested by any
voting stockholder or member.
• In stock corporations, cumulative voting allowed.
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.
• If no election is held, 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.
Cumulative Voting: (see internet for calculator)
• Cumulative voting is a type of voting system that
helps strengthen the ability of minority
shareholders to elect a director. This method allows
shareholders to cast all of their votes for a single
nominee for the board of directors when the
company has multiple openings on its board.
• For example, if the election is for five our directors
and you hold 500 shares. You are entitled to one
vote per share per director for a total of 2,500
votes.
• You could vote all 2,500 votes for one candidate or
divide your votes whichever way you want.
• Under the Corporation Code, stockholders or
members periodically elect the board of directors or
trustees, who are charged with the management of
the corporation. The board, in turn, periodically
elects officers to carry out management functions
on a day-to-day basis. As owners, though, the
stockholders or members have residual powers
over fundamental and major corporate changes.
• While stockholders are entitled to receive profits,
the management and direction of the corporation
are lodged with their representatives and agents —
the board of directors or trustees. In other words,
acts of management pertain to the board; and
those of ownership, to the stockholders or
members. In the latter case, the board cannot act
alone, but must seek approval of the stockholders
or members.
• Conformably with the foregoing principles, one of
the most important rights of a qualified shareholder
or member is the right to vote — either personally
or by proxy — for the directors or trustees who are
to manage the corporate affairs. The right to choose
the persons who will direct, manage and operate
the corporation is significant, because it is the main
way in which a stockholder can have a voice in the
management of corporate affairs, or in which a
member in a nonstock corporation can have a say
on how the purposes and goals of the corporation
may be achieved. Once the directors or trustees are
elected, the stockholders or members relinquish
corporate powers to the board in accordance with
law.
• Tan v. Sycip, G.R. No. 153468, August 17, 2006
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,
corporation, shall submit to the Commission,
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) and shall specify a new date for the
election which shall be within 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 summarily
order that an election be held. The Commission
shall have the power to issue such orders as may be
appropriate.
• 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.
SEC. 24. Corporate Officers.
Immediately after their election, the directors 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, elect a
compliance officer.
The same person may hold 2 or more positions
concurrently, except that no one shall act as president
and secretary or as president and treasurer 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.
Conformably with Section 25, a position must be
expressly mentioned in the By-Laws in order to be
considered as a corporate office. Thus, the creation of
an office pursuant to or under a By-Law enabling
provision is not enough to make a position a corporate
office. Guerrea v. Lezama, the first ruling on the matter,
held that the only officers of a corporation were those
given that character either by the Corporation Code or
by the By-Laws; the rest of the corporate officers could
be considered only as employees or subordinate
officials. Thus, it was held in Easycall Communications
Phils., Inc. v. King:
An "office" is created by the charter of the corporation
and the officer is elected by the directors or
stockholders. On the other hand, an employee occupies
no office and generally is employed not by the action of
the directors or stockholders but by the managing
officer of the corporation who also determines the
compensation to be paid to such employee.
Matling Industrial and Commercial Corporation v. Coros,
G.R. No. 157802, October 13, 2010
SEC. 52. Regular & Special Meetings of Directors or
Trustees, Quorum.
• Unless articles the bylaws provides for greater
majority, a majority of the directors or trustees as
stated in the articles of incorporation shall
constitute a quorum. Every decision reached by at
least a majority of the directors or trustees
constituting a quorum, except for the election of
officers which shall require the vote of a majority of
all the members of the board, shall be valid as a
corporate act.
• Regular meetings of the board shall be held
monthly, unless the bylaws provide otherwise.
Special meetings may be held at any time upon the
call of the president or as provided in the bylaws.
• Meetings of board may be held anywhere in or
outside of the Philippines, unless the bylaws
provide otherwise. Notice of regular or special
meetings must be sent at least two (2) days prior to
the scheduled meeting. A director or trustee may
waive this requirement, either expressly or
impliedly.
• Directors or trustees can participate and vote
through remote communication Directors or
trustees cannot attend or vote by proxy at board
meetings.
• A director or trustee who has a potential interest in
any related party transaction must recuse from
voting on the approval of the related party
transaction without prejudice to compliance with
the requirements of Section 31 of this Code.
The general rule is that a corporation, through its board
of directors, should act in the manner and within the
formalities, if any, prescribed by its charter or by the
general law. Thus, directors must act as a body in a
meeting called pursuant to the law or the corporation's
by-laws, otherwise, any action taken therein may be
questioned by any objecting director or shareholder. 
Be that as it may, jurisprudence tells us that an action of
the board of directors during a meeting, which was
illegal for lack of notice, may be ratified either expressly,
by the action of the directors in subsequent legal
meeting, or impliedly, by the corporation's subsequent
course of conduct. Thus, in one case, it was held:
" . . . In 2 Fletcher, Cyclopedia of the Law of Private
Corporations (Perm. Ed.) Sec. 429, at page 290, it is
stated: ‘Thus, acts of directors at a meeting which was
illegal because of want of notice may be ratified by the
directors at a subsequent legal meeting, or by the
corporation's course of conduct . . .'
"Fletcher, supra, further states in Sec. 762, at page
1073-1074: 'Ratification by directors may be by an
express resolution or vote to that effect, or it may be
implied from adoption of the act, acceptance or
acquiescence. Ratification may be effected by a
resolution or vote of the board of directors expressly
ratifying previous acts either of corporate officers or
agents; but it is not necessary, ordinarily, to show a
meeting and formal action by the board of directors in
order to establish a ratification.'cdt
• "In American Casualty Co., v. Dakota Tractor and
Equipment. Co., 234 F. Supp. 606, 611 (D.N.D.
1964), the court stated: 'Moreover, the
unauthorized acts of an officer of a corporation may
 be ratified by the corporation by conduct implying
approval and adoption of the act in question. Such
ratification may be express or may be inferred from
silence and inaction.'
• ||| (Lopez Realty, Inc. v. Fontecha, G.R. No. 76801,
[August 11, 1995], 317 PHIL 216-230)
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.
Gokongwei, Jr. v. Securities and Exchange Commission
G.R. No. L-45911, April 11, 1979
• Every corporation has the inherent power to adopt
by-laws 'for its internal government, and to regulate
the conduct and prescribe the rights and duties of
its members towards itself and among themselves
in reference to the management of its affairs.
• No vested right of stockholder to be elected
director. Any person who buys stock in a
corporation does so with the knowledge that its
affairs are dominated by a majority of the
stockholders and that he impliedly contracts that
the will of the majority shall govern in all matters
within the limits of the act of incorporation and
lawfully enacted by-laws and not forbidden by law.
• 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." "The ordinary trust relationship of directors
of a corporation and stockholders", according to
Ashaman v. Miller, "is not a matter of statutory or
technical law. It springs from the fact that directors
have the control and guidance of corporate affairs
and property and hence of the property interests of
the stockholders. Equity recognizes that
stockholders are the proprietors of the corporate
interests and are ultimately the only beneficiaries
thereof . . ."
• A director is a fiduciary. . . . Their powers are
powers in trust. . . . He who is in such fiduciary
position cannot serve himself first and his cestuis
second. . . . He cannot manipulate the affairs of his
corporation to their detriment and in disregard of
the standards of common decency. He cannot by
the intervention of a corporate entity violate the
ancient precept against serving two masters. . . . He
cannot utilize his inside information and strategic
position for his own preferment. He cannot violate
rules of fair play by doing indirectly through the
corporation what he could not do so directly. He
cannot violate rules of fair play by doing indirectly
through the corporation what he could not do so
directly. He cannot use his power for his personal
advantage and to the detriment of the stockholders
and creditors no matter how absolute in terms that
power may be and no matter how meticulous he is
to satisfy technical requirements. For that power is
at all times subject to the equitable limitation that it
may not be exercised for the aggrandizement,
preference, or advantage of the fiduciary to the
exclusion or detriment of the cestuis.
• 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.
• An amendment to the corporate by-law which
renders a stockholder ineligible to be director, if he
be also director in a corporation whose business is
in competition with that of the other corporation,
has been sustained as valid. It is a settled state law
in the United States, according to Fletcher, that
corporations have the power to make by-laws
declaring a person employed in the service of a rival
company to be ineligible for the corporation's Board
of Directors.
SEC. 160. Violation of Disqualification Provision;
Penalties.
When, despite the knowledge of the existence of a
ground for disqualification as provided in Section 26 of
this Code, a director, trustee or officer willfully holds
office, or willfully conceals such disqualification, such
director, trustee or officer shall be punished with a fine
ranging from Ten thousand pesos (P10,000.00) to Two
hundred thousand pesos (P200,000.00) at the discretion
of the court, and shall be permanently disqualified from
being a director, trustee or officer of any corporation.
When the violation of this provision is injurious or
detrimental to the public, the penalty shall be a fine
ranging from Twenty thousand pesos (P20,000.00) to
Four hundred thousand pesos (P400,000.00).
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 which may act, by majority vote, 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) Where 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 may create special committees of temporary
or permanent nature and determine the members'
term, composition, compensation, powers, and
responsibilities.
SEC. 27. Removal of Directors or Trustees.
• By two-thirds (2/3) of the outstanding capital stock
or of the members at a regular meeting of the
corporation or at a special meeting after notice to
stockholders or members of the intention to
propose such removal at the meeting.
• A special meeting must be called by the secretary
on order of the president, or upon written demand
of at least a majority of the outstanding capital
stock or members entitled to vote.
• If there is no secretary, or if the secretary fails or
refuses to call the special meeting or to give notice,
stockholder or member signing the demand may
call for the meeting by directly addressing the
stockholders or members.
• Removal may be with or without cause: Provided,
That removal without cause may not be used to
deprive minority of the right of representation
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.
Relative to the powers of the Board of Directors,
nowhere in the Corporation Code or in the MSC by-laws
can it be gathered that the Oversight Committee is
authorized to step in wherever there is breach of
fiduciary duty and call a special meeting for the purpose
of removing the existing officers and electing their
replacements even if such call was made upon the
request of shareholders.
Needless to say, the MSCOC is neither empowered by
law nor the MSC by-laws to call a meeting and the
subsequent ratification made by the stockholders did
not cure the substantive infirmity, the defect having set
in at the time the void act was done. The defect goes
into the very authority of the persons who made the call
for the meeting. It is apt to recall that illegal acts of a
corporation which contemplate the doing of an act
which is contrary to law, morals or public order, or
contravenes some rules of public policy or public duty,
are, like similar transactions between individuals, void.
The void election of 17 December 1997 cannot be
ratified by the subsequent Annual Stockholders'
Meeting.
Bernas v. Cinco, G.R. Nos. 163356-57 & 163368-69, [July
1, 2015]
SEC. 28. Vacancies in the Office of Director or Trustee;
Emergency Board.
• Vacancy other than by removal or by expiration of
term may be filled by the vote of at least a majority
of the remaining directors or trustees, if still
constituting a quorum;
• Vacancy due to term expiration - election shall be
held no later than the day of such expiration.
• Vacancy due to removal - election may be held in
same meeting.
• In all other cases, the election must be held no later
than forty-five (45) days from the time the vacancy
arose.
• The replacement director or trustee serves only for
the unexpired term of the predecessor.
• 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 term shall
cease within a reasonable time from the
termination of the emergency or upon election of
the replacement.
Any directorship or trusteeship to be filled by reason of
an increase in the number of directors or trustees filled
only by an election at a regular or at a special meeting.
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.
Based on the above discussion, when Section 23 of the
Corporation Code declares that "the board of
directors . . . shall hold office for one (1) year until their
successors are elected and qualified", we construe the
provision to mean 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.
Valle Verde Country Club, Inc. v. Africa, G.R. No. 151969,
[September 4, 2009]
SEC. 29. Compensation of Directors or Trustees.
• In the absence of any provision in the bylaws
directors or trustees shall not receive any
compensation in their capacity as such, except for
reasonable per diems. However, majority of
stockholders or members may grant directors or
trustees with compensation and approve the
amount thereof at a regular or special meeting.
• In no case shall the total yearly compensation of
directors exceed ten percent (10%) of the net
income before income tax of the corporation during
the preceding year.
• Directors or trustees shall not participate in the
determination of their own per diems or
compensation.
• Corporations vested with public interest shall
submit to their shareholders and the Commission,
an annual report of the total compensation of each
of their directors or trustees.
SEC. 30. Liability of Directors, Trustees or Officers.
• Shall be liable jointly and severally for all damages
resulting therefrom suffered by the corporation, its
stockholders or members and other persons if:
 Willfully and knowingly vote for or assent to
patently unlawful acts of the corporation;
 Guilty of gross negligence or bad faith in directing
the affairs of the corporation;
 Acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees
• When a director, trustee or officer attempts to
acquire or acquire, in violation of his duty, any
interest adverse to the corporation in respect of any
matter which has been reposed in him in
confidence, as to which equity imposes a disability
upon him to deal in his own behalf, he shall be
liable as a trustee for the corporation and must
account for the profits which otherwise would have
accrued to the corporation.
• Before a director or officer of a corporation can be
held personally liable for corporate obligations, the
following requisites must concur:
(1) the complainant must allege in the complaint that
the director or officer assented to patently unlawful acts
of the corporation, or that the officer was guilty of gross
negligence or bad faith; and
(2) the complainant must clearly and convincingly
prove such unlawful acts, negligence or bad faith.
Corporate directors and officers are solidarily liable with
the corporation for the termination of employees done
with malice or bad faith; and declared that bad faith did
not connote bad judgment or negligence, but a
dishonest purpose or some moral obliquity and
conscious doing of wrong, or meant a breach of a known
duty through some motive or interest or ill will, or
partook of the nature of fraud
Lozada v. Mendoza, G.R. No. 196134, October 12, 2016
Bad faith implies breach of faith and willful failure to
respond to plain and well understood obligation. It does
not simply connote bad judgment or negligence; it
imports a dishonest purpose or some moral obliquity
and conscious doing of wrong; it means breach of a
known duty through some motive or interest or ill will. It
partakes of the nature of fraud.
Gross negligence is the want of even slight care, acting
or omitting to act in a situation where there is duty to
act, not inadvertently but willfully and intentionally,
with a conscious indifference to consequences insofar as
other persons may be affected. It evinces a thoughtless
disregard of consequences without exerting any effort
to avoid them; the want or absence of or failure to
exercise slight care or diligence, or the entire absence of
care.
Section 31 lays down the "doctrine of corporate
opportunity" and holds personally liable corporate
directors found guilty of gross negligence or bad faith in
directing the affairs of the corporation, which results in
damage or injury to the corporation, its stockholders or
members, and other persons.
Sanchez v. Republic, G.R. No. 172885, October 9, 2009
SEC. 64. Liability of Directors for Watered Stocks.
A director or officer of a corporation who:
(a) consents to the issuance of stocks for a consideration
less than its par or issued value;
(b) consents to the issuance of stocks for a consideration
other than cash, valued in excess of its fair value; or
(c) having knowledge of the insufficient consideration,
does not file a written objection with the corporate
secretary, shall be liable to the corporation or its
creditors, solidarily with the stockholder concerned for
the difference between the value received at the time of
issuance of the stock and the par or issued value of the
same.
SEC. 31. Dealings of Directors, Trustees or Officers with
the Corporation.
A contract of the corporation with directors or trustees
or officers is voidable, at the option of such corporation,
unless all the following conditions are present:
1. The presence of such director or trustee in the
meeting approving the contract was not necessary to
constitute a quorum (may be ratified by 2/3 vote);
2. The vote of such director or trustee was not
necessary for the approval of the contract (may be
ratified by 2/3 vote if contract fair and reasonable);
3. The contract is fair and reasonable under the
circumstances(may be ratified by 2/3 vote);
4. 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
5. That in case of an officer, the contract has been
previously authorized by the board of directors.
Section 32. Contracts between corporations w/
interlocking directors.
• Except in cases of fraud, and if contract is fair and
reasonable a contract between two or more
corporations having interlocking directors shall not
be invalidated on that ground alone.
• If the interest of the interlocking director in one
corporation is substantial (exceeding 20% of capital
stock) and his interest in the other corporation or
corporations is merely nominal, he shall be subject
to the provisions Sec. 32 insofar as the latter
corporation is concerned.
Section 33. Disloyalty of a director. –
• A director, by virtue of his office, acquires a
business opportunity which should belong to the
corporation, thereby obtaining profits to the
prejudice of such corporation, he must account to
the latter for all such profits by refunding the same,
unless ratified by a vote of the owning or
representing at least two-thirds (2/3) of the
outstanding capital stock. This provision apply even
if the director risked his own funds in the venture.
Prime White Cement Corp. v. Intermediate Appellate
Court
G.R. No. 68555, March 19, 1993.
• A director of a corporation holds a position of trust
and as such, he owes a duty of loyalty to his
corporation. In case his interests conflict with those
of the corporation, he cannot sacrifice the latter to
his own advantage and benefit. As corporate
managers, directors are committed to seek the
maximum amount of profits for the corporation.
This trust relationship "is not a matter of statutory
or technical law. It springs from the fact that
directors have the control and guidance of
corporate affairs and property and hence of the
property interests of the stockholders.
• . . . He cannot by the intervention of a corporate
entity violate the ancient precept against serving
two masters . . .
Lent v. Tullett Prebon (Philippines), Inc.,
G.R. Nos. 189158 & 189530, January 11, 2017
• The Corporation Code was intended as a regulatory
measure, not primarily as a penal statute. Sections
31 to 34 in particular were intended to impose
exacting standards of fidelity on corporate officers
and directors but without unduly impeding them in
the discharge of their work with concerns of
litigation. Considering the object and policy of the
Corporation Code to encourage the use of the
corporate entity as a vehicle for economic growth,
we cannot espouse a strict construction of Sections
31 and 34 as penal offenses in relation to Section
144 in the absence of unambiguous statutory
language and legislative intent to that effect.
Director’s and Officer’s Liability Summary -
. When :
(a) wilfully 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. Watered stocks.
3. When contractually agreed or stipulated to liability.
or

4. By specific provision of law, personally liable.

5. In labor cases, for the termination of employment

with malice or in bad faith.

MAM Realty Development Corporation v. NLRC