Commercial Law Review: Corporations

Commercial Law Review
CORPORATION (Moot Court, A.Y. 2013 - 2014)
1st meeting (January 7, 2014)
Corporation Code of the Philippines (B.P. 68)

Took effect: May 1, 1980
Purpose: An effective partner of the government for social and economic development of
the country and to spread the benefits of capitalism
According to Atty. M – The real purpose is for revenue or profit.
Section 1.Title of the Code. - This Code shall be known as "The Corporation Code of
the Philippines."
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 incident to its existence.
Attributes of a corporation:
1. Artificial being - Separate juridical personality

2. Created by operation of law
3. Has the right of succession - Death of the corporators does not mean the end of
the corporation
4. Powers, attributes and properties authorized by law or incident to its
existence
Sec. 3.Classes of corporations. - Corporations formed or organized under this Code may
be stock or non-stock corporations. Corporations which have capital stock divided into
shares and are authorized to distribute to the holders of such shares dividends or
allotments of the surplus profits on the basis of the shares held are stock
corporations. All other corporations are non-stock corporations.
Classes of corporations:
1. Stock - which have capital stocks divided into shares and are authorized to
distribute dividends on the basis of the shares held
2. Non-stock – all others
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.
Manner of creating corporations:

1. By virtue of Corporation Code – private corporations
2. Congress by legislation – public corporations (province, city, municipality,
barangay)
Example:
Province in Zamboanga Valley, Compostela and Subugay. They are newly created provinces
in which Congress, created by legislation, to become public corporations. If a
corporation is acting in assisting the governmental functions of the State, it is a
public corporation e.g. Cebu City, Cebu Province and Barangays. But if its purpose is
to create profits like SMB that is considered a private corporation.
Prepared by: 1
Commercial Law Review Committee
Sec. 5.Corporators and incorporators, stockholders and members. - Corporators are

those who compose a corporation, whether as stockholders or as members. Incorporators
are those stockholders or members mentioned in the articles of incorporation as
originally forming and composing the corporation and who are signatories thereof.
Corporators in a stock corporation are called stockholders or shareholders.
Corporators in a non-stock corporation are called members.
Those who compose the corporation:

1. Corporators – either stockholders or members
2. Incorporators – stockholders or members who are
a. originally forming and composing the corporation
b. mentioned in the AOIand
c. who are signatories to it
All incorporators are corporators.

- A corporator is a broader term because it embraces all persons who comprise the
corporation, whether stock or non-stock. While incorporators are limited to
those who originally formed the corporation, their names are appearing in the
articles of incorporation and signatories thereof.
Is the corporate treasurer a corporator?

- Yes. Under the definition, corporators are those composing the corporation
either as stockholder or member. SH are those owning at least one share of
stock of the corporation. The corporate treasurer need not own shares of stock.
He is not a stockholder but since he is one of those composing the corporation,
he is also a corporator.A Corporate Treasurer is a corporator but is not a
stockholder because under Sec. 25, he has no qualifications. So class, there is
a loophole on the definition.
Stockholders- Corporators in a stock corporation are called stockholders or

shareholders (Corporation Code).
Note: Atty. M prefers the definition in Act 1459 – A person who owns a share of stock
in a stock corporation.
Member – a corporator of a non-stock coporation.

- But in a stock corporation, those who compose the corporation are collectively
called corporators. If you have shares, you are also called a stockholder. But
if you are only a corporator, without any shares, you can never be a
stockholder.
***Aguilar
SECTION 10.Number and Qualifications of Incorporators. — Any number of natural persons

not less than five (5) but not more than fifteen (15), all of legal age and a majority
of whom are residents of the Philippines, may form a private corporation for any
lawful purpose or purposes. Each of the incorporators of a stock corporation must own
or be a subscriber to at least one (1) share of the capital stock of the corporation.
(6a)
Qualifications of Incorporators:
A. Individual qualifications
1. Must be a natural person
Prepared by: 2
Note: Before, under Act 1459 Sec. 6, it says "Five or more persons not
exceeding 15, majority of whom are residents of the Philippines xxx"
- The law here says "persons" without specifying if natural or juridical.
It was general so there was a problem in applications with the SEC
whether the latter will grant it or not.
- The problem there would be,the directors of the applicant corporation
will indirectly manage the new corporation. Therefore, there will be
conflict of decisions.
- But now, it is clear that only natural persons are allowed. At least in
1980, effectivity of the CCP, it was made clear.
2. Must be of legal age - at least 18 years of age (don't say or stop at 18)
3. Must own at least one share of capital stock registered in his own name in the
Stock and Transfer Book - you must be the legal owner
B. Collective qualifications
4. Majority of the incorporators must be residents of the Philippines

- Even if they are all aliens, they can still incorporate because residence
is different from citizenship unless there is a special law requiring
certain percentage of Philippine citizenship.
Examples:
1. Mass media - 100% Filipino
2. Mining - 60% Filipino
3. Pawnshop - 70% Filipino
4. Security agency - 100% Filipino
5. Not less than five no more than fifteen as to composition
Illustration:
Incorporators National Situation A Situation B

Residence Residence
1. A Kiribati Cebu China
2. B Belgium Cebu China
3. C Vatican Cebu China
4. D Finland Cebu China
5. E Japan Cebu China
6. F Estimore Cebu China
7. G Brazil China China
8. H Uganda China China
9. I Jordan China China
10. J Israel China China
Authority to form Permitted, unless
corporation in the the law prescribes Not allowed.
Philippines minimum required
citizenship
***Llanera
Sec. 12. Minimum capital stock required of stock corporations. - Stock corporations
incorporated under this Code shall not be required to have any minimum authorized
Prepared by: 3
capital stock except as otherwise specifically provided for by special law, and
subject to the provisions of the following section.
- There is no required minimum authorized capital stock except as otherwise

specifically provided for by special law.
Sec. 13. Amount of capital stock to be subscribed and paid for the purposes of
incorporation. - At least twenty-five percent (25%) of the authorized capital stock as
stated in the articles of incorporation must be subscribed at the time of
incorporation, and at least twenty-five (25%) per cent of the total subscription must
be paid upon subscription, the balance to be payable on a date or dates fixed in the
contract of subscription without need of call, or in the absence of a fixed date or
dates, upon call for payment by the board of directors: Provided, however, That in no
case shall the paid-up capital be less than five Thousand (P5,000.00) pesos.
- At least twenty-five percent (25%) of the authorized capital stock as stated in

the articles of incorporation must be subscribed at the time of incorporation
- At least twenty-five percent (25%) of the total subscription must be paid in
actual cash and/or in property upon subscription but in no case shall be less
than five thousand (P5,000.00) pesos.
EXAMPLE 1: COMPLIED with the required amount of

capital stock subscribed and/or paid.
Corporate Stock Structure
At least twenty-five (25%) percent of the
AUTHORIZED CAPITAL STOCK: 1, 000, 000 authorized capital stock of the
NUMBER OF SHARES: 10, 000 corporation has been subscribed, and at
PAR VALUE: 100 least twenty-five (25%) of the total
SUBSCRIBED CAPITAL: 250, 000 subscription has been fully paid in actual
PAID-UP CAPITAL: 62,500 cash and/or in property the fair valuation
of which is equal to at least twenty-five
(25%) percent of the said subscription,
such paid-up capital being not less than
five thousand (P5,000.00) pesos.
Did not comply with the required amount of

Example 2: capital stock subscribed and/or paid.
Corporate Stock Structure Although at least twenty-five (25%)

percent of the authorized capital stock of
AUTHORIZED CAPITAL STOCK: 50, 000 the corporation has been subscribed, and
NUMBER OF SHARES: 500 at least twenty-five (25%) of the total
PAR VALUE: 100 subscription has been fully paid in actual
SUBSCRIBED CAPITAL: 12,500 cash and/or in property the fair valuation
PAID-UP CAPITAL: 3,125 of which is equal to at least twenty-five
(25%) percent of the said subscription,
such paid-up capital is less than five
thousand (P5,000.00) pesos. Under the
Code, the paid-up capital shall be in no
case less than five Thousand (P5,000.00)
pesos.
Corporation can be incorporated even if
Prepared by: 4
Example 3: the authorized capital stock is only 5,000

because under the Corporation Code, there
Corporate Stock Structure is no minimum authorized capital stock
required except as otherwise specifically
AUTHORIZED CAPITAL STOCK: 5,000 provided for by special law, and provided
NUMBER OF SHARES: 50 it has complied with the required amount
PAR VALUE: 100 of capital stock subscribed and/or paid.
SUBSCRIBED CAPITAL: 5,000
PAID-UP CAPITAL: 5,000 Fully subscribed. Fully paid-up.
Treasurer’s Affidavit
- To know if there is compliance with the required amount of capital stock
subscribed and/or paid.
- Non-compliance may result to the rejection or disapproval of articles of
incorporation (See Sec.17 - Grounds when articles of incorporation or amendment
may be rejected or disapproved).
- This affidavit is submitted together with articles of incorporation (See Sec.14
- Contents of the articles of incorporation).
Certification from Bank

- To verify the treasurer’s affidavit that there is compliance with the required
amount of capital stock paid.
- The amount deposited in the bank is under the name of the treasurer in trust of
the proposed corporation.
***Abejero
Drafting the articles of incorporation must be of substantial compliance. [Please

refer to Sec 15.]
SECTION 14.Contents of Articles of Incorporation. — All corporations organized under

this Code shall file with the Securities and Exchange Commission articles of
incorporation in any of the official languages, duly signed and acknowledged by all of
the incorporators, containing substantially the following matters, except as otherwise
prescribed by this Code or by special law:
1.The name of the corporation;
2.The specific purpose or purposes for which the corporation is being incorporated.
Where a corporation has more than one stated purpose, the articles of incorporation
shall state which is the primary purpose and which is/are the secondary purpose or
purposes: Provided, That a non-stock corporation may not include a purpose which would
change or contradict its nature as such;
3.The place where the principal office of the corporation is to be located, which must
be within the Philippines;
4.The term for which the corporation is to exist;
5.The names, nationalities and residences of the incorporators;
6.The number of directors or trustees, which shall not be less than five (5) nor more
than fifteen (15);
Prepared by: 5
7.The names, nationalities and residences of the persons who shall act as directors or
trustees until the first regular directors or trustees are duly elected and qualified
in accordance with this Code; casia
8.If it be a stock corporation, the amount of its authorized capital stock in lawful
money of the Philippines, the number of shares into which it is divided, and in case
the shares are par value shares, the par value of each, the names, nationalities and
residences of the original subscribers, and the amount subscribed and paid by each on
his subscription, and if some or all of the shares are without par value, such fact
must be stated;
9.If it be a non-stock corporation, the amount of its capital, the names,

nationalities and residences of the contributors and the amount contributed by each;
and
10.Such other matters as are not inconsistent with law and which the incorporators may
deem necessary and convenient.
The Securities and Exchange Commission shall not accept the articles of incorporation
of any stock corporation unless accompanied by a sworn statement of the Treasurer
elected by the subscribers showing that at least twenty-five (25%) percent of the
authorized capital stock of the corporation has been subscribed, and at least twenty-
five (25%) percent of the total subscription has been fully paid to him in actual cash
and/or in property the fair valuation of which is equal to at least twenty-five (25%)
percent of the said subscription, such paid-up capital being not less than five
thousand (P5,000.00) pesos.
Purpose of corporate name: For identification
What are prohibited when it comes to corporate name?

a. A corporation name already existing and operational - Must get a
certification from SEC that there is no duplication of name.
b. Names which are confusingly or deceptively similar to an existing
corporation.
Maximum term of a Corporation

- 50 years but renewable for another 50years. Number of renewal is permissible
and unlimited.
How soon are you permitted to renew?

- During the last 5 years of corporate existence, whether the original or the
renewed term.
Exception: Based on meritorious reason upon SEC’s determination.
***Bautista
Failure to organize within 2 years from the issuance of the certificate - one sanction
dissolution only.As compared to continuous non-operation for a period of 5 years -
suspension or revocation of the certificate.
Bylaws
Prepared by: 6
- Permanent and continuing laws adopted by the corporation for its own
government. The internal regulations of the corporation as well as the
management of all its members are governed by the bylaws.
- The bylaws will dictate the qualification, duties and compensation as well as
the time for the election of directors.
When to adopt the bylaws:
- The bylaws of the corporation shall be adopted within one month from the
receipt of the notice of the issuance of the certificate of incorporation not
from the issuance of the certificate of incorporation.
- The notice regardless of the favorable issuance will be mailed to the
organizers of the corporation.
Example:
If I receive the notice this morning, I have one month or 30 days to adopt and file
bylaws. The certificate of incorporation will follow soon.
What is the result if you cannot adopt and file the bylaws within the reglementary
period?
- It will result to the dissolution of the corporation for lack of interest on
your part since the filing of the bylaws is a condition subsequent. If the
Articles of Incorporation is a condition precedent, the bylaws is a condition
subsequent because that will cause the dissolution of the corporation if not
filed within the reglementary period.
Who will adopt the bylaws:
Stock corporation: the stockholders representing the majority of the outstanding share
or subscribed shares (outstanding and subscribed are all the same)
Ex. 1000 outstanding shares, majority is 501 shares.
Non-Stock corporation: Majority of all the members
Ex: 5000 members, majority is 2501 members.
Effectivity of the bylaws:

- The moment the SEC will issue a certification saying that the proposed bylaws
is not inconsistent with the provisions of the Corporation Code
Post incorporation filing of bylaws

- happens when the Articles of Incorporation is already approved upon the filing
of the bylaws
[Note] It is already permissible to file the bylaws of the corporation together with
the Articles of Incorporation.
What will happen when the bylaws are approved but the Articles of Incorporation is
disapproved?
- What will be the purpose of your bylaws if you do not have a corporation? No
AOI, no corporation.
Prepared by: 7
Corporations which require the recognition of the appropriate government agency

(department secretary concerned)
Examples: Banks, savings and loans associations, insurance companies, trust companies,
educational institutions, public utilities and other corporations governed by special
laws
- Such corporations require along with the AOI and bylaws, a recommendation from
the appropriate government agency concerned.
***Ibaňez
- There is a need to show the residences of those who shall act as directors or
trustees because under Sec.23 of the Corporation Code, it is required that
MAJORITY of the directors or trustees of all corporations organized under this
Code must be residents of the Philippines.
Sec. 16.Amendment of Articles of Incorporation. - Unless otherwise prescribed by this

Code or by special law, and for legitimate purposes, any provision or matter stated in
the articles of incorporation may be amended by a majority vote of the board of
directors or trustees and the vote or written assent of the stockholders representing
at least two-thirds (2/3) of the outstanding capital stock, without prejudice to the
appraisal right of dissenting stockholders in accordance with the provisions of this
Code, or the vote or written assent of at least two-thirds (2/3) of the members if it
be a non-stock corporation.
The original and amended articles together shall contain all provisions required by
law to be set out in the articles of incorporation. Such articles, as amended shall be
indicated by underscoring the change or changes made, and a copy thereof duly
certified under oath by the corporate secretary and a majority of the directors or
trustees stating the fact that said amendment or amendments have been duly approved by
the required vote of the stockholders or members, shall be submitted to the Securities
and Exchange Commission.
The amendments shall take effect upon their approval by the Securities and Exchange
Commission or from the date of filing with the said Commission if not acted upon
within six (6) months from the date of filing for a cause not attributable to the
corporation.
Amendment of Articles of Incorporation of Amendment of Articles of Incorporation of

STOCK CORPORATION NON-STOCK CORPORATION
1. Majority vote of the board of 1. Majority vote of the board of
directors;AND trustees;AND
2. the vote or written assent of the 2. the vote or written assent of at
stockholders representing at least least two-thirds (2/3) of the
two-thirds (2/3) of the outstanding members
capital stock, without prejudice to
the appraisal right of dissenting Note: the 2/3 requirement refers the
stockholders in accordance with the number of members.
provisions of this Code
Note: the 2/3 requirement refers the

number of shares and not to the number of
Prepared by: 8
the stockholders.
Written Assent
- It is only under Sec.16 that written assent w/out the stockholder being present
is permitted.
Is there a chance wherein my vote is counted without me being present in the meeting?
- Yes, if you notice section 16, written assent is sufficient. You will not find
any provision in the Corporation Code that permits written assent. You have to
be present either in person or by proxy during the meeting. But here, written
assent is permitted in sec. 16 in the matter of amendment of the Articles of
Incorporation. The only instance written assent may be counted without being
present in the meeting is amendment to the Articles of Incorporation either as
a stockholder in a stock corporation or member in a non-stock corporation.
That's why one of its kind.
- Hence, you can just send a letter indicating your intention to amend.
Section 17. Grounds when articles of incorporation or amendment may be rejected or

disapproved - The Securities and Exchange Commission may reject the articles of
incorporation or disapprove any amendment thereto if the same is not in compliance
with the requirements of this Code: Provided, That the Commission shall give the
incorporators a reasonable time within which to correct or modify the objectionable
portions of the articles or amendment.
The following are grounds for such rejection or disapproval:
1. That the articles of incorporation or any amendment thereto is not substantially in

accordance with the form prescribed herein;
2. That the purpose or purposes of the corporation are patently unconstitutional,
illegal, immoral, or contrary to government rules and regulations;
3. That the Treasurer’s Affidavit concerning the amount of capital stock subscribed
and/or paid is false;
4. That the percentage of ownership of the capital stock to be owned by citizens of
the Philippines has not been complied with as required by existing laws or the
Constitution.
No articles of incorporation or amendment to articles of incorporation of banks,

banking and quasi-banking institutions, building and loan associations, trust
companies and other financial intermediaries, insurance companies, public utilities,
educational institutions, and other corporations governed by special laws shall be
accepted or approved by the Commission unless accompanied by a favorable
recommendation of the appropriate government agency to the effect that such articles
or amendment is in accordance with law. (n)
Grounds when articles of incorporation or amendment may be rejected or disapproved:
1. You don't follow the prescribed form (Sec 15 serves as guide) - take note that
substantial compliance is sufficient. You don't need to follow all that is
prescribed in Sec 15. But if not substantial, it will be disallowed.
2. If the purpose of the corporation is unlawful, illegal, immoral.
3. If the 25% (ACS and Paid in) requirement provided by law is not complied with.
That's why there is Treasurer's affidavit and don't forget Certificate of
Deposit from the bank that the money is with them.
Prepared by: 9
Sec. 19.Commencement of corporate existence. – A private corporation formed or

organized under this Code commences to have corporate existence and juridical
personality and is deemed incorporated from the date the Securities and Exchange
Commission issues a certificate of incorporation under its official seal; and
thereupon the incorporators, stockholders/members and their successors shall
constitute a body politic and corporate under the name stated in the articles of
incorporation for the period of time mentioned therein, unless said period is extended
or the corporation is sooner dissolved in accordance with law.
Issuance of the certificate of incorporation/certificate of authority by the SEC

- This is the climax/fruit of your labor in complying with the requirements to
basically form a corporation.
- What is its significance? The first breathe of life of the corporation is
experienced. Start of the existence of the corporation
Can we now start the business?

- No, because we need to organize first. By laws under Sec 46.
Section 20.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.
Corporation in fact but not in law:

- If you complied all, it is a de jure corporation and it is legitimate but if
there is lacking, then that's de facto because certain omission of requirements
has not been complied with religiously
Examples:
a. The corporation has been issued certificate of incorporation but it's not true
that the 25% requirement has been not been subscribed. Then that's a de facto
corporation because you did not comply with the requirements of the capital
stock structure.
b. In your Articles of Incorporation, notarized by a tanod then that is not
allowed. It is defective.
c. Incorporators are five but only 4 signed the AOI, then that is defective still.
Hence, de facto.
Section 21.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 as a defense its lack of corporate personality.
On who assumes an obligation to an ostensible corporation as such, cannot resist
performance thereof on the ground that there was in fact no corporation.
- Persons who represent themselves as a corporation which does not really exist.
- They are not permitted to deny the existence of a corporation or what have you
represented.
- Liable as general partners.
Prepared by: 10
Example:
- We are liable for 100k but we can only pay for 50k. Then our separate
properties will be answerable to that.
Section 22.Effects on non-use of corporate charter and continuous inoperation of a

corporation. – If a corporation does not formally organize and commence the
transaction of its business or the construction of its works within two (2) years from
the date of its incorporation, its corporate powers cease and the corporation shall be
deemed dissolved. However, if a corporation has commenced the transaction of its
business but subsequently becomes continuously inoperative for a period of at least
five (5) years, the same shall be a ground for the suspension or revocation of its
corporate franchise or certificate of incorporation. (19a)
This provision shall not apply if the failure to organize, commence the transaction of
its businesses or the construction of its works, or to continuously operate is due to
causes beyond the control of the corporation as may be determined by the Securities
and Exchange Commission.
- Failure to organize within 2 years from issuance of the certificate of incorporation

warrants dissolution ONLY. Corporate powers shall cease.
- Business becomes continuously inoperative for a successive period of 5 years,
suspension or revocation is warranted at the option of SEC.
***Go
2nd meeting (January 11, 2014)
Section 48.Amendments to by-laws. – The board of directors or trustees, by a majority

vote thereof, and the owners of at least a majority of the outstanding capital stock,
or at least a majority of the members of a non-stock corporation, at a regular or
special meeting duly called for the purpose, may amend or repeal any by-laws or adopt
new by-laws. The owners of two-thirds (2/3) of the outstanding capital stock or two-
thirds (2/3) of the members in a non-stock corporation may delegate to the board of
directors or trustees the power to amend or repeal any by-laws or adopt new by-laws:
xxx xxx
- The interest of the shares of the stockholders are not equal. It will depend on
the investment. For instance the outstanding share totals to 3,000. So now, we
need to find the shares equivalent to 2/3 so we may delegate the act of the
amendment to the board.
What is to be considered is the vote of the stockholders representing at least 2/3 of

the outstanding shares. Don’t confuse it with 2/3 of the stockholders – it should be
the vote of the stockholders REPRESENTING AT LEAST 2/3 OF THE OUTSTANDING SHARES.
Illustration:
Outstanding Shares: 3, 000
I, alone, have 2000 shares; all the rest of 1000 shares are owned by all of you (the
class).
Then I say, ―I vote in favor the delegation to the board the act of amendment.‖ All of
you dissented.
Prepared by: 11
The vote has been cast. There is nothing you can do. Although, I, alone, vote in favor
of the delegation, what is considered is the share of the investment and not the
number of stockholders.
Now we know that it needs at least 2/3 of the outstanding shares to delegate the act
of amendment.
xxx Provided, That any power delegated to the board of directors or trustees to
amend or repeal any by-laws or adopt new by-laws shall be considered as revoked
whenever stockholders owning or representing a majority of the outstanding capital
stock or a majority of the members in non-stock corporations, shall so vote at a
regular or special meeting. xxx xxx
So what if after such delegation, we discovered that the amendment of the by-laws
would be very much favorable to the directors, and would be ―anti-stockholder,‖ what
would be our remedy?
- We can revoke the delegated authority. When the directors become abusive of the
delegated power, then as stockholders, we can revoke such delegation.
Acts Needed votes of stockholders

To delegate the power to amend or 2/3 votes of the outstanding capital stock
repeal any by-laws or adopt new by-
laws
To participate in the amendment, majority of the outstanding capital stock (plus
repeal, or adoption ofby-laws majority votes of board of directors or
trustees)
To revoke delegated authority Majority
(non –stock: 2/3 of the members)
(stock: stockholders representing 2/3 of the
outstanding shares)
Why is it so difficult to delegate (2/3 votes), but so easy to revoke (majority

votes)?
- To encourage participation on the part of the stockholders, considering that
they are the persons affected by the by-laws.
Section 23.The board of directors or trustees. – Unless otherwise provided in this

Code, the corporate powers of all corporations formed under this Code shall be
exercised, all business conducted and all property of such corporations controlled and
held by the board of directors or trustees to be elected from among the holders of
stocks, or where there is no stock, from among the members of the corporation, who
shall hold office for one (1) year until their successors are elected and qualified.
(28a) xxx
Management of the Corporation:
A Corporation has no physical existence, so who will manage the corporation?
- The board of directors collectively.

- As when a partnership have general partners, the corporation has the Board of
Directors.
- The Board acts as the AGENT of the corporation. They are responsible for the
acts of the corporation.
Prepared by: 12
Broad powers of the BOD:

1. Corporate Powers
2. Control of the capital assets of the corporation
3. Contract corporate business
Term of Board of Directors:

- Only one (1) year, without prejudice to the so-called hold over – meaning,
unless a successor shall have been elected and qualified.
xxx xxx xxx

Every director must own at least one (1) share of the capital stock of the corporation
of which he is a director, which share shall stand in his name on the books of the
corporation. Any director who ceases to be the owner of at least one (1) share of the
capital stock of the corporation of which he is a director shall thereby cease to be a
director. xxx xxx A majority of the directors or trustees of all corporations
organized under this Code must be residents of the Philippines.
Section 14. xxx xxx

6. The number of directors or trustees, which shall not be less than five (5) nor more
than fifteen (15);
Directors:
- Same as the incorporator, with some additional conditions.
Qualifications: (discussion + de Leon, 2010*)
1. Natural Person;
2. Legal age;
3. Must own at least one share of the capital stock*;
4. The share of stock held by the director must be registered in his name on the
books of the corporation*;
5. Must continuously own at least one share of stock during his term; otherwise he
shall cease to be a director*; and
6. Majority of the directors must be residents of the Philippines*
Legend:
* From de Leon
Note: The number of directors must not be less than five (5) nor more than fifteen
(15).
Section 27.Disqualification of directors, trustees or officers. – No person convicted

by final judgment of an offense punishable by imprisonment for a period exceeding six
(6) years, or a violation of this Code committed within five (5) years prior to the
date of his election or appointment, shall qualify as a director, trustee or officer
of any corporation.
Disqualification of Directors:
There are persons who can never be chosen or elected as directors. There are two
instances:
I. If you have been convicted of an offense punishable by imprisonment for a

period of MORE than six (6) years – that is perpetual disqualification.
Prepared by: 13
- So if you have been convicted for only six (6) years, then you are still
eligible because the law says MORE than six years
Example:
If you have a crime of which the penalty imposable is more than six years, but it has
a mitigating circumstance, thus the penalty is lowered making it less than six years,
then you are still eligible.
Question raised by classmate:

What about successive penalties?
Answer:
What the law pertains to here is the penalty of one crime or only one instance of
conviction, it does not contemplate successive penalties. We should look at the
separate occasions. What the law pronounces is the time of the commission, not the
actual penalty imposed, not considering the mitigating circumstances or aggravating
circumstances. THE PRESCRIBABLE PENALTY found Revised Penal Code of the act that you
have committed.
NOTE: this contradicts the example he first gave.
II. If you have violated the provisions of the Corporation Code within five (5)
years prior to your election.
Illustration:
Today is January 11, 2014. If on January 11, 2009, you violated one of the provisions
of the Corporation Code, then for this day you are disqualified from being a director.
BUT this is merely a temporary disqualification. When the 5 years have lapsed and no
violation was done upon lapse of such period, then you are no longer disqualified to
be elected as director.
Thus, when you are to be elected as Director on January 11, 2015, and you have not
violated the Corporation Code on 2014, 2013, 2012, 2011 and 2010, then you are
qualified to be a Director.
***Malana
Sec. 27. Disqualification of directors, trustees or officers. - No person convicted by

final judgment of an offense punishable by imprisonment for a period exceeding six (6)
years, or a violation of this Code committed within five (5) years prior to the date
of his election or appointment, shall qualify as a director, trustee or officer of any
corporation.
So there are 2 kinds of disqualification for a director. Either you were convicted of
a crime by final judgment, which the law prescribes a penalty of more than 6 years, or
you violated the provisions of the Corporation Code, 5 years prior to your election.
(But the problem is, according to sir, who list the violations?)
SECTION 24.Election of Directors or Trustees. — At all elections of directors or

trustees, there must be present, either in person or by representative authorized to
act by written proxy, the owners of a majority of the outstanding capital stock, or if
there be no capital stock, a majority of the members entitled to vote. The election
must be by ballot if requested by any voting stockholder or member. In stock
corporations, every stockholder entitled to vote shall have the right to vote in
Prepared by: 14
person or by proxy the number of shares of stock standing, at the time fixed in the
by-laws, in his own name on the stock books of the corporation, or where the by-laws
are silent, at the time of the election; and said stockholder may vote such number of
shares for as many persons as there are directors to be elected or he may cumulate
said shares and give one candidate as many votes as the number of directors to be
elected multiplied by the number of his shares shall equal, or he may distribute them
on the same principle among as many candidates as he shall see fit: Provided, That the
total number of votes cast by him shall not exceed the number of shares owned by him
as shown in the books of the corporation multiplied by the whole number of directors
to be elected: Provided, however, That no delinquent stock shall be voted. Unless
otherwise provided in the articles of incorporation or in the by-laws, members of
corporations which have no capital stock may cast as many votes as there are trustees
to be elected but may not cast more than one vote for one candidate. Candidates
receiving the highest number of votes shall be declared elected. Any meeting of the
stockholders or members called for an election may adjourn from day to day or from
time to time but not sine die or indefinitely if, for any reason, no election is held,
or if there are not present or represented by proxy, at the meeting, the owners of a
majority of the outstanding capital stock, or if there be no capital stock, a majority
of the member entitled to vote. (31a)
Section 24 is all about the election of the directors.
When do you elect?

- You consult your bylaws. For some ints the 1st Saturday of January, for others,
the day after the first Monday of January. The point is, they differ. Just
check the bylaws because they really differ. In the bylaws you find the time,
place, date, and manner of special or regular meetings as well as the manner of
election.
What is the system of the Philippines when it comes to choosing or voting?
1. Straight voting system - (e.g. classroom elections, or local elections). In

this system, you can cast your vote for any one candidate. In other words, you
cannot cast your vote more than once for any one candidate.
Formula: No. of shares x no. of directors to be elected
Example:
This coming 2016 election, we have 12 senators to pick. In case there is candidate
named Juan dela Cruz and you really like him so you write his name 12 times on the
ballot. He will not receive 12 votes but only 1.
2. Cumulative voting system – used in a corporation. Generally number of shares

held times number of directors to be elected. That’s the number of their
votes.
Example:
In case I have 100 shares, and there are 5 directors to elect. I am therefore armed
with 500 votes. It’s up to me to distribute, how to use them. I can give it all to A,
or just to A and B with 250 each or A & B 200 each and C with 100 votes.
The reason for adopting this system is illustrated in the following example.
Prepared by: 15
If there is a corporation, with 100 shares, and the distribution of the shares is the
following:
Giant stockholders Minority stockholders

A 40 shares
B 30 shares Moot courters 20 shares
C (allied of 10 shares
A and B)
TOTAL 80 shares 20 shares 100 shares
Do we have a chance to choose our director?

If the class will unite and choose just one candidate, that’s 20 x 5 = 100 votes. A,
B, et al have 400 votes.
Minority stockholders voting as one in favour of one director:

20 shares x 5= 100 votes
Even if only 18 would join, because some rebelled, that would still be 90 votes. Now
let’s go back to A,B, etc. They have 400 votes, given 5 directors, then they can only
give 80 votes per director they want.
Giant stockholders voting separately:

80 shares x 5 = 80 votes
So, the minority could still choose their director. Or even if A,B, etc. divide only
their votes among 4 directors, giving 100 each, that still would leave one director.
Therefore, through unity it is possible that the minority voters can still win.
Candidates Giant stockholders voting Minority stockholders

separately voting as one
A 80 votes 100 votes
B 80 votes
C 80 votes
D 80 votes
E 80 votes
Therefore, the purpose of the cumulative voting system is to give the opportunity
subject of course to unity.
Number shares x number of directors = number of votes. That is the formula. The
purpose is to give the minority shares the opportunity to be represented. It is not to
give representation. But to give opportunity.
Sec. 25.Corporate officers, quorum. - Immediately after their election, the directors
of a corporation must formally organize by the election of a president, who shall be a
director, a treasurer who may or may not be a director, a secretary who shall be a
resident and citizen of the Philippines, and such other officers as may be provided
for in the by-laws. Any two (2) or more positions may be held concurrently by the same
person, except that no one shall act as president and secretary or as president and
treasurer at the same time.
The directors or trustees and officers to be elected shall perform the duties enjoined
on them by law and the by-laws of the corporation. Unless the articles of
incorporation or the by-laws provide for a greater majority, a majority of the number
of directors or trustees as fixed in the articles of incorporation shall constitute a
Prepared by: 16
quorum for the transaction of corporate business, and every decision of at least a
majority of the directors or trustees present at a meeting at which there is a quorum
shall be valid as a corporate act, except for the election of officers which shall
require the vote of a majority of all the members of the board.
Directors or trustees cannot attend or vote by proxy at board meetings.
We go to directors. What do they do? They act for the corporation. Consequentially, to
bind the corporation, what is needed?
- 1st requirement is that there is quorum. Quorum is ½ plus 1 of the total number
of directors. In order to constitute quorum, if there are 10 directors in
total, then you need the presence of 6.
***Espina, Carlo
Example: If there are 10 directors,
To constitute quorum there has got to be at least 6 directors present, (½+1). Why?
- In order to do valid corporate business. If there is no quorum, the act of the
board will be void. It will not bind the corporation at all. So if the total
number of directors fixed in the articles of incorporation is 10, in order to
do valid corporate business there has got to be quorum, numerically at least
―½+1.‖ So it can be 6,7,8.
Considering the number of directors present is 6, how much votes is necessary to pass
a resolution?
- Majority of the directorspresent and constituting quorum. Therefore, there has
got to be positive votes of 4 of the directors present and constituting quorum.
EXAMPLE: VALID
BOD fixed in the AOI DIRECTORS PRESENT TO PASS A RESOLUTION

10 6 (THERE IS QUOROM) 4
ORDINARY MAJORITY = ½ + 1 Majority of the Majority of the
QUOROM = AT LEAST ORDINARY directors directorspresent and
MAJORITY OF BOD’S (1/2 of 10 + 1) = 6 constituting quorum.
(1/2 of 6 + 1) = 4
- So if there were no quorum, they would only wait until the requisite quorum is
attained, thereafter they will start deliberating. If they act without the
requisite quorum, such acts are void. Hence a valid quorum is needed and a
positive vote of majority of the directors present and constituting quorum in
order to validly pass a resolution, a valid corporate act.
EXAMPLE: VOID
BOD fixed in the AOI DIRECTORS PRESENT TO PASS A RESOLUTOION
10 5 (NO QUOROM) 5 (ALL DIRECTORS PRESENT
VOTED)
- So in this example class there are 10 directors fixed in the AOI, only 5 were
present, and 5 voted to pass a resolution meaning all the directors present.
Prepared by: 17
Is the resolution valid? If you compare this with the previous example that the
vote of 4 directors present was enough to pass a resolution how much more if it
is 5.
- This is VOID. The act of the corporation without the benefit of quorum, all
proceedings are void. There is no quorum here, only 5 are present, don’t look
at the number as compared with the previous example. The defect lies in the
fact that there is no quorum. If there is no quorum then the proceedings of
that board shall be null and void - all of it. This shows how important quorum
is. In order to give a color of validity for the actuations of the directors
binding upon the corporation.
―QUOROM BY PROVISION‖
Sec. 25 xxx Unless the articles of incorporation or the by-laws provide for a greater
majority, a majority of the number of directors or trustees as fixed in the articles
of incorporation shall constitute a quorum for the transaction of corporate business
xxx
- Still about quorum, under the 1980 Corporation Code, ordinary quorum is ―1/2 +
1‖ but it is legally permissible to adopt a number higher than majority for
purposes of quorum. So it is allowed to provide in the by-laws that ―there has
got to be at least 8 directors present to constitute quorum‖, that is ALLOWED
AND VALID. You can put that in your AOI or By-Laws because that is the charter
of your corporation. So you can provide that it be higher than ordinary
majority.
- So in our example, ordinary majority is 6. Therefore, you can adopt a number
like 7, 8 or 9 for purposes of quorum and that is valid. If it is provided in
the by-laws that out of the 10 directors there must be present at least 8
directors to constitute quorum then there must be at least 8 directors present
to constitute quorum.
- If it is so provided in the AOI or by-laws or both that there be a number
higher than ordinary majority, to my mind I will call it ―QUOROM BY PROVISION‖
since that is what you agreed upon and placed in your Articles. That means,
they are free to adopt a number higher than ordinary majority to constitute
quorum and that is VALID.
- How about if it provides ―that out of the 10 directors there must be present at
least 5 directors to constitute quorum‖? NO, it must be greater or higher
only.Five is lesser than the majority. So you begin from 7, 8 or 9 but not 10
since that would constitute unanimity.
***Tan
3rd meeting (January 14, 2014)
Overview of the process of creating corporation (Phases):

I. Incorporation
II. Organization
a. Adoption of bylaws
b. Election of BOD/BOT
c. Election of officers
III. Commencement of corporate business
Prepared by: 18
Sec. 25. Corporate officers, quorum. - Immediately after their election, the directors
of a corporation must formally organize by the election of a president, who shall be a
director, a treasurer who may or may not be a director, a secretary who shall be a
resident and citizen of the Philippines, and such other officers as may be provided
for in the by-laws. Any two (2) or more positions may be held concurrently by the same
person, except that no one shall act as president and secretary or as president and
treasurer at the same time.
The directors or trustees and officers to be elected shall perform the duties enjoined
on them by law and the by-laws of the corporation. Unless the articles of
incorporation or the by-laws provide for a greater majority, a majority of the number
of directors or trustees as fixed in the articles of incorporation shall constitute a
quorum for the transaction of corporate business, and every decision of at least a
majority of the directors or trustees present at a meeting at which there is a quorum
shall be valid as a corporate act, except for the election of officers which shall
require the vote of a majority of all the members of the board.
Directors or trustees cannot attend or vote by proxy at board meetings.
Election of corporate officers:
Officers prescribed by the Corporation Code:

a. President;
b. Secretary;
c. Treasurer
Only these officers are needed. All other officers, as may be provided by the by laws.
Qualification of president:
- must be a director
Qualification of treasurer:
- no prescribed qualification
- need not be a director
Qualification of secretary:
- must be a resident and citizen of the Philippines
Can a person hold these three positions at the same time?

- No.
How about two positions?

a. treasurer and secretary – allowed
b. president and secretary – not allowed
c. president and treasurer – not allowed
It is possible that the positions are ―conjugal.‖

Example: Husband is the president, wife is the treasurer and secretary.
Election in the corporation is like a ―pyramid‖:

a. Corporate officers - elected by the majority of all the directors in the
Articles (not of those present). So if there are 15, therefore at least a vote
of 8, for one to be a corporate officer.
b. Board of Directors
Prepared by: 19
c. Stockholders – elect the BOD
Quorum- is ½ plus one of the total number of directors to do a valid corporate act.
Specific act like resolution.
How much voted is needed if there are 14 directors?

- To file a resolution in particular, a vote of the majority of the directors
present and constituting a quorum. So the minimum is 8. Therefore, 5 votes are
needed, unless the Articles or by-laws provide for a different quorum. You can
choose a quorum other than the ordinary ½ plus one, but not lesser than 8.
Sec. 26. Report of election of directors, trustees and officers. - 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 Securities
and Exchange Commission, the names, nationalities and residences of the directors,
trustees, and officers elected. Should a director, trustee or officer die, resign or
in any manner cease to hold office, his heirs in case of his death, the secretary, or
any other officer of the corporation, or the director, trustee or officer himself,
shall immediately report such fact to the Securities and Exchange Commission.
SECTION 27.Disqualification of Directors, Trustees or Officers. — No person convicted

by final judgment of an offense punishable by imprisonment for a period exceeding six
(6) years, or a violation of this Code, committed within five (5) years prior to the
date of his election or appointment, shall qualify as a director, trustee or officer
of any corporation. (n)
- Sec. 27 is in relation to the qualification of directors.

- There is no much difference in the qualifications of the director and
incorporator, except the two:
1. he should not be convicted by final judgment where the prescribed
penalty is more than 6 years - permanent ground
2. should not have committed a violation of the Corporation Code within
5 years from the date of his election or appointment - temporary
disqualification. Meaning, five years backwards, you are cleared of
violation under the Corporation Codealthough next year you can be
qualified.
Sec. 28. 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 if the corporation be a
non-stock 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 of a corporation for the purpose of removal of directors or trustees, or any
of them, must be called by the secretary on order of the president or on the written
demand of the stockholders representing or holding at least a majority of the
outstanding capital stock, or, if it be a non-stock corporation, on the written demand
of a majority of the members entitled to vote. Should the secretary fail or refuse to
call the special meeting upon such demand or fail or refuse to give the notice, or if
there is no secretary, the call for the meeting may be addressed directly to the
Prepared by: 20
stockholders or members by any stockholder or member of the corporation signing the

demand. Notice of the time and place of such meeting, as well as of the intention to
propose such removal, must be given by publication or by written notice prescribed in
this Code. Removal may be with or without cause: Provided, That removal without cause
may not be used to deprive minority stockholders or members of the right of
representation to which they may be entitled under Section 24 of this Code.
Section 28 talks about removal of directors with or without cause. If the stockholders
are the ones who elect, it carries with it the authority to remove.
How much vote is needed to effect the removal?

a. stock corporation - vote of stockholders representing 2/3 of the outstanding
shares
b. non-stock corporation - vote of the members representing at least 2/3 of the
members.
Procedure for removal of directors:

3. There must be a meeting called for that purpose - state your purpose to effect
the removal of a directorso that the stockholders will know and they have the
opportunity to weigh and outweigh, and to determine the merits and demerits of
the removal.
Example:
If in the meeting, the agenda was about declaration of stock dividends.There
were huge dividends but suddenlythe removal of a director was also tackled.
What is your remedy as a director?Mandamus,that you be reinstated to your
position.
4. Immediately after the removal if one is successfully removed, before you

adjourn you elect for a replacement of the removed director during the same
setting unless of course there is a valid reason such as it’s already evening.
Note: The newly elected director should serve only the unexpired term. Of
course hold over just in case if the newly elected director is not yet
qualified.
Sec. 28 cannot be used to remove a director representing the minority stockholders.

Their removal cannot be done without valid cause. This is to give purpose to the
cumulative system of voting whereby the policy is to give the minority an opportunity
to be represented in the board. So the exception under Sec 28 complements Sec 24. You
can remove only if there exists a valid cause.
***Furuyama
Causes of vacancy:
A. (1-3) the successor director shall be elected by the stockholders

1. In case of increase of the number of directors;
2. Expiration of term;
3. Removal under sec. 28
B. (4-7) the remaining directors shall elect to fill up the existing vacancy
provided that they still constitute a quorum. If they no longer constitute a
quorum, then the stockholders shall fill up the vacancy
4. Resignation;
Prepared by: 21
5. Disqualification;
6. Death;
7. Abandonment.
Compensation:
General Rule: Directors are only entitled to reasonable per diem
Exception: If stipulated in the by-laws that they should receive compensation provided
that it will not exceed 10% of the net income of the preceding year (on a yearly
basis)
***Larino
Example:
- There is a director of a large company, owned mostly by the government. He
earns P500 a month, but with discretionary funds at an amount of P45,000.
- If you declare 45k as part of the director’s earnings, it will overshoot the
maximum 10% prescribed by law. (10% of the net income of the preceding year
before corporate income tax.) refer to previous example. The 1 million is the
basis for the tax paid. So 10% of it.
- In theory it is there, but that is prone to abuse.
SECTION 31.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.
When a director, trustee or officer attempts to acquire or acquires, in violation of

his duty, any interest adverse to the corporation in respect of any matter which has
been reposed in him in confidence, as to which equity imposes a disability upon him to
deal in his own behalf, he shall be liable as a trustee for the corporation and must
account for the profits which otherwise would have accrued to the corporation. (n)
Obligations of a director:
1. Loyalty to the business/corporation;
2. Duty of obedience to abide by the rules and resolutions;
3. Duty of diligence – service for the business
Instances when Directors/Trustees are liable to the stockholders even to Third

Persons:
1. Any director/trustee/officer who consented to a patently or clearly unlawful or

illegal act of the corporation
Example:
- Along Juan Luna St., upon a tip received by BFAD & DENR, a truck loaded
with corals was inspected. Note that there is a law prohibiting the
gathering and harvesting of red or white sea corals alike. And so the
corals were confiscated by the authorities on top of a fine amounting to
100K. By this, the corporation is poorer by 100K because of the fine.
- Who among the stockholders are liable for the 100K fine? Those directors
who voted in favor of the venture to buy red/white sea corals for export
will be held liable solidarily. Why? Because of them, the corporation is
Prepared by: 22
poorer by 100K due to their wrongful act. Those directors/or trustees who
consented by voting to a clearly/patently unlawful act of the corporation
will be held liable. Who are prejudiced? All the stockholders.
2. Any director/trustee who is guilty of GROSS negligence in managing the affairs

of the corporation
Example:
- Profit of 2 million. There is an agreement among the Board of Directors.
A resolution was passed that the monthly profit of 2 million will be
deposited to X Bank. But a local newspaper has recently featured X Bank
as one already in distress (on the verge of bankruptcy). Eventually, X
Bank went bankrupt, extinguishing its existing obligations. How much will
you receive from PDIC? 500k. Where will the 8 million go?
- Here, the directors are guilty of gross negligence because you cannot
expect your Board of Directors to be ignorant - it’s all in the
newspapers. They will be liable to that amount lost.
3. Director/trustee, who is financially or pecuniarily interested in any corporate

transaction, inconsistent with his position as a director
- It means you are only after the money you will get from the corporation.
- ―Inconsistent‖ - if you are a director of a corporation, you are expected
to be loyal to the corporation.
SECTION 32.Dealings of Directors, Trustees or Officers with the Corporation. — A

contract of the corporation with one or more of its directors or trustees or officers
is voidable, at the option of such corporation, unless all the following conditions
are present:
1.That the presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such meeting;
2.That the vote of such director or trustee was not necessary for the approval of the
contract;
3.That the contract is fair and reasonable under the circumstances; and
4.That in the case of an officer, the contract with the officer has been previously
authorized by the Board of Directors.
Where any of the first two conditions set forth in the preceding paragraph is absent,
in the case of a contract with a director or trustee, such contract may be ratified by
the vote of the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock or of 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: Provided, however, That the contract is
fair and reasonable under the circumstances. (n)
The article deals with voidable contracts between the director and the corporation.
Note:
- Numbers 1-4 of Section 32 is called VALIDATION BY REQUIREMENT.
- Last paragraph of Section 32 is called VALIDATION BY RATIFICATION.
Example:
A, B, C, D and E are directors of Corporation H. Whenever the car of the corporation
malfunctions, it is always brought to the repair shop of B. So there is contract
Prepared by: 23
between B and Corporation H. Logically, you will doubt about the transaction because B
is a director of Corporation H.
Q1: What is the status of the contract between H Corporation and B, one of the
directors of Corporation H?
A: Under Section 32, the contract between a corporation and one of its directors is
voidable.
Q2: If the contract is voidable under the law on contracts, who will file the case for
annulment?
A: It depends. In case of incapacity to consent, then the party incapable of giving
consent such as minor. Another, if there is vitiated consent, then the innocent party
shall have the right to annul.
5. So now, in case the voidable contract is between a corporation and one of
its directors, just like in ordinary contracts when there is vitiated
consent, then the innocent party; in case of incapacity to contract then
the party incapable.
6. So in the example, it is the corporation. It is at the option of the
corporation whether to annul the contract. The right to annul belongs to
the corporation. (Sec. 32)
How about if we want to get rid of/erase the defect of the contract? We want to make
the voidable contract valid. What should we do?
Requisites to make the contract valid:
1. That the presence of the director with whom the corporation contracted is not
necessary to constitute quorumfor the meeting for such purpose (to contract)
- During the meeting, A, B, C, and D were present (4 out of 5). Therefore, even
if B was not present, A, C, and D would still have constituted a quorum for
such meeting. The presence of director B, with whom the corporation contracted
is not necessary to constitute quorum at the time they deliberated the
questioned resolution/contract.
2. That the vote of the director with whom the corporation contracted is not necessary
to pass the resolution;
- During the meeting, a resolution was passed to make the contract. It was voted
upon by all directors present, namely A, B, C, and D (4 out of 5). The votes of
A, C, and D already constitute majority of the directors present (3 out of 4).
- In the example, the vote of director B, with whom the corporation contracted is
not necessary to pass the resolution/contract at the time they deliberated the
questioned resolution/contract.
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the
board of directors.
Note: Only the first two requisites were discussed by Atty. M. because they are only
critical ones.The last two requisites are not critical in passing the
resolution/contract.
- So if all the requisites are present, then the contract between Corporation H
and director B is perfectly valid and binding.
Prepared by: 24
What about if the first requisite is present while the second requisite is absent, or
if the first requisite if absent while the second requisite is present, what will
happen to the contract?
Remedy: the contract may still be validated by ratification of stockholders

constituting 2/3 of outstanding capital stock.
***Rosas
What if requirement number 1 was present but requirement 2 was not?

Example:
A, B, C, and D were present but D abstained from voting (only A, B, and C voted to
pass on the resolution; 3 votes out of 4 directors present).
- Therefore, presence of B was not required to constitute quorum BUT the vote of
B was necessary to pass on the resolution. Without vote of B, there would only
be 2 out of 4 votes and the resolution would not be passed.
What if requirement number 1 was absent but requirement 2 was present?

Example:
A, B, and C were present and all of them voted to pass on the resolution.
- Therefore, presence of B was definitely required to constitute the quorum BUT
the vote of B was not necessary to pass on the resolution because even without
the vote of B, the votes of A and C were sufficient (2 votes out of 3 directors
present).
Note: In case one of the first 2 requirements is absent, the contract may be
validated. How?
- It may be validated if the matter is submitted to the stockholders/members and
it is ratified by them.
- Ratification by votes of stockholders representing at least 2/3 of outstanding
shares OR 2/3 of members
- Contract becomes valid not because of the requirements but because it is
ratified by the stockholders/members.
So contract between corporation and one of its directors may be validated in two ways:
1. By fulfillment of requirements; OR
2. By ratification
- If the outstanding shares is3,000, it needs 2,000 shares for ratification.
Outstanding shares – those shares in the hands of the stockholders by virtue of a

valid subscription contract
Are treasury shares included in outstanding shares?

- No. treasury shares are in the hands of the corporation not the stockholders.
Note: Ratification may only be done if one of the first two requirements is absent.
What ifboth of the first two requirements are absent?

- Contract will remain voidable. It cannot be validated by requirement due to
lack of the first two requirements AND it cannot be validated by ratification
because ratification may only be done if one of the first two requirements is
present.
- If both are absent, no ratification allowed.
Prepared by: 25
Why is ratification allowed?

- Because it is the interest of the stockholders which are being protected.
Therefore, they can ratify if one of the first two requirements is absent.
Sec. 33.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 or more corporations having interlocking directors shall not be
invalidated on that ground alone: Provided, That if the interest of the interlocking
director in one corporation is substantial and his interest in the other corporation
or corporations is merely nominal, he shall be subject to the provisions of the
preceding section insofar as the latter corporation or corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding capital stock shall be
considered substantial for purposes of interlocking directors.
Interlocking Directors:
- A person who serves as director in two or more existing corporations at the
same time
- He should serve as director of multiple corporations at the same time.
Situation A Situation B
X Corporation Y Corporation X Corporation Y Corporation
Directors Directors Directors Directors
A (40%) A (15%) A (50%) or (15%) A (50%) or (14%)
B K B K
C L C L
D M D M
E P E P
VOIDABLE VALID
***Sing
Situation A:
There is an existing contract between X and Y Corporation but it involves an

interlocking director because A is a director of both corporations.
- This is a valid contract. Contract between two corporations involving an

interlocking director is VALID.
HOWEVER, (Section 33) if the interest of the interlocking director in one corporation
is substantial and his interest in the other corporation or corporations is merely
nominal, he shall be subject to the provisions of the preceding section insofar as the
latter corporation or corporations are concerned.
When is interest substantial?

- Stockholdings exceeding twenty percent(20%) of the outstanding capital stock
shall be considered substantial for purposes of interlocking directors.
Example:
Prepared by: 26
- The interest of A in X Corporation is 40% while in Y corporation 15%. How do

you call 40%? It’s substantial because ―exceeding 20%.‖
- And will it be nominal? If it is less than 20%. So therefore, the interest of A
in Y corporation is nominal because it is less than 20%, while his interest in
X is substantial, exceeding 20%. So in this case, is this valid?
- No, there is a doubt in this case. It's possible that the director will
purposely sacrifice his nominal interest (15%) He can recover that because he
has substantial interest of 40%. So Corporation Y can likely be the object of
manipulation.
- So therefore, voidable - if his interest in one corporation is nominal while in
the other substantial.
Situation B:
However, if both interests are nominal or substantial, there is no problem.
- The share ofA in X Corporation is 50% then in Corporation Y- 50% (all

substantial)or 15% in X then 14% in Y (all nominal), this isvalid.
So in the event that the combination is nominal and substantial, there is a concurrent
change in the characterization of the contract. It now becomes voidable. What to do in
this case?
- You adopt Section 32.
If you follow Sec. 32, will the corporation undergo that particular requirement?
- Yes, if the 4 conditions in section32 are missing. In that case, the option
shall be exercised by the corporation where the director has nominal interest
because it can most likely be the object of manipulation. So it's like a
protection on their part.
- So the corporation where he has nominal interest, the presence of the director
is not necessary to constitute quorum and the vote of such director or trustee
was not necessary for the approval of the contract
- Otherwise, if one of the first two requirements is absent, the stockholder who
holds nominal interest will have to undergo the RATIFICATION. If at least 2/3
of the outstanding shares will vote or if they conform, contract will be
validated.
If a certain share of stocks is owned by several persons, then you have to identify
your contribution or proportionate interest in the shares. You can extract the
equivalent interest. Check how much you contributed to determine the number of shares.
How to know if nominal or substantial?

- Check the number of shares or the extent of your investment. If exceeding 20% -
substantial. So you have to extract your exact share. Consider your
contribution divided by the total number of shares so you will know your
individual share.
- Determine the number of share commensurate to your payment. Know your par value
share.
Summary:
- If the interests of the interlocking directors are both nominal or both
substantial, there is nothing to be validated because the contract is already
Prepared by: 27
valid. But if the combination is nominal and substantial, there must be

ratification in order to validate the contract.
***Garong
4th meeting (January 18, 2014)
SECTION 35.Executive Committee. — The by-laws of a corporation may create an executive

committee, composed of not less than three members of the board, to be appointed by
the board. Said committee may act, by majority vote of all its members, on such
specific matters within the competence of the board, as may be delegated to it in the
by-laws or on a majority vote of the board, except with respect to: (1) approval of
any action for which shareholders' approval is also required; (2) the filling of
vacancies in the board; (3) the amendment or repeal of by-laws or the adoption of new
by-laws; (4) the amendment or repeal of any resolution of the board which by its
express terms is not so amendable or repealable; and (5) a distribution of cash
dividends to the shareholders.
What is the purpose of executive committee?

- All of the issues that are within the competence of the Board of Directors are
also granted to the Executive Committee. They are equal. However, while the
Executive Committee has the authority to deliberate on matters that are within
the competence of the Board, it is subject to certain limitations like:
1. Allow to declare cash dividends;

2. Amend, repeal or adopt new bylaws;
3. Fill up existing vacancies to the Board;
4. Amend a resolution which by its terms is not amendable or repealable;
5. Adopt a resolution, which by its conditions requires the concurrence of the
stockholders.
These five are the ―don’ts‖ of the Executive Committee. The decision of the executive
committee must be reached by a majority decision. Hence for a committee of 5, you must
obtain 3. The nature of the decision of the Executive Committee is ONLY
RECOMMENDATORY, as nothing will prevent the other members of the BOD to adopt a new
resolution. The decision of the EXECOM will not attain finality since the entire
membership of the BOD may adopt a new decision. The point is, the power of the EXECOM
is not greater than the entire members of the BOD.
SECTION 36.Corporate Powers and Capacity. — Every corporation incorporated under this
Code has the power and capacity:
1.To sue and be sued in its corporate name;
2.Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation;
3.To adopt and use a corporate seal;
4.To amend its articles of incorporation in accordance with the provisions of this
Code;
5.To adopt by-laws, not contrary to law, morals, or public policy, and to amend or
repeal the same in accordance with this Code;
6.In case of stock corporations, to issue or sell stocks to subscribers and to sell
treasury stocks in accordance with the provisions of this Code; and to admit members
to the corporation if it be a non-stock corporation;
Prepared by: 28
7.To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and bonds of
other corporations, as the transaction of the lawful business of the corporation may
reasonably and necessarily require, subject to the limitations prescribed by law and
the Constitution;
8.To adopt any plan of merger or consolidation as provided in this Code;
9.To make reasonable donations, including those for the public welfare or for
hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, that
no corporation, domestic or foreign, shall give donations in aid of any political
party or candidate or for purposes of partisan political activity;
10.To establish pension, retirement, and other plans for the benefit of its directors,
trustees, officers and employees; and
11.To exercise such other powers as may be essential or necessary to carry out its
purpose or purposes as stated in its articles of incorporation. (13a)
POWER- Capacity to do certain act with legal effect.
Classification of Powers:
1. Express – powers exercised sourced from different documents like the
Corporation Code, Constitution, the By-Laws, Special Laws, PD, EOs. Although
not all powers in Sec. 36 are expressed. One of the enumerated is inherent—the
power to adopt a corporate seal. To adopt a corporate seal, to sue and be sued
are inherent rights of a corporation.
2. Implied
3. Inherent – powers exercised by the corporation as a being. Example: to sue and
be sued, to use a corporate name
***Sayson
Articles of Incorporation (AOI) contradistinguished from by laws:
AOI – condition precedent for the existence of the corporation.Is there a corporation
without AOI? Except for Roman Catholic Church.
Bylaws - They are necessary only after the formation of the corporation. You adopt
bylaws when you already have corporation.You adopt within 1 month from the notice
issuance of the Certificate of the Incorporation.
Improved distinction:
- Bylaws can be adopted before the existence of the corporation or after, while
the AOI is always a condition precedent to the existence of the corporation.
The bylaws maybe adopted at the time or before the existence of the corporation. 2nd
paragraph of Sec. 46 provides that it is now permissible for the incorporators to
adopt the bylaws. That is preincorporationfiling of bylaws. But the 1st paragraph of
Sec. 46 that is post incorporation filing of bylaws because when you adopted, there
was already an existing corporation.
Therefore, while AOI is a condition precedent, the bylaws can be adopted at/or before
the existence of the corporation.
There are two sets of persons who can file bylaws:
Prepared by: 29
1. 1st paragraph, majority of the members if non stock corporation, and SH

representing majority of the outstanding shares if stock corporation.
2. If you look at the 3rd paragraph, incorporators are already allowed to adopt
bylaws signed by all of them and filed together with the articles. That bylaw
is forwarded to the SEC before the formation of the corporation.
Who makes the AOI?

- The incorporators.
How about by laws?

- The SH generally. Why generally? Because incorporators are already allowed
under Sec. 46.
So who makes the AOI? Incorporators. That's why we choose incorporators who are
eligible because the next they will do is to adopt AOI.
Don't be confused. Sec. 16 refers to amendment of AOI.Sec. 48 refers to amendments of

bylaws. Don’t lose sight of this.
What is the striking difference?

- The bylaws can be delegated to the Board for purposes of amendment or repeal.
Is your AOI that changes the Board? No. 2/3 isof the members of non-stock
corporation, and stockholders holding at least 2/3 of outstanding stocks for
stock corporations.
Implied powers:
1. The 1st group of implied powers are those incidental to the exercise of express
powers
Example:
In the bylaws and AOI, what are the powers conferred to the president? To borrow money
in behalf of the corporation, provided it does not exceed 5million pesos. How do call
this power? Express powers because it is in the AOI and bylaws. Printed so express.
Let's say you are all stockholders, I am the president, pursuant to the authority
granted to me, I have the power. So no need for me to ask the entire members of the
Board to borrow money because that right is conferred already in the bylaws.
Because I have the power, I borrowed 1million.I went to a financing company. In behalf
of ABC Corporation, I will borrow money. Now the money is ready to be released.So I
went there.The financing company said, "Sir the money is already here, but are you
authorized to receive?" So can I receive when it was not expressly stated? Emergency!
Members of the board, authorize me to receive money. So I went back, but financing
company asked, are you authorized to count the money? Emergency #2 again! Authorize me
to count money.
- To sign the document, to receive and count, they are implied powers. For how
can you exercise the express power to borrow money if you are not able to sign,
count or receive the money? The signing, receiving and counting of the money
are implied powers. Why? Incidental to the exercise of express power.
You have the express power that authorized you to borrow money not exceeding 5 million
contained in the bylaws. How could I exercise such powers if I am not authorized to
sign, receive or count? The others are implied because they are necessary for you to
exercise the powers granted to you in the bylaws.
Prepared by: 30
2. Powers necessary for the accomplishment of the purpose to which it is organized
Example:
The corporation is a producer of cement. There is always power interruptionso they put
up a power plant for their own use for they need up to 5k sacks a day.The SEC
questionedthem why they have power plant.“Is it in your bylaws/articles? Why are you
putting it? It is not needed.”
- This is a case. The SC said, there’s nothing in the AOI or bylaws that permits
them to operate a power plant, nevertheless, they cannot accomplish their
purpose, which is primarily to produce cement without power. Because of the
impairment, the continuing brownout, they cannot meet their existing desired
production of 5K. So even if it is not expressly provided, it is necessary for
the purpose why the corporation is organized. We consider it as implied powers.
***Espina, Angge
This was allowed by the Court. This power is not express power but an IMPLIED one.
Although not expressly written but permitted. They could not produce the cement since
the power provided by the government is insufficient, characterized by frequent
brownouts.
Now let’s go to another example. In Ilo-ilo, particularly Borris and Son’s Fishing
Corporation which conducts fishing operations in the territorial seas of the
Philippines. Their fishing operations are characterized as long-term. Meaning a
fishing expedition would take as long as two weeks or even longer. What was their
infraction? They put up an ice plant. This was questioned by the SEC.
The Corporation contended that they were engaged in long-term fishing. Since it was
long-term there was a need to preserve their catch otherwise the fish would
decay/spoil. They would need plenty of ice. The ice plant installed would produce such
ice. With the help of an ice breaker, big blocks of ice would be made smaller. A hose,
connected from the machine to the hull (flooring of the boat in layman’s terms) of the
fishing boat, would be used to transfer the ice. Any catch they get would be directly
placed on the ice. This is how the fish caught was to be preserved. If they could not
preserve it, the fish may turn out to be unfit for human consumption. Buyers would
always prefer fresh goods. (lab-as in local dialect, ―basta pink gane lab-as pero kung
lagomwalanadubokna!‖). But the SEC ruled that their ice plant operations should cease
and desist as it is not necessary for the accomplishment of the corporation.
Ruling of the SC: Primarily, under the Articles of Incorporation, their purpose is to
engage in fishing within the territorial seas of the Philippines. But since it was
long-term, there was a need to preserve their catch, and if not, the fish might spoil
rendering it unfit for human consumption. Therefore, the ice is necessary for the
accomplishment of their purpose. Therefore, it is justified. It is an implied power.
***Teodorico
Example:
X Airline Corp. puts up a taxi business. They did not get franchise for taxi because
for them, the operation of taxi is incidental or implied to the operation of the
airline company. So they were questioned. X Airline contended that it is for the
convenience of the passengers in going to and fro.
Prepared by: 31
SC: The airline company can operate independently without the taxi being involved. And
if at all you decide to operate a taxi, a separate franchise should be secured. It is
not necessary for the accomplishment of the purpose which means it should be closely
connected to the purpose for which the corporation was organized. Taxi business is
unconnected because airplanes can fly and land without taxi.
***Absin
***************************
If any of you lacks wisdom, you should ask God,

who gives generously to all without finding fault,
and it will be given to you.
James 1:5
Commercial Law Review Committee:
1. Abejero, Marian
2. Abellana-Espina, Angge
3. Absin, Roh Dundee
4. Aguilar, Christianne
5. Baustista, Veronicaliza
6. Delos Santos, Robnette
7. Espina, Carlo Eduardo
8. Furuyama, Ken
9. Garong, Daisy Mae
10. Go, Eden Jerby
11. Ibanez, Eddu
12. Larino, Emily
13. Llanera, Mary Ann
14. Malana, Micha Chernobyl
15. Rosas, Reeld
16. Sayson, James Allan
17. Sing, Anthony
18. Teodorico, Ron
Prepared by: 32

Commercial Law Review: Corporations

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Commercial Law Review: Corporations

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Commercial Law Review

CORPORATION (Moot Court, A.Y. 2013 - 2014)

1st meeting (January 7, 2014)

Corporation Code of the Philippines (B.P. 68)

Sec. 2. Corporation defined. - A corporation is an artificial being created by

1. Artificial being - Separate juridical personality

Sec. 4. Corporations created by special laws or charters. - Corporations created by

Manner of creating corporations:

Sec. 5.Corporators and incorporators, stockholders and members. - Corporators are

Those who compose the corporation:

All incorporators are corporators.

Is the corporate treasurer a corporator?

Stockholders- Corporators in a stock corporation are called stockholders or

Member – a corporator of a non-stock coporation.

SECTION 10.Number and Qualifications of Incorporators. — Any number of natural persons

1. Must be a natural person

4. Majority of the incorporators must be residents of the Philippines

Incorporators National Situation A Situation B

- There is no required minimum authorized capital stock except as otherwise

- At least twenty-five percent (25%) of the authorized capital stock as stated in

EXAMPLE 1: COMPLIED with the required amount of

Did not comply with the required amount of

Corporate Stock Structure Although at least twenty-five (25%)

Corporation can be incorporated even if

Example 3: the authorized capital stock is only 5,000

Certification from Bank

Drafting the articles of incorporation must be of substantial compliance. [Please

SECTION 14.Contents of Articles of Incorporation. — All corporations organized under

1.The name of the corporation;

4.The term for which the corporation is to exist;

5.The names, nationalities and residences of the incorporators;

9.If it be a non-stock corporation, the amount of its capital, the names,

Purpose of corporate name: For identification

What are prohibited when it comes to corporate name?

Maximum term of a Corporation

How soon are you permitted to renew?

Exception: Based on meritorious reason upon SEC’s determination.

When to adopt the bylaws:

Who will adopt the bylaws:

Ex. 1000 outstanding shares, majority is 501 shares.

Non-Stock corporation: Majority of all the members

Ex: 5000 members, majority is 2501 members.

Effectivity of the bylaws:

Post incorporation filing of bylaws

Corporations which require the recognition of the appropriate government agency

Sec. 16.Amendment of Articles of Incorporation. - Unless otherwise prescribed by this

Amendment of Articles of Incorporation of Amendment of Articles of Incorporation of

Note: the 2/3 requirement refers the

Section 17. Grounds when articles of incorporation or amendment may be rejected or

The following are grounds for such rejection or disapproval:

1. That the articles of incorporation or any amendment thereto is not substantially in

No articles of incorporation or amendment to articles of incorporation of banks,

Grounds when articles of incorporation or amendment may be rejected or disapproved:

Sec. 19.Commencement of corporate existence. – A private corporation formed or

Issuance of the certificate of incorporation/certificate of authority by the SEC

Can we now start the business?

Corporation in fact but not in law:

Section 21.Corporation by estoppel. – All persons who assume to act as a corporation

Section 22.Effects on non-use of corporate charter and continuous inoperation of a

- Failure to organize within 2 years from issuance of the certificate of incorporation

2nd meeting (January 11, 2014)

Section 48.Amendments to by-laws. – The board of directors or trustees, by a majority