A single proprietor may do business under a

CORPORATION LAW
business name, but it does not create an
NOTES identity distinct from the person operating the
business.
Aquino Book
A proprietor who does not register his
PART I – CORPORATIONS business name as required under Act No. 3883
is subject to the following prohibitions:
Introduction to Business Organizations
a. He cannot use or sign the business
1. Types of Business Organizations:
name in connection with his business
a. Sole proprietorship
on any written or printed receipts or
b. Partnerships
any evidence of agreement or other
c. Joint accounts
documents; and
d. Business trusts
b. He cannot exhibit the business name or
e. Joint venture 1
sign thereof in plain view.
f. Cooperative
g. Syndicate It should be noted that a DTI Certificate of
h. Corporations Business Name must be submitted to the BIR
before the latter can issue a Certificate of
 The business organization under the Spanish Registration.
regime, but is not exactly the same as a
corporation, is sociedad anonima. 2.2 Merchant

Art.1, Code of Commerce

2. Sole Proprietorship.
It is a form of business organization with only Merchants are:
one proprietary owner; a single individual
conducts business under his own name or a. Those who, having legal capacity to
under a business name. engage in commerce, habitually devote
In effect, it is an unorganized business owned themselves to it.
by a person. Only his or his agent’s acts may b. The commercial or industrial
bind the business. He is the only one to share companies which may be created in
in the profits. The individual proprietor is the accordance with this code.
only one who is personally liable for business
Art. 4. Persons who possess the following
debts.
qualifications shall have legal capacity to
It is totally dependent upon the life of the
habitually engage in commerce:
sole proprietor. It has no legal personality
separate from its proprietor. a. Having completed the age of twenty-
The only available methods of obtaining one years.
funds are personal contributions of the b. Not being subject to the authority of
proprietor and loans from financial institutions the father or of the mother nor to
or private sources. marital authority.
The registration of a trade name on the name c. Having the free disposition of their
of one person does not necessarily lead to the property
conclusion that the trade name is his/hers
alone, particularly when he/she is married. By 2.3 Disqualifications under the
law, all properties acquired during the Constitution
marriage, whether the acquisition appears to
have been made, contracted or registered in The Constitution prohibits a number of
the name of one or both spouses, is presumed government officers from engaging in business
to be conjugal unless the contrary is or profession, from entering into certain
established. contracts or being financially interested in
specified transactions.
2.1 Business Name.
i. Senators and Congressmen are
A “Business Name” refers to any name that is enjoined not to be directly or indirectly,
different from the true name of an individual interested financially in any contract with,
which is used or signed in connection with or in any franchise or special privilege
his/her business on any written or printed granted by the Government during his
receipts –xxxxx- term of office. –xxxx- [Article 6, Sec. 14]
 e. They both act only through their
ii. The President, Vice-President, agents; and
Members of the Cabinet, and their deputies f. They can be organized only where
or assistants are prohibited, during their there is a law authorizing their
tenure, from practicing any profession, organization.
participate in any business, be financially
interested in any contract or franchise 4. Joint Accounts
granted by the Government –xxxx- [Article
A Joint Account is present when there is an
7, Sec. 13]
arrangement whereby merchants may interest
themselves in the transaction of other
iii. Members of the Constitutional
merchants, contributing thereto the amount of
Commissions are not allowed to engage in
capital they may agree upon, and participating
the practice of any profession or active
in the favorable and unfavorable results thereof
management of any business that may be
in the proportion they may determine. This is
affected by the functions of his office. – 2
also commonly called as “accidental
xxxx- [Article 9, Sec. 2]
partnership”.

iv. The President, Vice-President, 5. Business Trust

Members of the Cabinet,
Supreme Court and the Constitutional
Commissions, Ombudsman are prohibited
during their tenure form obtaining any
loan, guaranty, or other form of financial
accommodation for any business purpose
from any government-owned or controlled
bank. [Article 11, Sec. 16]
Congress,
It is a legal relation whereby one person,
called the “trustor”, conveys a property to
another to another for the benefit of a person
called the “beneficiary”. The person in whom
confidence is reposed as regards the property
is called the “trustee”.
6. Joint Venture

v. The Congress shall not, except by Joint Venture is an association of persons

general law, provide for the formation, or companies jointly undertaking some
organization, or regulation of private commercial enterprise; generally all contribute
corporations. GOCCs may be created or assets and share risks.
established by special charters in the
interest of common good and subject to It is the substance rather than the form of
the test of economic viability. [ Art. 12, the agreement that determines if the parties
Sec. 16] entered into a joint venture agreement.

7. Cooperatives

A cooperative is an autonomous and duly

registered association of persons, with a
common bond of interest, who have voluntarily
3. Partnership joined together to achieve their social,
economic, and cultural needs and aspirations
There is a partnership when two or more
by making equitable contributions to the
persons bind themselves to contribute money,
capital required, patronizing their products and
property, or industry to a common fund, with
services and accepting a fair share of the risks
the intention of dividing profits among
and benefits of the undertaking in accordance
themselves.
with universally accepted cooperative
Similarities of partnerships and principles.
corporations:
8. Corporations
a. Both have juridical personality distinct
Its separate personality (under the Doctrine
from their components;
of Separate Personality) and the limited liability
b. Both are groups of persons;
of its components (Limited Liability Rule) make
c. Capitals of both are derived from their
a corporation the most desirable business
components;
organization for many businessmen.
d. There is distribution of profits in stock
corporations and in partnerships;
 The Code is consistent with the mandate
under Art. 12, Sec. 16 of the Constitution for
Five Core Characteristics:
Congress to prescribe all the criteria for the

a. Legal personality; “formation, organization, or regulation” of

b. Limited liability; private corporations in a general law applicable

c. Transferability of shares; to all without discrimination.

d. Delegated management under a board

structure; and  Purpose of Corporate Law

e. Investor ownership. a. Defining the area within which the

parties are free to allocate risk, control
Advantages of Corporations: and profit as they wish; and
b. Prescribing the allocation of these
a. The capacity to act as legal unit;
elements in the absence of express
b. Limitation or exemption from,
agreement.
individual liability of shareholders; 3
c. Continuity of existence; The main group of persons that are affected
d. Transferability of shares; by corporate law includes stockholders,
e. Centralized management of board of directors and officers and creditors.
directors;
f. Professional management;  When the Corporation Code applies

g. Standardized method of organization, suppletorily

and finance; and

General Rule: Corporation Code is the
h. Easy capital generation.
primary law that should be applied in the

Disadvantages of Corporations: regulation of corporations.

a. Prone to Double Taxation; Exceptions:

b. Subject to greater governmental
a. General Banking Law (banks)
regulation and control;
b. Insurance Code (insurance companies)
c. A corporation may be burdened with
an inefficient management if
stockholders cannot organize to
Section 2. – Corporation defined.
oppose management;
d. Limited liability of stockholders may at  Attributes of a Corporation:
times translate into limited liability to a. It is an artificial being;
raise creditor capital; b. It is created by operation of law;
e. It is harder to organize compared to c. It has the right of succession; and
other business organizations; d. It has the powers, attributes expressly
f. It is harder or more complicated to authorized by law or incident to its
maintain and existence.
g. The “owners” or stockholders do not
participate in the day-to-day  Concession Theory
management.
A corporation owes its life to the State and its
birth is purely dependent on the State’s will.

THE CORPORATION CODE OF THE Fletcher: A corporation is not in fact and in

PHILIPPINES
Batas Pambansa Blg. 68
TITLE I – GENERAL PROVISIONS
reality a person, but the law treats it as thought
it were a person by process of fiction, or by
regarding it as an artificial person distinct and
separate from its individual stockholders.

Definitions and Classifications Opposite theory: Genossenchaft Theory

This is the reality of the group as a social and

legal entity, independent of state recognition
Section 1. – Title of the Code and concession.

 Franchises
 Corporation Code
A corporation is granted by the State the
right to exist by virtue of a primary franchise.
 A franchise is a special privilege conferred by
governmental authority, and which does not
belong to the citizens of the country generally
as a matter of common right.
For practical purposes, franchises, so far as
relating to corporations, are divisible into:
a. Corporate or general franchises.
- This is the franchise to exist as a
corporation.
- This is the right to exist as a
corporation vested in the individuals
who compose the corporation and not
in the corporation itself, and cannot be
conveyed in the absence of legislative
authority to do so.
b. Special or secondary franchises.
- These are certain rights and privileges
conferred upon existing corporations.
- It can be ordinarily conveyed or
mortgaged under a general power
granted to a corporation to dispose of
its property.
A corporation therefore, is created by
operation of law when it is granted a franchise
either through a special law or it is organized
under a general law.
The general law under which a corporation
can be organized in the Philippines is the
Corporation Code. Examples of secondary
franchises are those issued by the SEC to
companies that issue securities.
 Creation by Special Law
The Constitution provides that only GOCC
may be created by special law.
 Contract Theory
Under this theory, incorporation is deemed to
involve contracts among the members,
between the members and the corporation,
and between the members or the corporation
and the State.
Incorporation is a contract between those
who compose the corporation and their
contract is governed and evidenced by the
Articles of Incorporation.
The State cannot likewise take the life of the
corporation without due process.
 Right of Succession
One of the distinctive features of a
corporation is the right of succession that is
also known as “perpetual succession”.
Perpetual Succession is that continuous
existence which enables a corporation to
manage its affairs, and hold property without
the necessity of perpetual conveyances, for
purposes of transmitting it.
However, this does not imply corporate
immortality but rather a continuity of existence
irrespective of that of its components.
 Doctrine of Separate Personality
A corporation has a personality separate and
distinct from its members.
It has a personality separate and distinct from
the persons composing it as well as from that
of any other entity to which it may be related.
 Separate Properties
4
Because of the separate personality of the
corporation, the properties of the corporation
are not the properties of its shareholders,
members or officers.
Properties registered in the name of the
corporation are owned by it as an entity
separate and distinct from those who compose
it.
A stockholder cannot sell, transfer, mortgage
or encumber the properties of the corporation
without proper authority. Similarly, a
stockholder cannot use any such property to
pay for his personal debts.
An action filed by a corporation to recover
the properties of its shareholders or members
should be dismissed for failure to state a cause
of action because the corporation is not the
real party in interest.
 Nature of Stockholders’ Interest in
Corporation
The interest of the shareholder in the
properties of the corporation is indirect,
contingent and inchoate.
The interest of the shareholder on a
particular property becomes actual, direct and
existing only upon liquidation of the assets of
the corporation and the same property is
assigned to the shareholder concerned.
The interest of each stockholder consists in
the right to a proportionate part of the profits
whenever dividends are declared by the
corporation.
The stockholders of a corporation are not co-
owners of the corporation’s assets.
 Separate Obligations
The obligations of the corporation are not
the obligations of its shareholders and
members and officers and vice-versa.
The rule is that the directors and officers are
not personally liable for the obligations of the
corporation.
 Limited Liability Rule
Under this Rule, a stockholder is personally
liable for the financial obligations of the
corporation to the extent of his unpaid
subscription.
Remedy
The stockholders who are sought to be made
liable for their unpaid subscription should be
impleaded. If the stockholders are not
impleaded as defendants, a separate action
should be filed against them to enforce any
judgment obligation.
 Separate Acts
The acts of the stockholders do not bind the
corporation unless they are properly
authorized. Similarly, the acts of officers and
directors in their personal capacity cannot be
imputed to the corporation.
 Doctrine of Piercing the Veil of Corporate
Fiction
A corporation has a separate personality
distinct from its stockholders and from other
corporations to which it may be connected.
It is a fiction created by law with the intent
that it should be treated as true. However,
under the Doctrine of Piercing the Veil of
Corporate Fiction, the corporation’s separate
juridical personality may be disregarded when
there is an abuse of the corporate form.
Instances when corporate personality may be
disregarded:
 When the corporate identity is used to
defeat public convenience, justify wrong,
protect fraud or defend crime.
 Where the corporation is a mere alter
ego or business conduit of a person.
 Where the corporation is so organized
and controlled and its affairs are so
conducted as to make it merely an
instrumentality, agency, conduit or
adjunct of another corporation.
Mere ownership by a single stockholder or by
another corporation of all or nearly all of the
capital stock of a corporation is not in itself
sufficient ground for disregarding the separate
corporate personality.
The mere fact that the businesses of the two
entities are interrelated is not a justification for
disregarding the separate personalities, absent
sufficient showing that the corporate entity was
purposely used as a shield to defraud creditors
and third persons of their rights.
Classifications
Instances when the Doctrine is applicable,
according to the SC:
a. Cases where public convenience may
be defeated, as when corporate fiction
is used for vehicle for the evasion of an
existing obligation;
b. FRAUD cases or when the corporate
entity is used to justify a wrong, protect
fraud, or defend a crime; and
c. Alter Ego cases, where a corporation is
merely a farce since it is a mere alter
ego or business conduit of a person, or
where the corporation is so organized
and controlled and its affairs are so
conducted as to make it merely an
instrumentality, agency, conduit or
adjunct of another corporation.
However, legal writers cite three variants within 5
the doctrine of piercing the veil of corporation,
namely:
a. Instrumentality Doctrine;
b. Alter Ego Doctrine; and
c. Identity Doctrine.
*at any rate, any classification cannot fully
differentiate one group of cases from other
groups of cases. Indeed, there is no rigidity or
exactitude in the application of the doctrine of
piercing the veil of corporate fiction.
Fraud
There is fraud if there is deception that would
lead an ordinarily prudent person into error
after taking the circumstances into account.
 Enriquez Security Services, Inc. vs.
Cabotaje
The veil of corporate fiction was
disregarded because the same was
used to perpetrate injustice or as a
vehicle to evade obligations. There was
fraud in this case when the guard was
transferred to a new corporation after
the dissolution of the old corporation,
and his length of service with the old
corporation was not recognized.
 Mendoza vs. Banco Real Development
Bank
The separate corporate personalities of
a mortgagor corporation and a new
corporation were disregarded because
it was established that the same
mortgagor ceased operations and is no
longer holding office in its principal
office. It was established that the
incorporators and controlling
stockholders of the mortgagor
corporation and the new corporation
are the same.
 Liddle and Co. vs. CIR
 The doctrine may be applied if the
government may be deprived of taxes.
Alter Ego
Piercing the Veil is justified under this
doctrine if there is such unity of interest and
ownership that the separate personalities of the
corporation and individual no longer exist.
 Alter Ego Doctrine was applied to make
the controlling shareholder who is also
operations manager, and the
corporation itself, liable for the
obligations of a sole proprietorship.
It is not necessary in Alter Ego cases that the
corporation was organized or operated to
commit fraud or wrong.
In the cases covered by the Alter Ego
Doctrine, the focus is on reality and not form; if
the same will not be applied, it will result into
inequity. The focus is on how the corporation
was operated and the relationship between
those who compose the corporation with such
operation.
Totality of Circumstances Test
The following circumstances indicate the
applicability of the doctrine although it is not
required that all of the circumstances must
concur:
a. Commingling of funds and other assets
of the corporation with those of
individual shareholders;
b. Diversion of the corporation’s funds to
non-corporate purpose;
c. Failure to maintain corporate minutes
or adequate corporate records;
d. Identical equitable ownership in two
entities;
e. Failure to adequately capitalize a
corporation for the reasonable risks of
corporate undertaking;
f. Absence of separately held corporate
assets;
g. Sole ownership of all the stock by one
individual or members of a single
family;
h. Use of the same office or business
location by the corporation and its
individual shareholders;
i. Employment of the same employees or
attorney by the corporation and its
shareholders;
j. Disregard of legal formalities and
failure to maintain proper arm’s length
relationship among activities.
Probative Factors
Proof of facts and circumstances must be
presented to establish the elements of Fraud
cases and Alter Ego cases.
Probative factors of identity which will justify
the application of the doctrine:
a. Stock ownership by one or common
ownership of both corporations;
b. Identity of directors and officers;
c. The manner of keeping corporate
books and records; and
d. Methods of conducting the business.
Subsidiary – means a corporation more than
50% of the voting stock of which is owned or 6
controlled directly or indirectly through one or
more intermediaries by another corporation,
which thereby become a parent company.
The SC outlined the circumstances to
determine whether the subsidiary is a mere
instrumentality or alter ego of the parent
corporation:
a. The parent corporation owns all or
most of the capital stock of the
subsidiary;
b. The parent and subsidiary corporations
have common directors or officers;
c. The parent corporation finances the
subsidiary;
d. The parent corporation subscribes to
all the capital stock of the subsidiary or
otherwise causes its incorporation;
e. The subsidiary has grossly inadequate
capital.
Judicial Function
Only the courts or administrative tribunals
like the NLRC can pierce the veil of corporate
fiction.
Jurisdiction over the Alter Ego
The Court requires that the corporation or
person that is sought to be made liable must
be impleaded stating that the implication is
two-fold:
a. The court must first acquire jurisdiction
over the corporation or corporations
involved before its or their separate
personalities are disregarded; and
b. The doctrine of piercing the veil of
corporate entity can only be raised
during a full-blown trial over a cause of
action duly commenced involving
parties duly brought under the
authority of the court by way of service
of summons or what passes as such
service.
Personality Not Abrogated
When the veil of corporate fiction is pierced
in proper cases, the corporate character is not
necessarily abrogated. It continues
legitimate objectives.
The Court’s power is confined to the
transactions involved in the case for the
purpose of adjudging the rights and liabilities
of the parties in the case. They have no
jurisdiction to do more. [Koppel, Inc. vs. Yatco]
Doctrine of Piercing the Veil of Corporate
Fiction and Limited Liability Rule
Halley vs. Printwell, Inc.
The SC observed that “stockholders of a
corporation are liable for the debts of the
corporation up to the extent of their unpaid
subscriptions. They cannot invoke the veil of
corporate identity as shield from liability,
because the veil may be lifted to avoid
defrauding corporate creditors.
The creditor is allowed to maintain an action
upon any unpaid subscriptions and thereby
steps into the shoes of the corporation for the
satisfaction of its debt. To make out a prima
facie case in a suit against stockholders of an
insolvent corporation to compel them to
contribute to the payment of its debts by
making good unpaid balances upon their
subscriptions, it is only necessary to establish
that the stockholders have not in good faith
paid the par value of the stocks of the
corporation.
Artificial Being
Although it is treated as a separate person,
the fact is that a corporation does not have
physical existence, only artificial.
Primary Rules of Attribution
An artificial being cannot by itself act and
acquire knowledge. Due to the artificial nature
of the existence of corporations, corporations
can perform physical acts or commit omissions
only through natural persons.
Attribution of Knowledge
 Francisco vs GSIS
Knowledge of facts acquired or
possessed by an officer or agent of the
corporation in the course of his
employment, and in relation to matters
within the scope of his authority, is
notice to the corporation, whether he
communicates such knowledge or not
since a corporation cannot see, or
know, anything except through its
officers.
It is important to note, however, that even if
knowledge or even an act is properly attributed
to the corporation, it does not follow that all
the stockholders are deemed to have
knowledge of the same fact or act. The SC
for ruled that “absent any proof that the individual
respondents were notified of the stockholders’
meeting or that they were present during the
meeting, the respondents could not have been
informed of the transaction.
Nationality and Citizenship
The General Rule is that a corporation cannot
be considered a citizen as the term “citizen” is
understood in political law.
The instances when it is important to
determine the nationality of a corporation for
certain purposes. It has been observed that two
principal tests have been applied for
determining if a corporation is foreign or
domestic, namely: 7
a. The Aggregate Test (The Control Test)
– requires looking into the nationality,
domicile, or residence of the
individuals who control the
corporation.
Full beneficial ownership of the stocks,
coupled with voting rights is essential.
b. The Entity Test (Place of Incorporation
Test) – looks to the nation where the
corporation was incorporated.
This is explained in Section 123 of this
Code.
In public utilities, the Constitution limits
foreign equity to 40%, “the legal and beneficial
ownership of 60% of the outstanding capital
stock must rest in the hands of Filipinos”.
Ownership of at least 60% of the shares with
voting rights must pertain to Filipinos. If the
requirement will not be imposed, the
corporation will not be “effectively controlled”
by Filipinos in accordance with Article 12,
Section 11 of the Constitution.
Control Test and Grandfather Rule
Illustration:
If a Philippine corporation has
corporate stockholders, how does
one determine whether such
Philippine corporation is a
Philippine national? Two tests
have been employed in the
Philippines: (a) the grandfather
rule; and (b) the control test.
To illustrate how these tests are
applied, let’s take a Philippine
corporation (called “Corporation
X”) with the following ownership
structure:
(a) non-Philippine citizens
own 40% of the capital stock
outstanding and entitled to vote
of Corporation X;
(b) another Philippine
corporation (called “Corporation
Y”) owns 60% of the capital stock
outstanding and entitled to vote
of Corporation X.
On other hand, Corporation Y has
the following ownership structure:
(a) non-Philippine citizens
own 40% of the capital stock
outstanding and entitled to vote
of Corporation Y;
(b) Philippine citizens own
60% of the capital stock
outstanding and entitled to vote
of Corporation Y.
Let’s also assume that Philippine
citizens constitute at least 60% of
the members of the board of
directors of each of Corporation X
and Corporation Y.
If the grandfather rule is applied,
Corporation X will not be deemed
a Philippine national because the
grandfather rule takes into
account the direct and indirect
foreign equity of foreigners in
Corporation X (see SEC Opinion
re: Silahis International Hotel, May
4, 1987). Applying
grandfather rule, the direct and
indirect foreign equity
Corporation X would be 64%,
calculated at follows:
Direct foreign-owned equity in
Corporation X – 40%
Indirect foreign owned equity in
Corporation X – 24%
Under the above scenario, the
foreigners are deemed to have a
24% indirect foreign equity in
Corporation X because foreigners
own 40% of Corporation Y, which
in turn owns 60% of Corporation
X (i.e., 40% multiplied by 60%
equals 24%). Thus, under the
grandfather rule, Corporation X is
not qualified to own land.
On the other hand, if the control
test is applied, Corporation X is
deemed to be a Philippine
national qualified to own land.
Under the control test,
Corporation X is considered a
Philippine national since at least
60% of its capital stock
outstanding and entitled to vote
is held by Corporation Y, which is
also considered a Philippine
national since at least 60% of its
capital stock outstanding and
entitled to vote is held by
Philippine citizens.
One exceptional situation where the SC rule
that a corporation has no nationality is the case
of Corporation Sole; the case involved the
Roman Catholic Church but the ruling can also
be applied to other corporations sole.
8
Roman Catholic Apostolic
Administration of Davao, Inc. vs.
Land Registration Commission
The SC categorically declared “the
Roman Catholic Apostolic Church
in the Philippines has no
nationality and that the framers of
the Constitution did not have in
mind the religious corporations
sole when they provided the 60%
requirement.”
Residence
A corporation has no residence in the same
sense in which the term is applied to a natural
person. This is precisely the reason why it was
ruled that for practical purposes, a corporation
is in a metaphysical sense a resident of the
place where its principal office is located as
the
stated in the Articles of Incorporation. (Read
Section 14[3] of this Code)
in
Tort Liability
The liability of corporations may either be
vicarious or direct personal obligation and may
arise out of different sources of obligation.
Thus, the liability of a corporation may be
based on contract.
Under the primary rule on attribution, the
corporation is liable based on contract if the
BOD sanctioned the bread. On the other hand,
the direct corporate responsibility may be
imposed under Article 2176 of NCC.
Vicarious liability may be based on quasi-
delict under Article 2180 of NCC, delict under
Articles 102 and 104 of RPC.
The Corporate Negligence Doctrine
imposes several duties on a hospital:
a. To use reasonable care in the
maintenance of safe and adequate
facilities and equipment;
 b. To select and retain only competent
physicians;
c. To oversee as to patient care all
persons who practice medicine within
its walls; and
d. To formulate, adopt, and enforce
adequate rules and policies to ensure
quality care for its patients.
The Doctrine of Corporate Responsibility is
not limited to hospitals. Thus, direct and
primary liability may also be imposed on
schools as separate entities not only based on
contract but also under Article 2176 of NCC.
Right to Moral Damages
The award of moral damages cannot be
granted in favor of a corporation because,
being an artificial person and having existence
only in legal contemplation, it has no feelings,
no emotions and no senses.
It cannot therefore, experience physical
suffering and mental anguish, which can be
experienced only by one having a nervous
system. [ABS-CBN vs. CA]
The only exception in this rule is when the
corporation has a reputation that is debased,
resulting in its humiliation in the business
realm. [University of the Philippines vs. Dizon]
Report of Code Commission: It is believed that
the better rule is to disallow award of moral
damages to juridical entities like corporations
even for besmirched reputation and defamation.
The award of moral damages is predicated on
the presence of injury that is incapable of
pecuniary estimation like physical suffering,
mental anguish, and other similar injury.
Constitutional Rights
As an artificial being and as a mere creature
of the law, a corporation cannot exercise
Constitutional rights that are inconsistent with
its nature as a mere artificial being or rights
that are not available because the corporation’s
life is just a concession of the State. Thus, a
corporation cannot claim that it is entitled to
protection of the due process clause for the
protection of “liberty”.
A corporation is entitled to the right against
unreasonable searches and seizure.
It is elementary that the right against self-
incrimination has no application to juridical
persons. While an individual may lawfully refuse
to answer incriminating questions, unless
protected by an immunity statute, it does not
follow that a corporation vested with special
privileges and franchises, may refuse to show
its hand when charged with an abuse of such
privilege.
Criminal Liability
No criminal action can lie against a
corporation under the present rules.
Nevertheless, the officers of the corporation
may be held liable.
It is settled that an officer of a corporation
can be held criminally liable for acts or
omissions done in behalf of the corporation
only where the law directly requires the
corporation to do an act in a given manner and
the same law makes the person who fails to
perform the act in a prescribed manner
expressly liable criminally.
Before a stockholder may be held criminally
liable for acts committed by the corporation, it
must be shown that he had knowledge of the
9
criminal act committed in the name of the
corporation and that he took part in the same
or gave his consent to its commission, whether
by action or inaction.
Contempt Cases
Corporations may be punished for contempt.
A corporation and those who are officially
responsible for the conduct of its affairs may be
punished for contempt in disobeying
judgments, decrees, or orders of a court made
in a case within its jurisdiction.
Theory of Special or Limited Capacities
The powers of the corporation are given by
law and it cannot exercise powers that are not
so given.
In fine, the powers of the corporation are
only those that are expressly provided for,
implied powers, and incidental powers.
Section 3. – Classes of corporations.
Section 4. – Corporations created by special
laws or charters.
 Corporation Code Classification
Under Section 3: Stock or Non-Stock
Under Section 4: Created by Special Law or
Created under the Corporation Code
 Classifications in Other Statutes and
Jurisprudence
A. As to the number of components:
i. Aggregate Corporation – a corporation
consisting of more than one member.
ii. Corporation Sole – a corporation
consisting of only one person or
member. (Read Sec. 110 of this Code)
B. As to functions:
i. Public Corporation – a corporation
organized for the government of a
 portion of a State for the purpose of
serving general good and welfare.
ii. Private Corporation – a corporation
formed for some private purpose,
benefit, aim or end. They may be stock or
non-stock corp.
C. As to the manner of creation:
i. By special law – a corporation directly
created by Congress through a special
law; must be a GOCC.
ii. By under a General law/Corporation
Code
iii. Corporations by Prescription – was not
formally organized as such but has been
duly recognized by immemorial usage as
a corp, with rights and duties enforceable
under the law.
D. As to Legal Status:
i. De Jure Corporation – a corporation
organized in accordance with
requirements of law.
ii. De Facto Corporation – a corporation
that is formed where there exists a flaw in
its incorporation but there is colorable
compliance with the requirements of law.
iii. Corporation by Estoppel – a group of
persons which holds itself out as a
corporation and enters into a contract
with a third person on the strength of
such appearance cannot be permitted to
deny its existence in an action under said
contract.
E. As to existence of stocks:
i. Stock Corporation – a corporation with
capital stock is divided into shares and is
authorized to distribute to holders
thereof of such shares or dividends or
allotments of the surplus profits on the
basis of the shares held.
ii. Non-stock Corporation – a corporation
that does not issue stocks and does not
distribute dividends to their members.
F. As laws of incorporation:
i. Domestic Corporation – formed,
organized or existing under Philippine
Laws.
ii. Foreign Corporation – F,O,E under any
laws other than those of the Philippines
and whose laws allow Filipino citizens
and corporations to do business in its
own country or state.
G. Special Types of Corporation under this
Code:
i. Close Corporation – Sec. 96
ii. Special Corporation –educational and
religious corporation
H. As to relationship:
i. Subsidiary – a corporation more than
50% of the voting stock of which is
owned or controlled directly or indirectly
through one or more intermediaries by
another corporation, which thereby
becomes a parent company.
ii. Affiliate – a corporation that directly or
indirectly, through one or more
intermediaries, is controlled by, or is
under the control of another corporation,
which thereby becomes its parent
company.
iii. Parent Corporation – a corporation that
has control over another corporation
directly or indirectly through one or more
intermediaries. 10
 Going public and Going private
A corporation is deemed to be “going public”
when it decides to list its shares in the stock
exchange. These include corporations that will
make initial public offering of its shares.
A corporation is said to be “going private”
when it would restrict the shareholders to a
certain group. In a sense, these also include
closed or closely held corporation.
 Corporation by Prescription
The Roman Catholic Church is a corporation
by prescription.
 Stock and Non-Stock Corporations
Requisites of Stock Corporation:
a. capital stock is divided into shares; and
b. authorized to distribute to holders
thereof of such shares or dividends or
allotments of the surplus profits on the
basis of the shares held.
The issuance of “share certificates” is not, by
itself, proof that the corporation is a stock
corporation. The so-called “share certificates”
may be nothing more than proof of
membership in a non-stock corporation.
In the case of non-stock corporations, there
must be members and the corporations must
not distribute any part of their income to the
members.
 Public and Private Corporations
GSIS and DBP are private corporations in
corporate law. Similarly, NAPOCOR and those
operating public utilities are more in the
character of a private corp.
 Quasi-Public Corporations
These are corporations like railroad and canal
corporations that are engaged in private
business affected with public interest.
 GOCCs
Partly governed by RA 10149 (GOCC
Governance Act of 2011).
GOCCs may either be:
a. With original charter or created by
special law; or
b. Incorporated under the Corporation
Code (also called, Non-Chartered
GOCCs).
The SEC has no jurisdiction over GOCCs
created by special law because they are
primarily governed by their charters. However,
the Corporation Code may apply suppletorily
either by operation of law or through express
provisions in the charter.
The SC ruled that “not all corporations, which
are not Government-owned or controlled, are
ipso facto to be considered private
corporations as there exists another distinct
class of corporations or chartered institutions
which are otherwise known as “public
corporations”.
Creation through special law
Section 16, Article 12 of the Constitution
explicitly prohibits the creation or
establishment of private corporations through
special laws, except GOCCs.
The requirements for the exception, that
private corporation can be created through
special law:
a. Must be government-owned or
controlled;
b. The creation must be for a common
good; and
c. The creation meets the test of
economic viability.
The test of economic viability applies only to
GOCCs that perform economic or commercial
activities, and need to compete on the market
place.
The above requirements do not apply to
purely public corporations.
The employees of GOCCs created by special
law or charter are subject to civil service laws.
The Labor Code covers the employees of
GOCCs that are created under the Corporation
Code.
GOCC distinguished from Government
Instrumentalities
The SC held that GOCCs should therefore be
distinguished from “government
instrumentalities’ which may also be vested
with corporate powers to perform efficiently
their governmental functions.
When the law vests the government
instrumentality with corporate powers, the
instrumentality does not become a corporation
(i.e. Manila International Airport Authority,
University of the Philippines, Bangko Sentral ng
Pilipinas).
Instrumentalities fall under the more general
term “Government Agency”.
Government Instrumentalities with Corporate
Powers (GICP) are considered GOCC under RA
10149.
11
Philippine National Red Cross as Sui Generis
 Dante Liban vs Richard Gordon
The PNRC was created through special law
and there is no dispute that it is a corporation.
However, it was declared that it is not a
subdivision, agency or instrumentality of
government nor a GOCC or a subsidiary
thereof. However, it does not follow that it is a
private corporation.
The SC ruled that the structure of the PNRC is
sui generis, being neither strictly private nor
public in nature; it is supposed to be a private
institution and at the same time a public
organization in accordance with its
commitments under the international law.
Thus, the SC ruled that the PNRC is a GOCC
for the purpose of enforcement of labor laws
and penal statutes.
Section 5. – Corporators and incorporators,
stockholders and members.
 Components
a. Shareholders or members
b. Directors or trustees; and
c. Officers.
Corporators in a stock corp are called
stockholders/shareholders; in a non-stock corp,
they are called members.
 Incorporators
There is only one set of Incorporators. The
incorporators appearing as such in the Articles
of Incorporation will remain to be incorporators
up to the termination of the life of the
corporation.
 Shareholders
The shareholders are the holders of shares in
a corporation with interest over the
management (control), income (dividends) and
assets (share upon liquidation) of the
corporation.
 The shareholders participate in controlling
the affairs of the corporation by exercising their
right to vote. It was observed that the right to
participate in the control and management is
exercised through the election of members of
the BOD because “it is the BOD that controls or
manages the corporation”. (Heirs of Gamboa
vs. Teves)
Section 6. – Classification of Shares.
 Concept of Shares
A share of corporate stock has been
defined as the unit into which the proprietary
interests in a corporation are divided.
The shares comprise what is known as the
capital stock.
“Capital Stock” consists of all classes of
shares issued to stockholders, that is, common
shares as well as preferred shared, which may
have different rights, privileges or restrictions
as stated in the articles of incorporation.
The classes and number of shares, which a
corporation shall issue, are first determined by
the incorporators in the Articles
Incorporation filed with the SEC.
 Kinds of Shares
Shares may be classified into:
a. Common or preferred shares
b. Voting or non-voting shares
c. Par value or no par value shares
d. Treasury shares
e. Redeemable shares
f. Founder’s shares
Preferred shares may be:
a. Cumulative or non-cumulative
b. Participating or non-participating
c. Preferred as to dividends
preferred as to assets
distribution.
Preferred shares may also be convertible
shares. It was explained in one case that
common shares and preferred shares are part
of the corporation’s capital stock and that both
stockholders are no different from ordinary
investors who take on the same investment
risks.
 Common Shares
Common shares or stocks represent the
residual ownership interest in the corporation.
It is a basic class of stock ordinarily and usually
issued without extraordinary rights or privileges
and entitles the shareholder to a pro rata
division of profits.
 Preferred Shares
Preferred stocks are those that entitle the
shareholder to some priority on dividends and
asset distribution. Preferred shareholders are
not creditors of the corporation by virtue of the
preferred shares.
Preferred shareholders are often excluded
from any control that is, deprived of the right 12
to vote in the election of directors and on
matters, on the theory that the preferred
shareholders are merely investors in the
corporation for income in the same manner as
shareholders. (Heirs of Gamboa vs. Teves)
Considering that preferred shares are
usually non-voting, inequity may result if the
board will not declare dividends for a long
period of time.
The present Corporation Code provides
of
that the BOD of a stock corporation may
declare dividends only out of unrestricted
retained earnings.
Dividends are, thus payable only when
there are profits earned by the corporation and
as a general rule, even if there are existing
profits, the BOD has the discretion to
determine whether or not dividends are to be
declared.
Shareholders, both common and preferred,
are considered risk takers who invest capital in
the business and who can look only to what is
left after corporate debts and liabilities are fully
paid.
and/or
upon
Kinds of Preferred Shares
Most common forms of Preferred Shares:
a. Preferred shares as to assets.
A share which gives the holder thereof
preference in the distribution of the
assets of the corporation in case of
liquidation.
b. Preferred shares as to dividends.
A share the holder of which is entitled
to receive dividends on said share to
the extent agreed upon before any
 dividends at all are paid to the holders
of the common stock.
Other forms of Preferred Shares:
a. Cumulative – if a dividend is omitted in
any year, it must be made up in a later
year before any dividend may be paid
on the common in the later year.
b. Non-Cumulative – there is no need to
make up for undeclared dividends. No
right survives as to the undeclared
dividends and the directors do not
even have discretion to declare those
past dividends subsequently.
c. Participating – entitled to participate
with the common shares in excess
distribution.
Share
d. Non-Participating
Convertible Shares
Preferred shares may be stipulated as
convertible into common shares. This feature
must be stipulated in the Articles of
Incorporation.
Conversion is also subject to the appraisal
right of dissenting stockholders because
conversion varies the rights of the stockholders.
 Doctrine of Equality of Shares
Under this Doctrine, all stocks issued by the
corporation are presumed to be equal with the
same privileges and liabilities, provided that the
Articles of Incorporation is silent on such
differences.
Section 6 of Corpo Code requires that the
distinguishing features of the shares must be
stated in the Certificate of Stock.
 Reclassification
Shares that are originally common shares
may be reclassified into preferred shares.
Reclassification of shares is a legitimate
exercise of corporate power under the
Corporation Code. (COCOFED vs. Republic)
 CIR vs CA
Reclassification of shares does not always
bring any substantial alteration in the
subscriber’s proportional interest. But
exchange of shares is different since there
would be shifting of the balance of stock
features like priority in dividend declarations
or absence of voting rights.
 Par Value and No Par Value Shares
Par Value Shares are those with fixed value
stated in the Articles of Incorporation and the
share certificate. Par Value is an arbitrary
amount assigned to the share and is expressed
in the certificate covering the share.
No Par Value Shares refer to shares without
such arbitrary amount.
The issued value or stated value of the shares
may be higher than the par value. The BOD is
authorized to fix the amount for which the
shares shall be subscribed. This is subject to the
condition that the value fixed cannot be below
par. With respect to no par value shares, the
stated or issued value cannot be less than 5
pesos.
13
Other values that are commonly associated
with shares of stocks:
a. Market Value – the price at which
shares of capital stock is bought and
sold by investors in the market.
b. Book Value – the amount per share
that each shareholder would receive if
the corporation were liquidated
without incurring any further expenses
and if assets were sold and liabilities
liquidated at their recorded amounts.
c. Liquidation Value- the amount a
stockholder would receive upon the
dissolution and liquidation of the
corporation.
d. Redemption Value – the price per share
at which the corporation may redeem
its share.
e. Issued (Stated) Value – the selling price
of the shares fixed by the Board or in
the Articles of Incorporation.
Conditions for the Issuance of No Par Value
Shares
a. Shares of capital stock issued without
par value shall be deemed fully paid
and non-assessable and the holder of
such shares shall not be liable to the
corporation or to its creditors in
respect thereto;
b. The shares without par value may not
be issued for a consideration less than
5 pesos per share; and
c. The entire consideration received by
the corporation for its no-par value
share shall be treated as capital and
not available for distribution as
dividends.
Shares that cannot be No-Par Value Shares
a. Preferred Shares
b. Shares in Banks
c. Shares in Trust Companies
d. Shares in Insurance Companies
e. Shares in Public Utilities; and
f. Shares in Building and Loan
Associations.

 Voting and Non-Voting Shares
Under the present law, all shareholders
regardless of the classification, other than
holders of preferred or redeemable shares, are
entitled to vote.
Memorize exceptions under Section 6 vis-à-
vis voting rights of holders of preferred shares.
The issuance of non-voting shares is subject
to the following conditions under Section 6:
a. Only preferred or redeemable shares
may be made non-voting shares;
b. There must remain other shares with
full voting rights; and
c. The non-voting shares may still vote in
the matters enumerated under Section
6.
Section 7. – Founders’ Shares.
 Rationale
Founders’ shares are shares that are given
to those who helped organize the corporation.
This may be a form of reward to the “founders”.
The 5-year limit must be observed. After the
expiration of the limitation period, founders’
shares shall have equal rights with the holders
of common shares.
Section 8. – Redeemable Shares.
 Definition
These are shares of stocks issued by a
corporation which said corporation can
purchase or take up from their holders as
expressly provided for in the articles of
incorporation and certificates of stock
representing said shares.
Redeemable shares are usually preferred
shares.
 Unrestricted Retained Earnings not
required
Redemption of redeemable shares can be
made without the need of unrestricted retained
earnings. In effect, payment may come from
the capital.
Unrestricted retained earnings means the
amount of accumulated profits and gains
realized out of the normal and continuous
operations of the company after deducting
therefrom distributions of stockholders and
transfers to capital stock or other accounts and
which is:
a. Not appropriated by its BOD for
corporate expansion programs;
b. Not covered by a restriction for
dividend declaration under a loan
agreement; and
c. Not required to be retained under
special circumstances obtaining in the
corporation such as when there is a
need for a special reserve for probable
contingencies.
 Mandatory Redemption
The records of the Batasang Pambansa show
the intent to allow mandatory or compulsory
redemption.
Mandatory redemption is not against public
policy. Anybody who acquires mandatory
14
redeemable shares is forewarned that the
redeemable shares may be purchased out of
capital.
The rules require that all corporations which
have issued redeemable shares with mandatory
redeemable features to set up and maintain a
“Sinking Fund”.
This fund is a fund set up by the corporation
where cash is gradually set aside in order to
accumulate the amount necessary to meet the
redemption price of redeemable shares at
specified dates in the future.
 Effect of Redemption
Redemption is repurchase or reacquisition of
stock by a corporation which issued the stock
in exchange for property, whether or not the
acquired share is cancelled, retired or held in
the treasury.
Essentially, the corporation gets back some
of its stock, distributes cash or property to the
shareholder in payment of the stock and
continues in business as before.
If the redeemable shares are considered as
retired, the authorized capital stock of the
corporation is in effect reduced by the
corresponding number of shares because the
redeemed shares can no longer be issued. The
Articles of Incorporation must be amended
accordingly.
Section 9. – Treasury Shares.
 Definition
Treasury shares are issued shares but being
in the treasury, they do not have the status of
outstanding shares. However, they still
represent paid-for-interest in the property of
the corporation.
 Stages in the Life of Treasury Shares
1st Stage: Creation of Treasury Shares
2nd Stage: The rights enjoyed by the
corporation as the holder of the treasury shares
are restricted. There is no voting right and right
to dividends with respect to treasury shares.
3rd Stage: Disposition of Treasury Shares.
 Limitations:
a. They may be re-issued or sold again as
long as the corporation holds them as
treasury shares.
b. Treasury shares cannot participate in
dividends because dividends cannot be
declared by the corporation to itself.
c. Treasury shares cannot be represented
during stockholder’s meetings 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.
d. The amount of unrestricted retained
earnings equivalent to the cost of
treasury shares being held shall be
restricted from being declared and
issued as dividends.
 Nature and Effects
A treasury share may be common or
preferred share.
Treasury shares are different from the
authorized but unissued share. Treasury shares
do not reduce the number of issued shares or
the amount of stated capital and their “sale”
does not increase the number of issued shares
or amount of stated capital.
The corporation has the option to retire the
treasury shares.
Treasury shares may be declared as property
dividend to be issued out of the retained
earnings previously used to support their
acquisition provided that the amount of the
retained earnings has not been subsequently
impaired by losses.
Inasmuch as treasury shares are not
considered as outstanding capital stock, the
corporation is not entitled to any right or
privilege of a shareholder. The reason is that
when a corporation re-acquires its own shares,
it does not become a subscriber thereof.
The BOD is empowered to re-issue the
treasury shares without the requirement of the
approval of the shareholders but subject to the
pre-emptive rights of the latter.
TITLE II – INCORPORATION AND
ORGANIZATION OF PRIVATE
CORPORATIONS
 Incorporation – means the performance of
conditions, acts, deeds and writings by
incorporators, and the official acts, certification
or records, which give the corporation its
existence.
Corporations are creatures of law, and can
only come into existence in the manner
prescribed by law.
Effect if not Incorporated
It is only through incorporation and
15
registration with the SEC that private
corporations can acquire juridical personality
under the Corpo Code. (Read Sec. 19)
However, incorporation is not necessary for
an association to function as a group. In
addition, incorporation is not necessary for
liability to attach under the rule on corporation
by estoppel. (Read Sec. 21)
Documentary Requirements for Incorporation:
a. For Stock Corporation (in addition to
the application)
1. Name Verification Slip
2. Articles of Incorporation and By-
Laws
3. Treasurer’s Affidavit
4. Joint Affidavit of two incorporators
undertaking to change the
corporate name if it is already used
by another corporation
5. Additional requirements
b. For Non-Stock Corporations (in
addition to the application)
1. Name Verification Slip
2. Articles of Incorporation and By-
Laws
3. Joint Affidavit of two incorporators
undertaking to change the
corporate name if it is already used
by another corporation
4. List of members certified by the
Corporate Secretary unless the
members are named in the Articles
of Incorporation
5. List of names of contributors or
donors and the amounts
contributed or donated, as certified
by the Treasurer
6. Registration Data Sheet
7. Additional requirements
 Organization
A corporation should have full and complete
organization and existence as an entity before
it can enter into any kind of a contract or
transact any business.
 Until organized as authorized by the charter,
there is no corporation, nor does it possess
franchises or faculties for it or others to
exercise, until it acquires a complete existence.
Section 10. – Number and qualifications of
incorporators
 Incorporators
Basic qualifications:
a. They must be natural persons;
b. There must be not less than five but
not more than fifteen;
c. They must all be of legal age;
d. The majority must be residents of the
Philippines; and
e. If the corporation is a stock
corporation, each incorporator must
own or be a subscriber of one share.
 Juridical Persons cannot be incorporators as
provided under Section 10 that the
incorporators must be natural persons.
The incorporators or original directors of a
corporation to be organized can even be
nominees of an existing corporation or a single
individual.
 Number of Incorporators and Shares
Minimum of 5 but not more than 15;
subscriber of at least one share.
It is not correct to assume that the
incorporators are always the only original
subscribers. They may be so but not in all cases.
While the law limits the number of
incorporators. The law does not limit the
number of original subscribers. Hence,
theoretically, the incorporators may each own
one share and the rest of the shares may be
subscribed originally by other persons.
 Residence
Non-residents may be incorporators because
the law only requires the majority to be
residents of the Philippines.
A person is a resident under the Corpo Code
if he is physically present with the intention to
remain present therein.
 Citizenship
There is no requirement that the majority
must be citizens of the Philippines. The rule is
however subject to the requirements of
pertinent nationalization laws.
 Accomplished Fact
An incorporator remains to be an
incorporator even if he will later on cease to be
a corporator or shareholder. Thus, he will still
be an incorporator even if he already
transferred all his shares to another. Being an
incorporator is an accomplished fact.
Section11. – Corporate term.
 Basic Rules
a. The corporate term is not more than 50
years.
b. The 50-year term may be shortened or
extended.
c. The corporation may be dissolved
thereby shortening the term.
d. The 50-year period may be extended
for another 50 years in any single
instance.
16
e. No extension can be made earlier than
5 years prior to the original or
subsequent expiry.
 State Control
The State is naturally interested that the
privilege of juridical persons be enjoyed only
under the conditions and not beyond the
period that it sees fit to grant.
 Arbitrary Limitations
Unless the existence of the corporation is
renewed or extended by proper proceedings, it
dies forever.
 Extension of Term
Extension must be made within the time and
manner prescribed by the Code. For instance,
an extension cannot be sought after the
expiration of the term. There is no more term
to extend in such a case.
Doctrine of Relations
The filing and recording of a certificate of
extension after the term cannot relate back to
the date of the passage of the resolution of the
stockholders to extend the life of the
corporation; except when the failure to timely
file an extension is due to the neglect of the
officer to receive such application.
The SEC clarified that the doctrine does not
apply if there was fault or negligence on the
part of the corporation.
Section 12. – Minimum capital stock
required of stock corporations
Section 13. – Amount of capital stock to be
subscribed and paid for the purposes of
incorporation
 Minimum Authorized Capital
There is no minimum authorized capital
under the Corporation Code. However, if the
minimum paid-up capital of 5 thousand pesos
prescribed under Section 14 is considered, it is
clear that the initial authorized capital cannot
be less than the same amount.
Important terms:
a. Authorized Capital Stock is the
amount fixed in the articles of
incorporation to be subscribed and
paid by the stockholders of the
corporation.
 Articles of Incorporation as Charter and
Contract
The Articles of Incorporation has been
described as one that defines the charter of the
corporation and the contractual relationships
between the State and the corporation, the
stockholders and the State, and between the
corporation and its stockholders. (Lanuza vs.
CA)

b. Subscribed Capital is that portion of

The Articles of Incorporation also binds the
the ACS that is covered by subscription
agreements whether fully paid or not. State. The State cannot disregard the
provisions of the Articles without any valid
c. Paid-Up Capital is the amount of reason. It cannot whimsically revoke the Articles 17
outstanding capital stock and of Incorporation.
additional paid-in capital or premium
paid over the par value of the shares.  Substantial Compliance

d. Outstanding Capital Stock refers to The Articles must comply with the form
the total shares of stock issued to prescribed by Articles 14 and 15 of the Code.
subscribers or stockholders, whether or
However, substantial compliance may not
not fully or partially paid except
affect the de jure existence of the corporation.
treasury shares so long as there is a
binding subscription agreement.
Section 14 provides that the Articles must
contain “substantially” the matters indicated
e. Capital includes properties and assets
therein.
of the corporation that are used for its
business or operation.
 Treasurer’s Affidavit

f. Stated Capital is the sum of the par This affidavit relates to the minimum
value of all issued par value shares, the
subscribed capital and the minimum paid-up
entire amount received for no-par
capital. Thus, the treasurer may be made liable
value shares and any amount
transferred by a stock dividend or if the corporation does not comply with the
other corporate action from surplus to requirements of law; he may even be
stated capital. prosecuted for Perjury.

 Special Laws may also impose initial  Name

capitalization requirements.
The SC explained that the very law of their
 Initial Subscribed and Paid-Up Capital creation and continued existence requires each
to adopt and certify a distinctive name.
The requirements of Section 13:
The incorporators constitute a body politic
a. Minimum Subscribed Capital – 25% and corporate under the name stated in the
of Authorized Capital certificate.
b. Minimum Paid-up Capital – 25% of
Subscribed Capital but must not be Before the Articles of Incorporation of the
less than 5 thousand pesos. prospective corporation is drafted, it is
advisable to verify with the SEC if the proposed
However, the subscribers are not name of the corporation is still available for
prevented from paying in full the subscription registration.
price. Exceptionally, subscription of non-
resident foreigners must be fully paid.  Purpose Clause

This clause is important in order to assure

that persons who invest in corporate entities
Section 14. – Contents of the articles of
would be aware of the business the corporation
incorporation.
is designed to engage in.
Section 15. – Forms of Articles of
Incorporation.
 The Primary Purpose must be only one, but
the Secondary Purposes may be several. Other
purposes not allied or incidental to the Primary
Purpose should be classified as Secondary
Purposes.
As a General rule, the primary purpose
determines the classification of the corporation.
However, where the corporation actually
engages in one of its secondary purposes, it
may also be classified in accordance with the
secondary purposes.
The purpose clause is included in the Articles
in order that:
a. The person who intends to invest his
money in the business will know where
and in what kind of business or activity
his money will be invested;
b. The directors and officers will be
informed regarding the scope of
business they are authorized to act;
and
c. A third person will be aware if the
transaction he has with the corporation
is within its authority.
The general limitations imposed on the
purpose clause are:
a. It cannot be created or formed for a
purpose of function of which a corporate
body is incapable.
b. It cannot be created for a purpose that
is contrary to law, morals, or public policy.
c. It cannot be organized for two or more
incompatible purposes.
d. The corporation may not be organized
for a purpose contrary to its nature.
The best proof of the purpose of a
corporation is the Articles. If the purpose stated
therein is lawful, then the SEC has no authority
to inquire whether the corporation has purpose
other than those stated, and Mandamus will lie
to compel it to issue the certificate of
incorporation.
It is also a well-established rule that collateral
attack in the legality of the purpose of the
corporation is not allowed.
 Principal Office
The Principal Office must be within the
Philippines.
SEC Circular requires that corporations must
state in their Articles the specifics of their
principal office which shall include, if feasible,
the street number, street name, barangay, city
or municipality and the specific address of the
incorporator, directors or trustee.
There is no need to amend the Articles when
the corporations change their principal offices
from one floor to another of same building.
However, there is a need to amend if the
change of address is from one building to
another or from one street to another, even if
within the same municipality or city.
Importance of Principal Office
18
The principal office is considered as the place
of residence of the corporation.
The principal place of business may
determine the venue of court cases involving
corporations. It may also determine if service of
summons and notices was properly made.
It is not necessary that all the business of the
corporation be conducted in the principal place
of business.
 Term
If the corporation will not be able to extend
its corporate term, the remedy is to file new
Articles of Incorporation and secure a new term
It has been explained that where the term of
a corporation expires but instead of liquidating
its affairs it continues the business in good
faith, not knowing that the term has expired,
some courts hold that it may be a de facto
corporation or as corporation by estoppel.
 Incorporators
All incorporators must sign and must
subscribe or acknowledge the Articles of
Incorporation. The Articles is defective if not all
incorporators acknowledged the same before
the notary public.
 Directors
The number of directors cannot exceed 15
even after the incorporation.
The Articles of Incorporation states the
names, nationalities, and residences of persons
who shall act as directors or trustees until the
first regular directors or trustees are duly
elected and qualified in accordance with the
Corpo Code.
 This means that the original directors
originally appearing in the Articles will be
replaced by regular directors after the issuance
of the certificate of incorporation.
 Capital Stock
It is mandatory to state the authorized capital
stock, the number of shares into which it is
divided and the par value of the shares, in
lawful money of the Philippines if the shares
have par value. If the shares have no par value,
only the number of shares need be stated.
 Paid-up Capital
If the paid-up capital consists of property,
verification of its ownership, physical existence,
and reasonableness of the valuation at which it
is being transferred to the corporation is made
by the SEC.
Documents to support ownership of the
property, whether real or personal, are required
to be submitted.
If any of the properties used as paid-up
capital is mortgaged or otherwise encumbered,
written consent of the mortgagee is necessary.
If the transfer value of the property is higher
than the cost or assessed value, an appraisal
report prepared by a licensed appraiser is
required.
A Deed of Assignment executed by the
owner, proprietor or partners in case of
partnership, transferring the properties, as well
as other assets and liabilities in favor of the
corporation is required. The Deed
Assignment covering real estate properties
must be presented for primary entry to the
ROD where the property is located.
 Effect if Sole Proprietorship is Organized
A single proprietorship may be organized as
a corporation. In such case, it is required that
there is a Deed of Assignment that must
specify the liabilities of the sole proprietorship
that are being assumed by the
corporation.
 Other provisions may be inserted in the
Articles of Incorporation as long as they are not
contrary to law, morals, good customs, public
order, and public policy.
Section 16. – Amendment of Articles of
Incorporation.
 Requirements:
a. The amendment must be for legitimate
purposes and must not be contrary to
other provisions of the Corpo Code
and Special Laws.
b. The amendment must be approved by
the majority vote of the BOD or BOT.
c. There must be a vote or written assent
of the stockholders representing at
least 2/3 of the Outstanding Capital
Stock, or the vote or assent of at least
2/3 of the members if it be a non-stock 19
corp.
d. The original and amended articles
together shall contain all provisions
required by law to be set out in the
Articles.
e. 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 SEC.
f. The amendment must be approved by
the SEC.
 Express and Implied Approval
Express: The amendments shall take effect
upon their approval by the SEC.
Implied: The amendments shall take effect from
of the date of filing with the SEC if not acted upon
within 6 months from the date of filing for a
cause not attributable to the corp.
 Provisions to be Amended
The amendment may involve amendment of
the corporate name, increase in the ACS, and
other similar changes.
Amendment is not allowed if it pertains to
Accomplished Facts, such as names and
new
numbers of the incorporators and names of the
original directors.
Amendments cannot likewise be allowed if it
goes against the nature of the corporation. For
example, there can be no amendment of the
Articles of a non-stock corp to convert it into
stock corp with the members as shareholders.
This procedure will enable the distribution of
the assets of non-stock corp to the members.
 Written Assent of the Stockholders d. The purpose of the corp is immoral
such as to provide a “mail-order-bride”
Silence or failure to object cannot be service.
construed as approval by stockholders. The law e. The purpose of the corp is to establish
requires the express approval of the a local government unit like a
stockholders through an affirmative vote or an “barangay”.
assent that is in writing.

 Who can question Amendments? Section 18. – Corporate name.

Amendments to the Articles and By-laws can  Basic Policy

be questioned only by a real party-in-interest
A corporation cannot use a name that
like a shareholder or member.
belongs to another even as a trade name.

Section 17. – Grounds when articles of  What Must be Proved by the Oppositor
20
incorporation or amendment may be a. The corporation has acquired a prior
rejected or disapproved. right over the use of such corporate
name; and
 Ministerial Duty b. It is any of the cases mentioned under
Section 18.
The SEC duty to approve an application for
registration is ministerial provided that all the
 Similar Names
requirements of law are complied with. The SEC
must approve the Articles if the applicant has A corporation has an exclusive right to use its
substantially complied with the requirements of name, which may be protected by injunction.
the Corpo Code.
Under the Dominancy Test that is
However, Section 17 recognizes the power of incorporated in the Intellectual Property Code,
the SEC to reject the Articles or any proposed there will be infringement if the mark contains
amendment thereto if the provisions of the the dominant feature of the mark of a
Corpo Code are violated. trademark belonging to another.

 Rejection Not Based on the Submitted

Articles

It may be necessary to go beyond the Articles

and the supporting papers in order to - Lyceum of the Philippines, Inc. vs. CA
determine if the establishment, organization or
The SC explained that the purposes of
operation is inconsistent with the declared
the prohibitions under Section 18 are:
national policies.
a. The avoidance of fraud upon the
 Illegal or Immoral Purposes
public which would have occasion
Rejection of the Articles or any amendment to deal with the entity concerned;
thereto will result if the purpose/s of the b. The evasion of legal obligations
corporation are patently unconstitutional, and duties; and
illegal, immoral or contrary to government c. The reduction of difficulties of
rules and regulations. administration and supervision
over corporations.
Some instances when the Articles may be
rejected: As a rule, generic, descriptive and
geographical terms cannot be exclusively
a. The declared purpose of the corp is to appropriated, such as the term “International”.
promote and enhance the
incorporation of the Philippines as an Doctrine of Secondary Meaning
American State.
Under this doctrine, a word or phrase which
b. The purpose is to practice a profession.
is originally incapable of exclusive
c. The corp is organized to engage in
appropriation because the word or phrase is
illegal gambling.
geographic or otherwise descriptive might,
nevertheless, have been used for so long and
so exclusively by one producer with reference
to an article and the purchasing public has
considered the word or phrase as associated to
his product.
 Registration Subject to Prior Right
The corporate name is a property right that
cannot be impaired or defeated if another
corporation will appropriate the same. It is in
the nature of a right in rem that can be
asserted against the whole
corporation may have a better right to use its
corporate name on the ground of priority of
adoption.
 Name in Articles of Incorporation
A corporation cannot use
corporate name other than what is reflected in
the Articles of Incorporation.
A corporation may use a trade name or
business name that is different from its
corporate name.
The SEC pointed out that there are instances
wherein a corporation is mandated to use,
issue and/or submit papers reflecting therein
not only just the business name but also its
corporate name.
 SEC Rules
The rules require the inclusion in the
corporate name of the word “Corporation” or
“Incorporated”, or the abbreviations “Corp.” or
“Inc.”. The requirement is imposed
distinguish corporations from other business
organizations like partnerships,
proprietorships and unregistered associations.
The rules provide that the name of a
corporation or partnership that has been
dissolved or whose registration has been
revoked shall not be used by
corporation or partnership, unless its use has
been allowed at the time of the dissolution or
revocation by the stockholders, members or
partners who represent a majority of the
outstanding capital stock or membership of the
dissolved corporation or partnership, as the
case may be.
If a new corporation is organized using the
name of a dissolved corporation, the newly
formed corporation cannot be considered as
the legal successor of the
corporation. The new corporation has a
personality distinct and separate from the
dissolved corporation. The new corporation
cannot enjoy the rights and privileges of the
dissolved corporation although the new
corporation ahs the same or similar name.
 Change of Name
A corporation has the right to apply for a
change of name if there is no express
world. A prohibition in the statute.
The corporation, upon the change of its
name is in no sense a new corporation or the
successor of the original corporation. It is the 21
same corporation with a different name, and its
character is in no respect changed.
any other
 Corporations with Same Name
Even if two corporations have the same
name, the corporations do not have a single
legal personality. The two registration
certificates show the separate nature of these
juridical entities.
Section 19. – Commencement of corporate
existence.
 Certificate of Incorporation
The issuance of the certificate of
incorporation by the SEC marks the
commencement of the corporate term of
corporations incorporated under the Code.
The certificate is an indispensable
to requirement before corporate life can ensue.
There is no corporation to speak of prior to an
entity’s incorporation.
sole
A certificate of incorporation from the SEC is
not necessary if the corporation is created
through special law.
 Contract Law under the Corporation Code
another It is only after the issuance of the certificate
of registration that a corporation can transact
business.
However, the law makes the pre-
incorporation subscription agreement binding
even if one of the parties – the corporation – is
still legally non-existent.
 Promoters
The General Rule is that the acts of the
promoter are not binding on the corporation
that will be organized.
Promoters are persons who, acting alone or
with others, take initiative in founding and
organizing the business or enterprise.
dissolved
 Promotional activities include:
a. Discovery – consists of finding the
business opportunity to be developed.
b. Investigation - entails an analysis of the
proposed business to determine
whether or not it is economically
feasible.
c. Assembly – includes the bringing
together of the necessary personnel,
property and money to set business in
motion as well as the secondary details
of setting up the corporation itself.
Promoters could not act as agents for a
projected corporation since that which has no
legal existence could have no agent.
The stockholders and the corporation cannot
be held personally liable for the compensation
claimed by the promoter for the services
performed by him in the organization of the
corporation.
Even if the stockholders benefited from such
services of the promoter, there is no
justification to hold them personally liable
therefor.
 Underwriters should be distinguished from
promoters. An underwriter is a person who
guarantees on firm commitment and/or
declared best effort basis the distribution and
sale of securities of any kind by another
company.
Section 20. – De facto corporations.
 Rules in determining if the corporation is
a de jure corporation or one that is
defectively formed:
a. Non-compliance with directory
provisions of law or regulations will not
affect the de jure existence of the
corporation.
b. Non-compliance with the mandatory
provisions will affect the de jure
existence. However, only substantial
compliance is required and mere
colorable compliance may result in a
de facto corporation.
c. Non-compliance with conditions
precedent to incorporation may affect
the de jure existence of the
corporation.
d. Non-compliance with conditions
subsequent to incorporation may not
affect the existence of a corporation
but may be a ground for revocation of
the certificate of incorporation.
e. Condition precedent to carry on the
business will not affect the
corporation’s de jure status but non-
compliance may be a ground to revoke
the certificate of incorporation.
 Requisites of De Facto Corporation:
a. A valid law under which the
corporation is organized.
b. An attempt in good faith to
incorporate.
c. An assumption of corporate powers.
Valid Law
One view (as recognized by Dean) vis-à-vis
unconstitutional law is that it is an “Operative
Fact”. Under this view, an unconstitutional law
does not bar the existence of a de facto
corporation.
22
Good Faith
Attempt in good faith means that there must
be colorable compliance with the law.
There can be no claim of attempt in good
faith to incorporate if no Certificate of
Incorporation is issued by the SEC.
Assumption of Powers
A corporation must have exercised its
franchise to be a corporation by doing business
under it.
 Distinguished from De Jure Corporations
A De Jure Corp has a right to corporate
existence even against the State.
In the case of De Facto Corp, it has a right to
corporate existence even against the State if
the attack is collateral but not if direct.
 Nature and Status of a De Facto
Corporation
The personality of a de facto corporation is
subject to attack by the State in a proper
proceeding.
A de facto corporation enjoys the attributes
of a corporation until the State questions its
existence.
 Dissolved Corporation
A group of employees who continued the
operations of a dissolved corporation or a
corporation whose registration had been
revoked cannot acquire the status of a de facto
corp.
 Effect of Non-Filing of By-Laws
- Sawadjaan vs. CA
The SC observed that a corporation
may be considered a de facto corp
because of its failure to submit its by-
laws on time.
 Author’s comment:
The observation is erroneous. The
nature of a juridical entity as a de facto
corp arises from the very beginning of
its existence. The filing of by-law with
the SEC is not a mandatory provision;
non-compliance of conditions
subsequent to incorporation may not
affect the existence of a corporation, it
is only a ground for revocation of the
certificate of incorporation.
Section 21. – Corporation by estoppel.
 Estoppel
One who assumes an obligation to an
ostensible corporation as such cannot resist
performance thereof on the ground that there
was in fact no corporation.
When a third person has entered into a
contract with an association which represented
itself to be a corporation, the association will
be stopped from denying its corporate capacity
in a suit against it by such third person.
 Liability as General Partner
Those who assume to act as a corporation
knowing it to be without authority to do shall
be liable as a general partner. Therefore, they
are liable beyond their investment; in other
words, their personal property may be made to
answer for what is purportedly a corporate
debt of the non-existent corporation.
This also means that those without
knowledge of the non-existence of the
corporation are liable as if they are regular
stockholders of a corporation. They are not
liable beyond their investments.
On the other hand, a third party who,
knowing an association to be unincorporated,
nonetheless treated it as a corporation and
received benefits from it, may be barred from
denying its corporate existence in a suit
brought against the alleged corporation.
Enterprise Liability
The main sequences of Corporation by
Estoppel:
a. The enterprise contracts with an
outsider, who later brings against the
enterprise as though it were a
corporation;
b. The enterprise contracts with the
outsider, and subsequently brings
action in corporate for against the
outsider;
c. The enterprise contracts with an
outsider and the outsider brings action
against the component individuals; and
d. The enterprise contracts with an
outsider, and the component
individuals seek to hold the outsider
liable in his contract.
Tort Liability
The liability under Section 21 in case there is
an ostensible corporation is applicable to tort
liability. There is a difference between tort
liability and contractual liability with respect to
the application of estoppel.
23
 When Not Applicable
The SC ruled that this the doctrine of
corporation by estoppel applies only to a third
party when he tries to escape liability on a
contract from which he has benefited on the
irrelevant ground of defective incorporation.
 Cannot Override Jurisdictional
Requirements
The doctrine of corporation by estoppel
cannot be likewise be advanced to override
jurisdictional requirements under the law.
 Rules of Court Provision
Section 15 of Rule 3 provides that when two
or more persons not organized as an entity
with juridical personality enter into a
transaction, they may be sued under the name
by which they are generally or commonly
known.
Section 22. – Effects on non-use of
corporate charter and continuous
inoperation of a corporation.
 Conditions subsequent
This Section involves two violations of
conditions subsequent to incorporation:
a. Failure to organize and commence
business within 2 years from
incorporation.
b. Becoming continuously inoperative for
a period of at least 5 years.
 Period to Organize
Even if the corporation has been operating
for 10 years, there is a ground to revoke the
franchise if it ceased to operate thereafter for
at least 5 years.
 Effect of Failure to Organize
If the corporation failed to organize within 2
years but exercises corporate powers after such
period, the corporation is deemed to be
exercising its powers illegally.
 Meaning of Organization
Organize or organization as used in reference
to corporations has a well-understood meaning
which is the election of officers, providing for
the subscription and payment of the capital
stock, the adoption of by-laws, and such other
similar steps.
TITLE III – BOARD OF
DIRECTORS/TRUSTEES/OFFICERS
Section 23. – The board of directors or
trustees.
 Corporate Management
The directors or trustees are the executive
representatives of the corporation, charged
with the administration of its internal affairs
and management and use of its assets.
The Board is the body which:
a. Exercises all powers provided for under
the Corporation Code;
b. Conducts all business of the
corporation; and
c. Controls and holds all property of the
corporation.
The authority of the BOD is restricted to the
management of the regular business affairs of
the corp, unless more extensive power is
expressly conferred.
A corporation can act only through its
directors and officers. The Board is the central
power that authorizes the executive agents to
enter into contracts and embark on a business.
 Reason for Concentration of Power
The concentration of power in a board is a
question of:
a. Speed and cost;
b. Expertise; and
c. Motivation.
Convening numerous shareholders every
time a decision should be made may be
cumbersome and may entail great cost.
 Theories on Source of Powers
a. Agency Theory – all powers reside in
the stockholders and are just delegated
to the directors as agents.
b. Concession Theory – the power of the
directors under this theory is derived
from the State.
c. Platonic Guardian Theory – every
corporation under this theory must
have a board and “the board is an
aristocracy or group of Platonic
Guardians created by the legislative
ordainment”.
d. Sui Generis Theory – the directors are
not agents of the stockholders who
elect them; they are fiduciaries whose
duties run primarily to the corporation.
- Valle Verde Country Club vs. Africa
The underlying policy of the
Corporation Code is that the business
and affairs of the corporation must be
governed by a BOD whose members
have stood for election, and who have
actually been elected by the 24
stockholders on an annual basis.
Only in that way can the directors’
continued accountability to the
shareholders, and the legitimacy of
their decision that bind the
corporation’s stockholders, be assured.
 Independence
Stockholders cannot reverse the decisions of
the Board. Consistently, the directors and not
the shareholders must make all contracts with
third persons.
Remedy of Stockholders
The stockholders must unite to make their
power felt. Nevertheless, the power to unite is
limited to removal and election of directors and
is not extended to contracts whereby
limitations are placed on the power of the
directors to manage the business of the
corporation by selection of agents.
If the stockholders do not agree with the
policies of the board, their remedy is to wait for
the election of directors or to remove the
directors if they have the required vote.
 Business Judgment Rule
Under this rule, the will of the majority
controls in corporate affairs, and the contracts
intra vires entered into by the BOD are binding
on the corporation and courts will not interfere
unless such contracts are so unconscionable
and oppressive as to amount to a wanton
destruction of rights of the minority.
For the BOD to be held accountable, the
mismanagement and resulting losses on
account thereof are not the only matters to be
proven; it is likewise necessary to show that he
directors and/or officers acted in bad faith and
with malice in doing the assailed acts.
Bad faith does not simply connote bad
judgment or negligence, it imports a dishonest
purpose or some moral obliquity and conscious
doing of a wrong, a breach of a known duty
through some motive or interest or ill will
partaking the nature of fraud.
Mere errors of judgment are not sufficient
grounds for equity interference, for the powers
of those entrusted with corporate management
is discretionary.
The directors are entitled to exercise honest
business judgment on the information before
them and to act within their corporate powers.
 Resolution
The Board must act, not individually or
separately, but as a body in a lawful meeting.
The actions of the Board are expressed in
resolutions passed in its meetings.
In relation to Section 25: the basis for
determining the presence of the required
number of directors or trustees for purposes of
confirming that there is a quorum is the
number fixes in the Articles of Incorporation
and not the actual present members of the
board.
Proof of Resolution
A Secretary’s Certificate – a certificate issued
by the Corporate Secretary of the corporation –
is a sufficient proof of the existence of a
resolution from the Board and it is presumed to
be true.
The Secretary’s Certificate is not rendered
invalid even if it is alleged that the Corporate
Secretary did not appear before the notary
public who notarized the same.
Similarly, the Minutes of Meeting of the BOD
can also establish the existence of a Resolution
of the Board.
 Quorum
Read Section 25.
The stockholders may elect less than the total
number of directors specified in the Articles.
Nevertheless, an incomplete Board may still
function as long as the remaining directors
constitute a quorum.
The SEC opined that a disqualified director
losses his capacity as director and as such
cannot be counted for purposes of establishing
a quorum.
 Term
The one-year term was construed by the SC
to mean that the term of the members of the
BOD shall be only for one year; their term
expires one year after election to the office. The
officers have the same term as directors.
The provision is explicit that the term is for
one year in a stock corp. The By-Laws cannot
provide for a longer term.
The SC defined “term” as the time during
which the officer may claim to hold the office
as of right, and fixes the interval after which the
several incumbents shall succeed one another.
Term is distinguished from “tenure” since the
latter is the period during which the incumbent
actually holds office. The tenure may be shorter
than the term.
The one year term does not apply to the
incorporating directors who shall act only as
such until the first regular directors are duly
elected and qualified.
The regular directors shall be elected during
the first organizational meeting of the
corporation, which shall be called immediately 25
after registration with the SEC.
 Qualifications
Those stated in Section 23 and 27.
Natural Person
A director or trustee must be a natural
person.
Shares or membership
Stock Corporation: the share must stand in
the director’s name in the books of the
corporation.
Non-Stock Corporation: the trustee must be
a member of record.
One cannot be a director if he is the assignee
of share and the assignment in his favor is not
yet registered in the books of the corporation.
It is sufficient that the legal title as it appears
in the books is in the director since the legal
title is what counts. What is material is the legal
title to, not beneficial ownership of, the stock
as appearing on the books of the corporation.
Thus, a person to whom one share of stock has
been transferred for the express purpose of
qualifying him as director is qualified.
It has been opined, however, that a person
who does not own any stock at the time of his
election or appointment is not disqualified as a
director if he becomes a shareholder before
assuming the duties of his office.
The SEC is of the opinion that a holder of a
non-voting share cannot be elected as director.
Residence
“Residence” as used in corporate statute is
equivalent to “domicile”, the pertinent
elements of which are physical presence in the
State and an intention to remain therein.
Foreigners
They can be elected as directors subject to
the provisions of special laws.
 Under the Anti-Dummy Law, foreigners can
be elected as directors only in proportion to
their allowable equity participation in the
capital of said activities.
Dual Citizens
They can be directors and officers even for
corporations engaged in partly nationalize or
nationalized industries even if they possessed
“dual citizenship”.
By-Laws
Section 47(5) of this Code provides that a
corporation is empowered to provide in its by-
laws the qualifications and disqualifications of
members of the Board.
Effect of Disqualification
A disqualified stockholder cannot run for
election as director. If the ground for
disqualification was present at the time of
election, but the disqualified stockholder was
nevertheless elected as director, the
subsequent disqualification of director would
not render the Board incapable of transacting
business for as long as the remaining directors
still constitute a quorum.
Such situation merely gives rise to a vacancy
in the Board.
 Re-Election
Unless there is a provision in the Articles or
By-Laws that disqualifies an incumbent director
or officer from seeking another term of office,
the incumbent is not prevented from seeking
re-election.
 Hold-Over
If no election is held, the directors and
officers shall hold-over until their successors
are elected.
The term of office is not affected by the hold-
over.
The hold-over 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
hold-over period, however, constitutes part of
his tenure.
 Corporate Governance
The 2009 Code of Corporate Governance was
issued by the SEC. It defines “Corporate
Governance” as the framework of rules, systems
and processes in the corporation that governs
the performance by the Board of Directors and
Management of their respective duties and
responsibilities to the stockholders and other
stakeholders which include, among others,
customers, employees, suppliers, financiers,
government and community it operates.
Alternative Theories on Corporate Governance
a. Shareholder Primacy Theory
This theory holds that the corporation
should be run for the exclusive benefit
of shareholders.
b. Corporate Social Responsibility Theory
This theory prefers the limitation on
excessive pursuit of profit and
promotion of employee, customer, and
community voice in corporate 26
governance.
 Independent Directors
As part of the rules on Corporate
Governance, the SEC likewise promulgated
rules on independent directors which is entitle
“Guidelines on the Nomination, and Election of
Independent Directors”.
Independent director means a person who,
apart from his fees and shareholdings, is
independent of management and free from any
business or other relationship which could, or
could reasonably be perceived to materially
interfere with his exercise of independent
judgment in carrying out his responsibilities as
a director in any corporation as prescribed
under the Securities Regulation Code.
The 2009 Code of Corporate Governance
provides that a regular director who resigns or
whose term ends on the day of the election
shall only qualify for nomination and election
as independent director only after a two-year
cooling off period.
According to the SEC, the policy behind the
appointment of an independent director is that
a non-executive director must not have a
relationship with the corporation that would
materially interfere with his exercise of
independent judgment in carrying out his
responsibilities as director in any covered
company.
It is during the annual
stockholders/members’ meeting that the
independent directors are elected. Hence, “it is
not correct to say that it is either the majority
block or the minority one which has the burden
to elect the independent directors since to do
so would be anathema to the policy behind the
appointment of independent directors.
Section 24. – Election of directors or
trustees.
 Manner of Election
A corporation cannot adopt a procedure
other than what is prescribed under this
Section for stock corporations.
Staggered election of directors is not allowed
in a stock corporation. A staggered election
would be violative of the rule that provides for
annual election of all directors.
 Plurality of Votes
Majority vote is not necessary for the election
of each director or trustee. The candidates who
will receive the highest number of votes shall
be declared as duly elected.
 Quorum
It is necessary that there is a quorum and in
the absence thereof, the election shall be
considered invalid. The quorum for election
purposes is the stockholders representing a
majority of the outstanding capital stock.
It is not necessary that the candidate
stockholder be present during the meeting
before he can be elected as director. A director
can be elected in absentia. However, the By-
Laws may require the physical presence of a
director that will be elected.
 Cumulative Voting
This is defined as a method of concentrating
votes devised to give sufficient opportunity to
minority shareholders to secure representation
in the Board.
It is not required that the total votes a
shareholder is entitled to cast under the
cumulative voting be evenly or proportionately
distributed among his candidates. He can give
such number of votes to each of his candidates
at his own discretion without any limitation
except that the total votes cast by him shall not
exceed the number of shares owned by him
multiplied by the number of directors to be
elected.
Example:
If Mr. A has 10 shares and there are five
directors to be elected, he can cast 50 votes
(10shares x 5directors) which he can give to
one candidate or distribute in the proportion
that he may deem fit.
Advantages of Cumulative Voting
The advantages of cumulative voting are:
a. It is democratic in that persons with
large (but minority) holdings would
have a voice in the conduct of the
corporation;
b. It is desirable to have as many
viewpoints as possible represented on
the BOD; and
c. The presence of minority director may
discourage conflicts of interest by
management since discovery is
considerably more likely.
Grounds Used to Oppose Cumulative Voting
a. The introduction of a partisan on the
27
Board is inconsistent with the notion that
the Board should represent all interests
in the corporation;
b. A partisan director may cause
disharmony which reduces the efficiency
of the Board;
c. A partisan director may criticize
management unreasonably so as to
make it less willing to take risky but
desirable actions;
d. A partisan director may leak confidential
information; and
e. It may be used to further narrow partisan
goals, particularly to give an insurgent
group a toehold in the corporation in an
effort to obtain control.
Distinguished from Straight Voting
Under straight voting, a stockholder can cast
one vote per share for each director.
Example:
If a shareholder has 10 shares and five
directors are supposed to be elected, the said
shareholder can give 10 votes to each of the
five candidates that he wants to elect.
In cumulative voting, he can cumulate all his
votes and give to one candidate all his votes
or he may divide the votes among two or
more candidates.
It is to be noted that even if cumulative
voting is provided for under the Corporation
Code, there is nothing that prevents
stockholders from resorting to straight voting.
It is up to the stockholder how he will divide his
votes.
Formula
With cumulative voting in place, the formula
that is prescribed in order to determine the
number of shares needed to elect a single
director is as follows:
S
+1=Number of S h ares needed ¿ elect one director
D+ 1
 “S” is the total number of shares voting and
“D” is the number of the directors to be
elected.
- The suggested formula to determine
the number of shares necessary to
elect a desired number of directors is:
S x ( Desired Number of Directors )+ 1
D+1
- The number of directors that can be
elected by a shareholder holding a
specific number of shares may be
determined using the formula given
below where “N” is the number of
shares of the shareholder; “D” is the
number of directors to be elected and
“S” is the total number of shares to be
voted by all shareholders:
Number of Directors that can be elected by “N”
( N −1 ) (D+1)
¿
S
 Election of Incomplete Directors
It may happen that the number of directors is
incomplete because the stockholders who are
willing to serve as directors are less than the
total number of directors that should be
elected. The election would still be valid and
the directors, though incomplete, can still
perform their functions provided that a quorum
remains.
 Failure to Hold an Election
If the Board or the officer authorized to call a
meeting like the President refuse to call an
election of directors, the stockholders may ask
for the assistance of the SEC to compel the
holding of such election.
 Election Contests
Complaints involving election contests
should be filed with the proper RTC.
The kinds of election contests are
controversies involving:
a. Title or any claim to any elective office
in a stock or non-stock corporation;
b. Validation of proxies;
c. Manner and validity of elections;
d. Qualifications of candidates;
e. Proclamation of winners.
In addition to the formal requirements under
the Interim Rules of Procedure for Intra-
Corporate Controversies, the complaint in an
election contests must state the following:
a. The case was filed 15 days from the
date of the election if the by-laws of
the corporation do not provide for a
procedure for resolution of the
controversy, or within 15 days from the
resolution of the controversy by the
corporation as provided in its by-laws;
and
b. The plaintiff has exhausted all intra-
corporate remedies in election cases as
provided for in the by-laws of the
corporation.
Questions regarding questioning the validity
of the election of the BOD for a given year may
be rendered moot and academic by a valid
election of a new set of BOD for the next
succeeding year.
28
Section 25. – Corporate officers, quorum.
 Corporate Officers
These are officers who are designated or
specified as such or given that character in the
law, the Articles of Incorporation and the By-
Laws of the corporation.
This Section 25 of the Code names only 3
officers, namely:
a. President;
b. Treasurer; and
c. Secretary.
Section 63 recognizes the existence of a Vice-
President and Assistant Secretary.
The Article and By-Laws may create other
corporate offices.
Office and Employment Distinguished
An “office” is a creation of the charter of a
corporation, while an “officer” is the person
elected by the directors or stockholders.
On the other hand, an “employee” occupies
no office and is generally employed but not by
action of the directors and stockholders but by
the managing officer of the corporation and
who also determines the compensation to be
paid to such employee.
 Qualification and Functions
President
The qualifications are, to wit:
a. He must be a director (and
consequently must be a stockholder);
and
b. He may not be concurrently the
treasurer or secretary.
There is no retirement age for the president.
 A corporate president is often given general
supervision and control over corporate
operations.
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.
Vice-President
Read Section 63.
The By-Laws ordinarily assign to the VP the
duty of succession to the position of chief
executive in the absence or disability of the
president or the chairman of the board and
such other duties as the board may assign.
Chairman
The concept of board chairman and his
functions as executive vary so widely in
different companies.
The chairman may be concurrently the
president and may be designated as the chief
executive officer of the corporation.
Secretary
The Corpo Code provides that the corporate
secretary must be a resident and citizen of the
Philippines. Other qualifications may be
provided for in the By-laws.
The secretary is duty-bound to keep the
corporate records and to make proper entries
thereto.
The secretary is the officer who maintains the
stock and transfer book.
Under Section 63, the corporate secretary
must sign the certificates of stocks of a
corporation.
It is also the corporate secretary who must
send notices of the meeting of the directors
and/or stockholders are sent by the secretary.
The secretary likewise prepares the minutes of
such meetings.
The minutes of the meetings need only to
contain a summary and the highlights of the
matters taken up during the meetings.
However, the actual resolutions that were
passed should be stated in the minutes.
The Secretary issues certificates commonly
known as “Secretary’s Certificate” regarding the
passage, existence, and binding effect of a
board resolution.
Treasurer
The Treasurer normally takes care of the
funds of the corporation.
The Corpo Code does not require the
treasurer to be a resident or a citizen of the
Philippines. However, the SEC, as a matter of
policy, has imposed the residence requirement
for treasurers.
 Concurrence
Any two or more positions may be held
concurrently by the same person. The President
may serve concurrently as the Chairman.
Similarly, the director may be the legal counsel
of the corporation.
Section 25 provides that no one shall act as
president and secretary or as president and
treasurer at the same time. The law considers
the positions of secretary and treasurer as 29
inconsistent with the position of a president.
 Corporate Officer Concurrently an
Employee
A corporation is not prohibited from hiring a
corporate officer to perform services under
circumstances that will make him an employee.
Indeed, it is possible for one to have a dual
role of officer and employee.
If the corporate officer is also an employee,
the NLRC has jurisdiction over the complaint
filed by the same corporate officer who served
both as corporate secretary and administrator,
if the money claims were made as an employee
and not as a corporate officer. (Vda. De
Lecciones vs. NLRC)
 Anti-Dummy Law
While a foreigner can still be a director in a
partly nationalized activity in proportion to the
equity participation allowed to foreigners, no
foreigner can be elected or appointed as officer
even in partly nationalized activities.
 Authority of Officers
In some cases, corporate officers like the
President can also bind the corporation. The
authority of such individuals to bind the
corporation is generally derived from:
a. Law;
b. Articles of Incorporation;
c. Corporate By-Laws;
d. Authorization from the Board; or
e. Those inherent in the office.
If the authority of the officers is provided for
in a board resolution, the corporate officers
shall be deemed fully clothed by the
corporation to exercise a power of the board, if
the board specifically authorizes them to do so.
If the By-Laws provide for specific powers of
an officer like the President, the officer need
not secure a separate resolution from the
Board to exercise the specific power.

 Implied Authority
A corporate officer, who is entrusted with the
general management and control of its
business, has implied authority to make any
contract or do any other act that is necessary or
appropriate to the conduct of the ordinary
business of the corporation.
As such officer, he may, without any special
authority from the BOD, perform all acts of an
ordinary nature that by usage or necessity are
incident to his office, and may bind the
corporation by contracts in matters arising in
the usual course of business.
 Practice, Custom and Policy
Where the BOD approves similar acts as a
matter of general practice, custom, and policy,
the officer may bind the company without
formal authorization of the BOD,
The existence of such authority is established,
by proof of the course of business, the usage
and practices of the company, and by the
knowledge that the BOD has or must be
presumed to have, of acts and doings of its
subordinates in and about the affairs of the
corporation.
 Ratification
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 the Board ratifies such acts
or is stopped from disclaiming therein.
Ratification by a corporation of an
unauthorized act or contract by its officers or
others retroacts back to the time of the act or
contract ratified.
The adoption or ratification of a contract by a
corporation is nothing more or less than the
making of an original document.
Any party who alleges that the corporation
ratified the action of the officer must prove
such ratification.
 The rule on Agency by Estoppel applies to
corporations.
Apparent Authority
Based on decisions of the SC, an officer may
also bind the corporation of he has apparent
authority.
The doctrine of apparent authority is a
species of the doctrine of estoppels.
Apparent authority is derived not only from
practice – its existence may be ascertained
through:
a. The general manner in which the
corporation holds out an officer or
agent as having the power to act, with
which it clothes him; or
b. The acquiescence in his acts of a
particular nature, with actual or
constructive knowledge thereof, with
or beyond the scope of his ordinary
powers.
The principal’s liability, however, is limited
only to third persons who have been led
reasonably to believe by the conduct of the
30
principal that such actual authority exists,
although none was given.
The Doctrine of Apparent Authority was
applied in a situation where the sole
management was left to the President and the
Treasurer who are both incorporators of the
corporation. (Advance Paper Corp. vs. Arma
Traders Corp.)
 De Facto Officers
A person is a de facto officer if he acts as
such, under color of authority, through election
or appointment.
By color of authority is meant authority
derived from an election or appointment,
although irregular or informal, so that the
incumbent must be more than a volunteer.
 Compensation
The By-Laws may provide that the Board shall
fix the compensation of the corporate officers.
The fixing of the compensation is part of the
regular business of the corporation that the
Board conducts, even if not stated under the
By-Laws.
Section 26. – Report of election of directors,
trustees and officers.
 The SEC rules provide that a “General
Information Sheet” (GIS) shall be filed with the
Commission within 30 days following the date
of annual stockholders’ (or members’) meeting.
 The GIS contains the names of the
stockholders, directors and corporate officers.
The recent enhancement of the GIS includes a
portion that is designed for compliance with
the Anti-Money Laundering Law.
 The GIS indicates who and who is not a
corporate officer or director or stockholder.
However, the GIS is only a piece of evidence
and is subject to stronger proof if entries
therein are in question.
 - Premium Marble Resources, Inc. vs. CA
Issue: WON the officers of the
corporation have legal capacity to file a
complaint for damages in behalf of the
corporation
The SC sustained the dismissal of the
complaint because it was not
established that the Members of the
Board who authorized the filing of the
complaint were the lawfully elected
directors of the corporation.
It was pointed out in this case that the
General Information Sheet filed
pursuant to Section 26 does not show
the names of the persons who
authorized the filing of the case.
- Monfort Hermanos Agricultural
Development Corporation vs. Antonio
Monfort III
The SC rejected the allegation that the
alleged members of the board who
signed the Board Resolution were duly
elected directors. It was noted that “the
fact that four of the six Members of the
Board listed in the GIS are already dead
at the time the Board Resolution was
issued”, does not automatically make
the four signatories to the said Board
Resolution (whose names do not
appear in the GIS) as among
incumbent members of the Board.
The belated attempt to replace the
deceased Board Members did not
erase the doubt as to whether an
election was indeed held.
 Report in case of Vacancy
If a new director is elected because of a
vacancy in the Board, the Corporate Secretary
must submit an Amended GIS indicating the
change of director within 30 calendar days
from the occurrence of such change.
Section 27. – Disqualification of directors,
trustees or officers.
 Grounds for Disqualification
a. If he is convicted by final judgment of an
offense punishable by imprisonment
exceeding 6 years;
b. If he is convicted by final judgment of a
violation of the Corporation Code
committed within 5 years prior to the
date of his election or appointment.
 Rationale
The position of director in a corporation is
one of trust. A director in a corporation has the
personality of managing the funds belonging
to other persons or individuals.
 Non-exclusive
The disqualifications under Section 27 are not
exclusive. Additional grounds for
disqualification are contemplated in the other
provisions of the Code.
For instance, a person who ceases to be a
shareholder because he already transferred all
his shares is already disqualified to be a
director.
 Grounds in Articles and By-Laws 31
Other grounds may be provided for in the
Articles or By-Laws of the corporation.
- Government vs. El Hogar Filipino
The SC sustained the validity of a
provision in the corporate by-laws in
pursuant to the law then in force that
“corporations are authorized to provide
in their by-laws for the qualifications of
directors and is highly prudent and in
conformity with good practice.
 Corporate Governance
Disqualifications are likewise provided under
the 2009 Code of Corporate Governance.
Section 28. – Removal of directors or
trustees.
 Right to Remove
At common law, the inherent right to remove
a director for cause is known as “amotion”.
Under the Corporation Code, the authority to
remove the directors is the prerogative of the
stockholders or members of the corporation
reposed under Section 28. Hence, the directors
cannot indirectly usurp or disregard the said
power of the stockholders.
 Requisites of Removal
a. It must take place either at a regular
meeting or a special meeting of the
stockholders or members called for the
purpose;
b. There must be previous notice to the
stockholders or members of the intention
to remove a director;
c. The removal must be by a vote of the
stockholders representing 2/3 of the
 Outstanding Capital Stock or 2/3 of
members;
d. A director who was elected by the
minority must be removed only for a
cause.
The directors may elect the replacement
during the same meeting that such director
was removed.
 Removal Without Cause
A director who was elected by the majority
may actually be removed with or without cause.
The requirement that there must be cause for
removal is limited to a director who was elected
by the minority.
- Raniel vs. Jochico
The SC declared valid the removal of
two directors where 400 shares voted
for their removal and 2/3 of the
Outstanding Capital Stock was only
333.33 shares.
The votes of 400 shares were more
than enough to oust the two directors,
with or without cause.
 Disqualified Director
Removal should be distinguished from ouster
because of disqualification.
There is no need to follow the procedure
under Section 28 if the director is disqualified.
Mere declaration of disqualification as the
cause of vacancy is sufficient.
 Effect on the Shares
The removal of the director does not result in
the transfer of his shares; the removed director
remains a shareholder.
 Removal of Corporate Officers
Since the authority to elect corporate officers
rests with the Board, there is a correlative
authority to remove the corporate officers. The
removal of corporate officers is a corporate act.
Section 29. – Vacancies in the office of
director or trustee.
 Filling Up of Vacancies in the Board
Vacancies may be filled up either by the
stockholders (or members) or by the remaining
directors (trustees) constituting a quorum
depending on the reason for vacancy.
Vacancy is the operative fact that justifies the
election or appointment of the replacement.
The stockholders or members shall
replace/elect the director if the vacancy is due
to:
a. Removal;
b. Expiration of term;
c. A ground other than removal or
expiration of term (e.g. death,
resignation, abandonment) where the
remaining directors do not constitute a
quorum; or
d. Increase in the number of directors.
Allowing the remaining directors or trustees
to fill up vacancies avoids the expenses and
inconveniences attending the calling of
stockholder’s or member’s meeting, especially
32
where there are many of them.
Note that filling up of vacancies by the
remaining board members, if proper, is
mandatory. For instance, the remaining
directors may choose not to fill up the vacancy
and leave the matter to the stockholders. Thus,
the directors may call a special stockholder’s
meeting for such purpose.
Vacancy may occur if the director abandoned
his position. A director is deemed to have
abandoned his position where a director of the
corporation accepts a position in which his
duties are incompatible with and which will
render him physically incapable of performing
his duties as director.
 Effect of Vacancy
The Board may continue to function even if
there is vacancy as long as there is a quorum
and any act, transaction or resolution made by
them shall be considered valid.
 By-Laws
The by-laws may provide for the procedure
for the filling-up of the vacancy. Thus, the by-
laws may provide that the stockholders must fill
the vacancy instead of the remaining directors.
However, such provisions must be consistent
with the other provision of the Corporation
Code.
 Hold-Over Directors
If a director resigns after the expiration of the
term of the directors, and while the directors
continue to function in a hold-over capacity,
the position of the resigning director cannot be
filled by the remaining hold-over directors. The
vacancy is, in legal effect, not due to
resignation but to expiration of the term. A
vacancy is created the moment the term of the
directors expires. Hence, only the stockholders
can fill the vacancy.
Section 29 limited the instances when the
remaining directors can fill in vacancies in the
board. It contemplates a vacancy occurring
within the director’s term of office. When a
vacancy is created by the expiration of the
term, there is no more unexpired term to speak
of.
 Term
The director who will fill up the vacancy will
not serve for another one-year term. The
replacement will serve only for the remaining
period of the original term of the director that
he replaced for the reason that the term is a
fixed period and cannot be split into two or
more terms.
Section 30. Compensation of Directors
 Rules on Compensation
a. The by-laws may provide for a fixed
compensation of the members of the
Board.
b. If the by-laws does not provide for
compensation, compensation may be
granted to the directors by majority
vote of the stockholders representing
the OCS.
c. Even if the by-laws does not provide
for compensation, the directors are
entitled to reasonable per diems.
d. The total compensation of directors
shall not exceed 10% of the net income
before income tax of the corporation
during the preceding year.
 No Salary
Therefore, directors or trustees are not
entitled to salary or other compensation when
they perform nothing more than usual and
ordinary duties of their office.
 Per Diems
This is limited to pay for a day’s services.
They are allowances of money for expenses
each day.
 Limitations
The 10% limit means that the compensation
can be given only if there are profits.
 Compensation of Officers
The board may fix their compensation. It is
within the power of the board to fix the salaries
of the officers by way of a resolution.
The salaries of officers are not covered by the
10% limit.
A director is also entitled to receive salaries if
he is performing functions as an officer.
 Remedy in case of abuse
The remedies in case of clear abuse of
discretion to give salaries or in case of
compensations or per diems that are contrary
to the Code include a derivative suit.
Section 31. Liability of Directors, trustees or
officers.
 Duties. In a broad sense, management has
three paramount duties, namely:
33
a. Obedience
This requires compliance with the law
and rules. In relation to this duty,
directors, trustees and officers have the
duty to act intra vires and within
authority.
The directors, trustees and officers
must also obey the orders of courts.
b. Diligence
The directors and officers are required
to exercise due care in the performance
of their functions.
The requirement of presence of bad
faith and gross negligence indicates
that the directors and officers are not
liable for simple mistakes or
negligence. They are not insurers and
are not liable for errors of judgment or
mistakes while acting with reasonable
diligence, care and skill.
Gross negligence removes the act or
omission from the operation of
Business Judgment Rule.
The standard of care to be applied in
the exercise of diligence is that of a
reasonably prudent person.
c. Loyalty.
The director or officer owes loyalty and
allegiance to the corporation. Any
adverse interest of a director will be
subject to a rigid and uncompromising
scrutiny.
Directors and officers owe fiduciary
duty to the corporation and to the
shareholders. Hence the Code provides
for rules on: (a) self-dealing directors,
(b) contracts between directors with
inter-locking directorship, (c)
usurpation of the corporations
business opportunity, (d) oppression of
 the minority shareholders, and (e)
conflict of interest.
 Liability of Directors/Officers
As a rule, directors and officers are not
solidarily liable with the corporation.
Obligations incurred by them, acting as such
corporate agents, are not theirs but the direct
accountabilities of the corporation they
represent.
Criminal Liability – corporate officers or
employees through whose act the corporation
commits a crime, may themselves be
individually held liable for the crime.
Solidary Liability – in following situations,
personal liability may be incurred by the
directors and officers:
a. When directors and trustees or, in
appropriate cases, the officers of the
corporation:
i. Vote for or assent to the patently
unlawful acts of the corporation;
ii. Act in bad faith or with gross
negligence in directing the affairs of
the corporation;
iii. Are guilty of conflicts of interest to
the prejudice of corporation, its
stockholders or members, and other
persons;
b. When a director has consented to the
issuance of watered stocks or who,
having knowledge thereof, did not file
with the corporate secretary his written
objection thereto;
c. When the director, trustee or officer
has contractually agreed or stipulated
to hold himself personally and
solidarily liable with the corporation;
d. When a director, trustee or officer is
made, by specific provisions of law,
personally liable for his corporate
actions.
Gross negligence – the directors
would also be considered grossly
negligent if their action lacks business
purpose, is so egregious as to amount
to no-win decision, or a result from an
obvious and prolonged failure to
exercise oversight or supervision.
Watered Stocks – sections 62 and 65
Contractual Assumption of Liability –
a director or officer is personally liable
for the corporation’s debt if they so
contractually agree or stipulate. [Tupas
IV vs CA]
 Labor Cases
Generally, directors and officers are personally
liable in cases when they acted with malice or
bad faith in terminating the services of an
employee.
 Duties of Officers
Like directors, officers are similarly vested with
the duties of obedience, loyalty and diligence.
Section 32. Dealings of directors, trustees or
officers with the corporation.
34
 Self-Dealing Directors, Trustees or Officers
It is discouraged because the directors, trustees
and officers have fiduciary relationship with the
corporation, and there can be no real
bargaining where the same is acting on both
sides of the trade.
 Fair and Reasonable
Fairness typically requires that the transaction
reflect terms one would expect in an arm’s
length transaction, which means generally that
a self-dealing director must treat his
corporation’s interest as his own.
Section 33. Contracts between corporations
with interlocking directors.
 Effect of Interlocking Directorship
Interlocking directorship by itself is not
prohibited under the Corporation Code.
 Ratification
Contract between corporations with
interlocking directors/trustees must always
meet the condition that said contracts must be
fair and reasonable under the circumstances.
Relate with Section 32.
 Effect of Prejudice to Third Party
Section 33, which provides for rules regarding
transactions between corporations with
interlocking directors, applies if the contract
results in prejudice to one of the corporations.
This rule does not apply if the corporation
allegedly prejudiced is a third party, not one of
the corporations with interlocking directors.
Section 34. Disloyalty of a director.
 Doctrine of Corporate Opportunity
Section 34 of the Corporate Code is consistent
with the duty of loyalty of a director.
The duty of loyalty mandates that directors
should not give preference to their own
personal amelioration by taking the
opportunity belonging to the corporation.
Section 34 applies if there is presented to a
corporate director a business opportunity
which:
a. The corporation is financially able to
undertake;
b. From its nature, is in line with
corporations business and is of
practical advantage to it; and
c. Is one in which corporation has in
interest or a reasonable expectancy.
Gokongwei Jr. vs SEC
The Doctrine of Corporate Opportunity, as
originally crafted by the courts, recognizes
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.
 Tests
1. Interest or Expectancy Test
Precludes acquisition by corporate
officers of the property of a business
opportunity in which the corporation
has a “beachhead” in the sense of a
legal or equitable interest or
expectancy growing out of pre-existing
right or relationship.
2. Line of Business Test
Characterizes an opportunity as
corporate whenever a managing officer
becomes involved in an activity
intimately or closely associated with
the existing or prospective activities of
the corporation..
3. Fairness Test
Determines the existence of a
corporate opportunity by applying
ethical standards of what is fair and
equitable under the circumstances.
4. Mixed Test
Another approach is to apply any two
or all the tests. For instance, one court
applied a two stage test using both the
line of business test and the fairness
test.
It is believed that either the Fairness
Test or the Mixed Test can be applied
in this jurisdiction.
 Trustees and Officers Not Covered
Section 34 of the Corporation Code specifies
only the directors as the persons who are
covered by the Doctrine of Corporate
Opportunity.
Trustees are not included because non-stock
corporations are not supposed to be engaged
in business as a main purpose. 35
Section 35. Executive Committee.
 Purpose
The executive committee is a corporate body
“with standing in law, although in a sense, it is
an agent of the BOD because it performs what
otherwise is vested by law in the BOD”.
The Code allows the creation of an executive
committee because the board may not readily
face the contingency of confronting urgent
matters that requires its attention.
The executive committee can only be created
by virtue of a provision in the by-laws.
 Authority
The executive committee has all the authority
of the board to the extent provided in the
resolution of the board or in the by-laws.
However, there must be no undue abdication
of the powers of the Board. The rights of the
minority should not be impaired.
 De Facto Officers
If the executive committee was not validly
constituted, the members thereof maybe
considered de facto officers.
TITLE IV – POWERS OF CORPORATIONS
Section 36. Corporate powers and capacity.
 Special Capacities
A corporation can only do that which the law
authorizes it to perform.
 Kinds of Powers
1. Express
These are powers expressly provided by the
Corporation Code. This includes (a) general
powers under Section 36; and (2) the specific
powers under Sections 11, 16 and 37-44.
The powers expressly provided for in the
Corporation Code are deemed part of the
Articles of Incorporation even if such powers
are not enumerated therein.
2. Implied
This is recognized under paragraph 11 of
Section 36.
a. Implied powers include all powers that
are reasonably necessary or proper for
the execution of the powers expressly
granted and are not expressly or
impliedly excluded.
b. For instance, a corporation engaged in
mining has the power to establish a
local post office. [Republic vs. Acoje
Mining]
c. Similarly, a corporation that
authorized to operate a cement factory
has the implied power to operate an
electric power plant for such factory.
[Teresa Electric & Power Co. vs. Phil.
Service Commission]
d. A corporation engaged in advertising
business may pursue any and all
related activities covered by
purpose clause.
e. The SEC opined that manufacturing is
not implied from or incidental to the
business of selling that is stated in the
Articles of Incorporation.
f. A corporation cannot operate an online
casino on the basis of its secondary
purpose to operate amusement centers
for various computer games.
g. A corporation with a primary purpose
of trading goods can likewise import
goods.
Powers merely convenient or useful are not
implied if they are not essential, having in view
the nature and object of the corporation.
The SEC adopted the “Stretching of Purpose
Clauses Rule” under which it is legal to stretch
the meaning of the purpose clause to cover
new and unexpected situations. There is no
more need to amend the Articles
accommodate the new situations.
3. Incidental
These are powers that are deemed conferred
on the corporation because they are incidental
to the existence of the corporation.
This include:
a. Right to succession
b. Right to have a corporate name
c. Right to make by-laws for its
government
d. Right to sue and be sued
e. Right to acquire and hold properties
for the purposes authorized by the
charter
36
 Specific Powers
Sections 11 and 37, 16, 38, 39, 40, 41, 42, 43,
44.
 General Powers
The Board exercises general powers of the
corporation. Generally, approval of a resolution
by the board is enough for the exercise of such
powers.
is
 Other Powers (paragraph 11)
a. To enter into a Partnership. Generally, a
corporation is prohibited to enter into
partnership. By way of exception, the SEC
allows a corporation to be a partner if the
the following conditions are present:
i. The authority to enter into a
partnership relation is expressly conferred by
the charter or Articles, and the nature of the
business venture to be undertaken by the
partnership is in line with the business
authorized by the charter or Articles of the
corporation involved.
ii. The partnership must be a limited
partnership and the corporation must be a
limited partner.
iii. If it is a foreign corporation, it must
obtain a license to transact business in the
country.
b. To enter into a Joint Venture. A
corporation can enter into a JVA. JV is an
organization formed for some temporary
purposes.
Under Philippine law, a JV is a form of a
partnership and should be governed by the law
of partnerships.
to c. To borrow funds. The power to borrow
money is auxiliary to the primary purposes of
the corporation.
It is only the duly authorized representatives
that must secure loans in behalf of the
corporation. If the loan is the personal debt of
the corporate officer, the corporation is under
no obligation to pay the loan. [Juanity Ang vs.
Spouses Ang]
d. To act as Surety or Guarantor. The general
rule is that a corporation may not ordinarily be
bound by a contract of guarantee or surety for
the benefit of third persons.
However, such guaranty may be given in the
accomplishment of any object for which the
corporation was created or when the particular
transaction is reasonably necessary or proper in
the conduct of its business.
Re: Negotiable Instruments
A corporation cannot act as accommodation
party in a negotiable instrument. Issue or
indorsement of a negotiable instrument
without consideration and for the
accommodation of another is ultra vires.
e. To Mortgage. Corporate assets may be
mortgaged by authorized directors or officers
on behalf of the corporation as owner, as the
transaction of lawful business of the
corporation may reasonably and necessarily
require.
In the case of China Banking Corp. vs. QBRO
Fishing Enterprises, Inc., the SC sustained the
validity of a mortgage to secure the obligations
of a “sister company” under Article 2085 of the
NCC.
f. Practice of Profession. A view was
expressed in one case that the corporate
practice of any profession must never be
sanctioned.
Exceptionally, architects can organize a
corporation for the practice of their profession
under R.A. 9266.
Section 37. Power to extend or shorten
corporate term.
 Not inherent right
Shortening of corporate term can actually be
done at the discretion of the corporation under
Sections 117-120.
 Dissolution
The shortening of a corporate term may be
designed to have the effect of dissolving the
corporation. The dissolution takes effect on the
date of approval of the Amended Articles of
Incorporation by the SEC.
Section 38. Power to increase or decrease
capital stock; incur, create or increase
bonded indebtedness.
 The exercise of the power to increase or
decrease the ACS of the corporation results in
the amendment of the Articles.
This should be distinguished from mere
increase of subscribed capital stock or paid-up
capital that does not necessarily require
amendment of the Articles.
Stock Split
The increase or decrease of capital will not
necessarily result if there is a stock split. In 37
stock split, a share is divided or converted into
two or more shares but the amount of the OC
remains the same because the par value is also
divided in as many shares.
 Increase of Subscribed Capital
This is necessary when additional funds are
required by the operation and the corporation
opted to raise funds through additional
investments.
The power to issue shares of stock in a
corporation is lodged in the Board and no
stockholders’ meeting is required to consider it
because additional issuances of shares of stock
do not need approval of the stockholders.
An increase in the ACS is required if the
additional subscription cannot be covered by
the original authorized capital or if the original
authorized capital is already exhausted.
Increase in paid-up capital
Generally, there is also no need to get the
approval of the SEC for the creation of
additional paid-in capital. However, there are
certain cases when the valuation of the
consideration is subject to the approval of the
SEC like in cases where property is given in
payment of subscription price.
 SEC Approval
Section 38 provides that it is only from and
after approval by the SEC and the issuance by
the SEC of a certificate of filing that the capital
stock shall stand increased or decreased.
Thus, there is no increase in the ACS even if the
stockholders already paid the additional
subscription if there is no approval of the SEC.
[Central Textile Mills vs. National Wages and
Productivity Comm.]
Verification
SEC Memorandum Circular No. 6, Series of
2008 provides for the rules for on-site
verification of financial records relative to the
application for increase in capital stocks where
SEC will verify cash payment for subscriptions
or the conversion of advances/liabilities to
payment subscription for the increase.
 Bonded Indebtedness refers to secured
indebtedness or those secured by real or
personal properties that are covered by
certificates.
Section 39. Power to deny pre-emptive
right.
 This is aimed to maintain the existing ratio of
the shareholder’s interest and voting power in
the corporation.
 The pre-emptive right covers all issues and
dispositions, whether newly-issued or
previously subscribed shares.
 The pre-emptive right is not available when
shares are issued in exchange for shares in
another corporation if the same is the result of
a merger to which the corporations are parties.
 Waiver
Upon the expiration of reasonable time granted
to the stockholder, he who has not exercised
such right will be deemed to have waived it.
A stockholder who neither desires nor intends
to buy any of the stocks being offered may
waive such right. In which event, the shares
may be offered to any interested persons
acceptable to the corporation.
 Transfer
The right subscribed to new issues and
disposition may be transferred by the
shareholder. Unless there is an express
restriction in the Articles, the pre-emptive right
is transferable.
 Denial and Restriction
Even if the pre-emptive right does not exist,
either because the issue comes within the
exceptions in Section 39 or because it is denied
or limited in the Articles, an issue may still be
objectionable if the directors acted in breach of
trust and their primary purpose is to perpetuate
or shift control of the corporation, or to “free
out” the minority interest.
Section 40. Sale or other disposition of
assets.
 Requisites
Islamic Directorate of the Philippines
vs. CA
A sale, lease, exchange, mortgage,
pledge or other disposition of all or
substantially all of the properties and
assets of the corporation, including its
goodwill, requires the ff:
a. It must be approved by the majority
of the directors or trustees;
b. 2/3 of OCS or 2/3 of members in a
meeting duly called for the purpose
after written notice.
The sale is void if these are not complied 38
with.
If the transaction does not cover all or
substantially all of the assets, the decision of
the board is sufficient and it is not necessary to
get the approval of the stockholders.
 Kinds of Corporate Acquisitions
SME Bank vs. De Guzman
The SC explained the two types of
corporate acquisitions are:
a. Asset sales – the corporate entity
sells all or substantially all of its
assets to another entity.
b. Stock Sales – the individual or
corporate stockholders sell a
controlling block of stock to new or
existing stockholders.
 Effect on Creditors
GR: The transferee-corporation of all or
substantially all of the assets or shares of the
transferor-corporation will not be liable for the
debts of said transferor.
Exception: [Edward J. Neil, Co., vs.
Pacific Farms] The transferee-corporation is
liable if:
a. There is an express or implied
assumption of liabilities;
b.There is a consolidation or merger or a
de facto merger;
c. The purchase was in fraud of creditors;
and
d.The purchaser becomes a continuation of
the seller.
To allow the assignor to transfer all its business,
properties and assets without the consent of its
creditors and without requiring the assignee to
assume the assignor’s obligations will defraud
the creditors. [Caltex Inc., vs. PNOC Shipping]
Creditors are likewise protected under Articles Investment of a corporation in a business,
1313 and 1381 of the NCC. which is in line with its primary purpose,
requires only the approval of the Board.
Read about Badges of Fraud.
 Pursuing Secondary Purpose
 Effect on Employees of Corporate
Acquisitions If the corporation will pursue its secondary
purpose, it is required that the requisites under
SME Bank, Inc., vs. De Guzman Section 42 shall concur.

The SC reiterated that the dismissal of the

employees in good faith is justified if the
corporate entity sells all or substantially all of
its assets.
At any rate, even under the present doctrine,
it is still necessary that there is good faith in
the dismissal of the employees.
 Meaning of Investment
Investment of funds includes not only
investment of money but also investment of
property of the corporation.
39
Lease of property is included in the term
“investment of funds”. However, the SEC
imposes the following requirements that:

Section 41. Power to acquire own shares. a. The property is not presently used by the
company and the leasing thereof is not
 Requirements for acquisition
made on a regular basis;
b.By leasing the property, it will make it
The SEC adopted the following enumeration of
productive instead of allowing them to
requirements for the exercise of the power to
remain idle;
acquire the corporation’s own shares:
c. There are no express restrictions in the
a. The capital is not impaired;
articles of incorporation or by-laws;
b. A legitimate and proper corporate
d.The leasing is not used as a scheme to
purpose or objective is advanced;
prejudice corporate creditors or result
c. The corporate affairs warrant it;
in the infringement of the Trust Fund
d.The transaction is designed and carried
Doctrine; and
out in good faith;
e. There must be compliance with the
e. There is intended and there results no
requirements of Section 42.
undue advantage to a favored
stockholders at the expense of the
 Section 42 does not cover investment in
remainder;
shares. Thus, a corporation with idle funds may
f. The creditors are not prejudiced;
invest in shares for the purpose of generating
g.The corporation acts in good faith and
income.
without prejudice to the rights of
creditors and stockholders; and
h. There must be unrestricted retained
earnings to purchase the same. Section 43. Power to declare dividends.

Section 41 provides a non-exclusive list of
examples of cases when the corporation can
acquire its own shares. However, it is still
necessary under any of the 3 purposes under
the section that there are unrestricted retained
earnings even if already considered as
legitimate corporate purposes.
Other cases when UREs are no longer necessary
include redemption of redeemable shares
under Section 8, purchase for the purpose of
reducing the ACS under Section 38, and in case
of deadlock in a close corporation under
Section 104.
Section 42. Power to invest corporate funds
in another corporation or business or for any
other purpose.
 Board Discretion
The Board has the discretion to declare
dividends.
 Property Dividends
SEC Rules provide that the property to be
distributed shall consist only of property which
is no longer intended to be used in the
operation of the business of the corporation
and which are practicable to be distributed as
dividends.
 Stock Dividends
This involves the conversion of surplus or
undivided profits into capital.
This was discussed by the SC in the case of
PLDT vs. NTC; 2007:

 Pursuing Primary Purpose

The value of the declaration in the case of stock
dividend is the actual value of the original
issuance of said stocks.
It cannot be said that no consideration is
involved in the issuance of stock dividends. In
fact, the declaration of stock dividends is akin
to a forced purchase of stocks.
 Retained Earnings and Unrestricted
Retained Earnings Definedog
Memorandum Circular No. 11, S-2009
Retained Earnings is the accumulated profits
realized out of normal and continuous
operations of the business after deducting
therefrom distribution of stockholders or
transfers to capital stock or other accounts.
Unrestricted Retained Earnings is the amount
of accumulated profits and gains realized out of
the normal and continuous operations of the
company after deducting therefrom
distributions of stockholders and transfers to
capital stock or other accounts, and which is:
a. Not appropriated by its Board for
corporate expansion projects or
programs;
b.Not covered by a restriction for dividend
declaration under a loan agreement;
and
c. Not required to be retained under special
circumstances obtaining in the
corporation such as when there is a
need for special reserve for probable
contingencies.
 No Dividends from Capital
The Trust Fund Doctrine considers the
subscribed capital as a trust fund for the
payment of the debts of the corporation to
which the corporation may look for satisfaction.
[NTC vs. CA]
The doctrine will be violated if dividends are
declared out of capital except only in two
instances:
a. Liquidating dividends; and
b.Dividends from investments in Wasting
Assets Corporation.
Wasting Assets Corporation are solely or
principally engaged in the exploitation of
wasting assets.
 What is Included in Retained Earnings
MC No. 11 S-2009 requires the existence of
surplus profits arising from the operation of
corporate business before dividends can be
declared.
a. Paid-in Surplus cannot be declared as
dividends because they part of the
capital. It is the difference between the
par value and the issued value or
selling price of the shares and are not
considered as profits earned in the
conduct of business of the corporation.
It is also called as “premium”.
b. Revaluation Surplus, generally, cannot
be declared as dividend because they
cannot be considered earnings of the
corporation. There is revaluation
surplus if there is an increase in the 40
value of the assets. They are by nature
subject to fluctuations.
c. Gains from sale of real property are
available for dividend declaration
because they are part of the retained
earnings. However, there must be
surplus profits. Hence, the corporation
cannot distribute gains from sale of real
properties as dividends if the remaining
assets after the distribution are less
than the amount of legal or stated
capital and liabilities.
d. Treasury Shares cannot be declared as
stock or cash dividends because they
are not considered part of the earned
or surplus profits.
e. Interim Income. The presence of URE
can be determined only at the end of
the fiscal year. The corporation will not
be able to know if there are earnings
until the end of the year. Thus, as a
general rule, there can be no dividend
declaration for profits in a fiscal year
that has not yet expired.
 Who is entitled
Stockholders are entitled to dividends pro rata
based on the total number of shares and not
on the amount paid for the shares. However,
only stockholders at the time of declaration are
entitled to dividends.
Dividends declared before the transfer of
shares belong to the transferor and dividends
declared after the transfer belongs to the
transferee. In others, dividends belong to the
person who owns the stock when the dividend
is declared.
 Vesting
The right of the stockholders to be paid
dividends accrued as soon as the declaration is
made in accordance with Section 43. From that
time, the stockholder can demand payment
thereof.
Generally, dividends cannot be revoked by the
Board upon declaration. However, the same
rule does not apply to stock dividends before
the issuance of dividend declaration.
Note that with respect to cash dividends, the
funds are not actually set apart from the
general mass of the company’s funds and are
not appropriated for the payment of dividend
that has been declared.
 Amount
The amount to be declared as dividends
depends upon the amount of the URE. After
determining the available amount, dividends
shall declared pro rata unless there are
preferred shares that are entitled to a fixed
percentage.
When it comes to stock dividends, the
corporation is not required to pay dividend
according to their par values. Stock dividends
can be declared at a premium (value higher
than par.
Section 44. Power to enter into management
contract.
 Management Contract is an agreement
whereby one undertakes to manage or operate
all or substantially all of the business of
another, whether such contracts are called
service contracts, operating agreements or
otherwise.
 Approving Authority
Read codal.
Section 45. Ultra vires acts of corporations.
 Concept
It can be inferred from Section 45 that ultra
vires acts are those powers that are not
conferred to the corporation by-laws, Articles,
and those that are not implied or necessary or
incidental to the exercise of the powers so
conferred.
An ultra vires act is one committed outside the
object for which the corporation is created as
defined by the law of its organization and
therefore beyond the powers conferred upon it
by law. [Republic vs. Acoje Mining Co., Inc.]
 Distinguished from Other Acts
Pirovano vs. Dela Rama Steamship Co.,
Inc.
Strictly speaking, an ultra vires act is one
outside the scope of the powers conferred
by the legislature, and although the term
has been used indiscriminately, it is
properly distinguishable from acts which
are illegal, in excess or abuse of power, or
executed in an unauthorized manner, or
acts within corporate powers but outside
the authority of particular officers or
agents.
 Effects of Ultra Vires Acts
If the act is ultra vires not because it is illegal
but because it is not an express, implied or
incidental power, the same may, in certain 41
cases, be enforced.
Senator Salonga summarized the rules in this
wise:
1. A corporation that is engaged in ultra
vires business is liable for torts
committed by its agents within their
authority in the course of that business.
2. If a corporation acted outside its
authority in taking or holding title to
property, the validity of the Torrens
Certificate of Title cannot be
questioned on the ground that the
corporation was without authority or
exceeded its authority in taking or
holding the property.
3. When the contract is fully executed on
both sides, the contract is effective and
will stand as a foundation of rights
acquired under it.
4. When the contract is executory on one
side and has been fully performed on
the other, the party who has received
benefits from the performance is
stopped in claiming that the contract is
ultra vires.
5. When both contracts are wholly
executory on both sides, neither party
can maintain an action.
 It was observed in Pirovano vs Dela Rama
Steamship and Republic vs Acoje Mining that
an ultra vires act can be ratified and parties may
be estopped from raising such defense.
In Civil Law, ratification is recognized.However,
it is required that at the time of the ratification,
the cause of nullity has already ceased to exist.
It is believed that an ultra vires act cannot be
ratified. In ultra vires act, the act is not within
the power of the corporation, hence the ground
for being ultra vires cannot cease.
TITLE V
BY-LAWS

Section 46. Adoption of by-laws.
Section 47. Contents of by-laws.
 Concept
Loyola Grand Villas HOA vs. CA
The By-laws of a corporation are the rules
and regulations or private laws enacted by
the corporation to regulate, govern and
control its own actions, affairs and
concerns and of its stockholders or
members and directors and officers in
relation thereto and among themselves in
their relation to the corporation.
The provisions of the By-laws should be
distinguished from resolutions of the Board. A
provision in the By-laws is a permanent rule of
action and mode of conduct of corporate
affairs, while a resolution ordinarily applies only
to a single act of a corporation.
 Nature of Power; Effect of Non-Adoption
Gokongwei, Jr. vs. SEC
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.
The SC, in this case, rejected the view that
there is automatic dissolution of the
corporation for non-submission of the By-
Laws.
At the very least, a corporation that failed
to submit the by-laws may be considered
a de facto corporation whose right to
exercise corporate powers may not be
inquired into collaterally in any private suit
to which such corporation may be a party.
It was stressed that substantial compliance
with conditions subsequent will suffice to
perfect corporate personality.
 Requisites
a. Must not be contrary to law
The fact that the provisions of the by-laws,
which are contrary to law, have not been
questioned for several years cannot forestall
the challenge to their validity.
Neither can the by-laws provisions attain
validity through acquiescence because, if they
are contrary to law, it is beyond the power of
the members of the association to waive their
invalidity. [Grace Christian High School vs. CA]
b. Must not be contrary to Articles
The Articles should be given more weight than
the by-laws. Hence, in case of conflict the
provisions of the Articles shall prevail.
c. Must not be contrary to morals and
public policy
Consequently, the provisions must be
reasonable and must not be discriminatory,
arbitrary or oppressive upon the shareholders.
In Gokongwei, Jr. vs SEC: while additional
qualifications can be provided for in the by-
laws, the same should be applicable to all
shareholders and not merely on one or a group
of shareholders.
d. Vested Rights 42
The provisions of the by-laws must not disturb
vested rights. In Salafranca vs. Philamlife, the
SC declared that amended by-laws should not
undermine the security of tenure of an
employee by declaring non-existent an
employee’s position.
 Binding Effect
The provisions of the by-laws are binding not
only upon the corporation but also on its
stockholder, members and those having
direction, management and control of its
affairs.
However, they are not binding on subordinate
employees having no actual knowledge of the
provisions thereof.
As to third persons: they are not also binding
unless there is actual knowledge. Third persons
are not even bound to investigate the contents
of the by-laws.
 Contents [read codal]
Section 48. Amendments to by-laws.
 Two-ways to amend by-laws
A. By the Board and Stockholders
In the absence of an express provision denying
the right to vote by proxy in the Articles or By-
Laws, proxies may validly amend the By-Laws.
B. Delegation to the Board; Revocation
of Delegated Power
A stockholders’ meeting is necessary both for
the delegation of the power to amend the By-
Laws and the revocation of the delegated
power.
 Filing with the SEC
If the SEC approved the amended By-Laws, the
approval has the presumption of regularity. The
regularity of the performance of the functions
of government officials is presumed and strong
evidence is necessary to rebut this
presumption. [UCCP vs. Bradford United Church
of Christ]
TITLE VI
MEETINGS
Section 49. Kinds of meetings
Section 50. Regular and special meetings of
stockholders or members
Section 51. Place and time of meetings of
stockholders or members
 Requisites
a. It must be held on the proper date
which is the date fixed in the by-laws
or in the absence of a provision therein
on the date fixed under Section 50;
b. There must be previous notice;
c. It must be held in the proper place; and
d. There must be a quorum.
 Date and Time
As a rule, the annual meeting cannot be
postponed. It is the duty of the Board to
determine the date and time to hold the
meeting earlier or postpone it taking into
consideration the surrounding circumstances or
valid reasons.
If the annual meeting of stockholders is
postponed for a valid reason, the adjournment
of the meeting for purposes of electing the
new directors must be from day to day and not
sine die.
 Notice
Written notice is mandatory and therefore
essential to the validity of the stockholders’
meeting.
The corporation cannot close its eyes to the
fact that the stockholder or member is no
longer residing or holding office in the address
appearing in the Stock and Transfer Book. Bad
faith will be ascribed if it continues sending
notices to the address of record even if the
corporation is already aware of the real
address. [Calatagan Golf and Country Club vs.
Clemente]
 Waiver of Notice
The mode of sending notice may also be
waived. For instance, if notice through e-mail is
not provided for in the by-laws, the
stockholders may be deemed to have waived
the right to question the sending of such notice
if the stockholder does not object.
 Call of Meeting
In the absence of a provision in the By-Laws,
the power to call the meeting rests with the
Board.
 Agenda 43
The notice must indicate the matters to be
taken up during the stockholders’ meeting. The
meeting is irregular if there are particular
transactions to be resolved but the same was
not stated in the agenda.
 Stockholders and Members
All the stockholders and members have the
right to attend the special and regular
meetings.
With respect to stockholders, the best evidence
in determining who the stockholders who can
attend the meeting is the Stock and Transfer
Book. [Lao vs Lao]
However, the STB is not the exclusive evidence
of the fact that a person is a stockholder. Other
evidence – like the certificate and deed of
transfer – may be presented in an appropriate
proceeding to prove that the STB does not
reflect the accurate list of stockholders.
 One Share-One Vote Policy
Voting shall always be on the basis of the
number of shares and not on the number of
stockholders present in the stockholders’
meeting. [MC No. 4, S-2004]
 Effect of Failure to Call
Officers of the corporation, whose duty is to
call the stockholders’ meeting for purposes of
holding an election, but who shall deliberately
avoid or cause the failure of holding such
stockholders’ meeting shall be punishable as
officers of the corporation.
 Joint Meeting
There is no express provision of law or ruling
prohibiting the holding of a joint meeting of
stockholders and directors of different
corporations. It is sound practice, however, to
prepare separate minutes of meetings for the
different corporations.
Section 52. Quorum in meetings
 Concept
Quorum means the number of members of the
corporation, board or committee who must be
present in order to take action. The meeting is
void if there is no quorum.
A different quorum may be provided for in the
by-laws.
 Bases of Quorum
In stock corporations, the presence of a
quorum is ascertained and counted on the
basis of OCS.
In non-stock, the members vote as persons.
Section 53. Regular and special meetings of
directors or trustees
 Compliance with Rules
The Board must comply with the required
quorum, notice and other similar formalities.
The directors must act as a body in a meeting
called pursuant to law, or the corporation’s By-
Laws, otherwise, any objecting director or
shareholder may question any action taken
therein. [Lopez Realty, Inc. vs. Fontecha]
 Quorum of the Board
The quorum is the same even if there is a
vacancy in the board. If the required quorum
cannot be satisfied because of this vacancy, the
remedy is for the stockholders to fill the
vacancy.
If there is a quorum at the start of the meeting,
the meeting can still continue even if some of
the directors will leave thereafter.
 Proxy Not Allowed
A director cannot participate in a meeting by
proxy. While voting by proxy is allowed in all
meetings of the stockholders, the same is
explicitly prohibited under Section 25 with
respect to directors.
 Teleconference or Video Conference
Expertravel & Tours, Inc. vs. CA
Justice Callejo observed that in this age of
modern technology, the courts may take
judicial notice that business transactions
may be made by individuals through
teleconferencing. Teleconferencing is an
interactive group communication through
an electronic medium.
Section 54. Who shall preside at meetings.
 Presiding Officer Can Vote
The presiding officer is also a member of the
Board. Hence, it cannot be provided in the By-
Laws or a Board Resolution that he can only
vote in case of a tie in a board meeting.
Section 55. Right to vote of pledgors,
mortgagors, and administrators.
 When Shares are Pledged or Mortgaged
The stockholders whose stock certificates were
used as collaterals for a loan have the right to
vote unless said stockholders authorized the
bank in writing to vote the pledged or
mortgaged shares.
44
 Escrow Shares
Where a stock certificate is deposited in escrow
as security for a promissory note with
instructions to the holder to deliver the
certificate to the payee of the note and the
stock is so delivered and transferred to the
payee in the books of the corporation, the
payee-transferee has the right to vote the
same.
Section 56. Voting in case of joint ownership
of stock.
 Unanimity; When not required
In Civil Law, acts of ownership require
unanimity among the co-owners.
Not required when:
a. There is a written proxy signed by all
the co-owners authorizing any or some
to vote; and
b. The shares are owned in an “and/or”
capacity.
Section 57. Voting right for treasury shares.
 Treasury shares are not part of the
outstanding capital.
Section 58. Proxies.
 A proxy is a written authorization given by
one person to another so that the second
person can act for the first such as that given
by the shareholder to someone else to
represent him and vote his shares at a
shareholders’ meeting.
 Requirements:
a. In Writing;
b. Signed by the stockholder or member;
c. Filed before the scheduled meeting
with the corporate secretary;
 d. Unless otherwise provided in the proxy,
it shall be valid only for the meeting for  Procedural Requirements; must undergo
which it is intended; and the following stages:
e. No proxy shall be valid and effective
for a period longer than 5 years at any
a. Execution and notarization of the VTA
one time.
stating the terms and conditions
 Duration of Proxy thereof;

A proxy is deemed to be a specific proxy,

b. A certified copy of such agreement
unless otherwise stated.
shall be filed with the corporation and
A. Specific Proxy refers to one where the with the SEC, otherwise the agreement
authority granted the proxy holder is is ineffective and unenforceable;
merely for a particular meeting on a
specific date. A specific proxy can only
c. The certificate or certificates of stock
be used on the date and purpose
covered by the VTA shall be cancelled; 45
specified in the proxy.

B. Continuing Proxy is not limited to a

specific meeting and it continues for a
certain period but must not be more
than 5 years.
d. A new certificate shall be issued in the
name of the trustee or trustees stating
that they are issued pursuant to the

 The power to appoint a proxy is a personal VTA;

right. In contrast, a proxy can be given to two

or more persons jointly. e. The transfer shall be noted in the
books of the corporation, that it is

 Revocation made pursuant to said VTA; and

As a general rule, one who has given a proxy f. The trustee or trustees shall execute
the right to vote may revoke the same at and deliver to the transferors voting
anytime, unless the proxy is coupled with trust certificates, which shall be
interest, even though it may appear by its transferable in the same manner and
terms to be irrevocable. with the same effect as certificates of
stock.
It may be revoked in writing, orally, or by
conduct.
 Rights of Trustee

Legal title is acquired by the trustee; hence, he

Section 59. Voting Trusts. can be elected as a director in the company.
The trustor is deprived of such right during the
 Concept life of the VTA.

A Voting Trust is an agreement whereby a  Distinctions

stockholder of a stock corporation confers
VOTING TRUST PROXY
upon a trustee or trustees the right to vote and AGREEMENT
other rights pertaining to the shares for a Irrevocable Generally revocable
period not exceeding 5 years at any time, Legal title is No transfer of title.
transferred to the
 Substantial Requirements trustee.
a. Must not exceed the period of 5 years The share certificate No cancellation of the
shall be cancelled and certificate shall be
at any time;
transferred to the made.
b. In the case of voting trust specifically
trustee.
required as a condition in a loan Must be notarized. Need not be
agreement, said voting trust may be for notarized.
a period exceeding 5 years but shall Trustor-shareholder The shareholder
automatically expire upon full payment cannot vote. retains his right to
of the loan; vote.
c. Must be in writing and notarized; Cannot be for a Can be for a specific
specific meeting. meeting.
d. Shall specify the terms and conditions
Trustee can vote by The proxy cannot
thereof.
proxy. further delegate his
 authority to vote and  Subscription Contract
must therefore vote in
person. A subscription contract is formed by an offer by
The trustee votes in The proxy is the agent one of the parties, the corporation or the
his own right as of the shareholder. subscriber, as the case may be, and an
holder of legal title. acceptance of this offer by the other.
The trustee can be The proxy, as such,
 Stock Options and Warrant
elected as a director. cannot be elected as a
director. There are hybrid securities that should be
distinguished from subscription contracts.

A stock option is a privilege granted to a party

to subscribe to a certain portion of the
unissued capital stock of a corporation within a
specified period and under the terms and
conditions of the grant, exercisable by the
grantee at any time within the period granted. 46
A warrant is a type of security which entitles
TITLE VII the holder to the right to subscribe to the
unissued capital stock of a corporation or to
STOCKS AND STOCKHOLDERS purchase issued shares in the future, evidence
by a warrant certificate, detachable or not,
which may be sold or offered for sale to the
public but does not apply to a right granted
Section 60. Subscription contract.
under an option plan duly approved by the SEC
for the benefit of the employees, officers
 Acquisition of Share
and/or directors of the issuing corporation.
A person may become a stockholder in a  Parties
corporation by voluntarily acquiring a share.
Voluntary onerous acquisition of shares can be The parties in a subscription contract are the
by (1) purchase; or (2) subscription. Purchase subscriber and the corporation itself.
may be from the corporation itself or from In a sense, the subscription contract is also a
other shareholders. contract among subscribers. Consequently, an
original subscriber cannot withdraw from the
Purchase Subscription pre-incorporation subscription agreement
Can be made only Can be made before without the consent of all shareholders.
after incorporation. or after incorporation.
The purchase under a If there is no  Number of Shares Covered
deed of absolute agreement as to the
assignment or sale time of payment, the Even a subscription agreement covers two or
must fully pay the subscriber in a more shares; the subscription agreement is
purchase price at the subscription considered an indivisible contract.
time the shares are agreement need not
transferred. pay unless there is a  Form
call.
A subscriber who sells The subscriber cannot There is no law or rule in this jurisdiction
his share can condone be released from his requiring a form of subscription to capital stock
the obligation to pay. obligation to pay the as a requisite for its validity; hence, the same
subscription price. need not be in writing.
Statute of Frauds Statute of Frauds does
applies to purchase if not apply to  Kinds
the price is not less subscription contracts.
than Php 500.00. A subscription contract may be a pre-
incorporation subscription contract or a post-
incorporation subscription contract.
As a rule, only persons whose ownership are
registered in the stock and transfer book are
considered stockholders of record.  Trust Fund Doctrine (favorite ni Dean )

Mere inclusion in the General Information

Sheet (GIS) submitted to the SEC is insufficient.
The information in the GIS should be correlated
with the corporate records. As between the GIS
and the corporate records, the latter should
prevail. [Lao vs. Lao]
Under the TFD, the subscribed capital stock of
the corporation is a trust fund for the payment
of debts of the corporation which the creditors
have the right to look up to satisfy their credits.
The corporation may not dissipate this and the
creditors may sue stockholders directly for the
unpaid subscription. [CIR vs. CA]
In the case of Halley vs. Prinwell, Inc. [2011],
the SC clarified that the TFD is not limited to
reaching the stockholder’s unpaid
subscriptions. The scope of the doctrine when
the corporation is insolvent encompasses not
only the capital stock, but also other property
and assets generally regarded in equity as a
trust fund for the payment of corporate debts.
The Trust Fund Doctrine is violated in the
following instances:
a. When the corporation condones or
releases payment of the unpaid
subscription and the stockholder has
no right to demand the refund of his
investment;
b. When there is payment of dividends
without unrestricted retained earnings;
c. When properties are transferred in
fraud of creditors;
d. When properties are disposed or
undue preference is given to some
creditors even if the corporation is
insolvent; and
e. When the capital stock is decreased
which has the effect of relieving the
stockholders of the obligation to pay
their respective subscription.
Consistent with the doctrine, a stockholder has
no right to demand for the return of his
investment. His investment is “locked-in” until
the liquidation of the corporation.
 Sources of Capital
“Capital” includes all properties and assets of
the corporation that are used for its business or
operation. This should be distinguished from
the “Authorized Capital Stock” which is the
amount fixed in the Articles to be subscribed
and paid by the stockholders of the
corporation.
On the other hand, “Subscribed Capital” is
that portion of the ACS that is covered by
subscription agreements whether fully paid or
not, while “Paid-Up Capital” is that portion of
the ACS that has been subscribed and actually
paid. [MSCI-NACUSIP Local Chapter vs. NWPC]
The corporation can increase its Subscribed
Capital by (1) issuing the remaining balance of
the ACS or (2) increasing the ACS that
necessarily involves additional subscription.
Subscription is not the only source of corporate
funds after incorporation. As an ongoing
concern, the corporation may get funds not
only from shareholders but also from creditors
in the form of debts. Additionally, funds may
also come from the income of the corporation
as a result of its operation.
 Creditors
With respect to corporate creditors who supply
additional funds to the corporation, they fall
under 2 categories, to wit:
a. Commercial Creditors – are normally
short-term creditors including banks
and other institutional lenders who
extend revolving lines of short-term
credit.
b. Investment Creditors – are those who
acquire bonds or debentures issued by
the corporation.
47
Section 61. Pre-incorporation subscription.
 Nature
The presence of at least two contracting parties
is presupposed. In a pre-incorporation
subscription, not all the parties can give their
consent because one of the parties, the
corporation, is still non-existent.
 Binding Effect
Despite the non-existence of the corporation,
the subscription contract before incorporation
is valid and binding.
Section 62. Consideration for stocks.
 The consideration for the issuance of stock is
not limited to only one of those enumerated
under Section 62 because the law states that
the consideration may be any or a combination
of any two or more of those enumerated.
 Conversion (#6)
“Conversion” also includes conversion of a
single proprietorship or partnership into a
corporation or a spin-off of one or more
division of a company. The consideration in
these cases is actually the net assets of those
enterprises or units.
 Watered Stocks are stocks that are issued
for a consideration less than the par or issued
price thereof.
 Issued Price (last paragraph)
The “issued value” of the shares may be higher
than its par value. A share is a property that
may also appreciate in value. Hence, it may
happen that the fair market value or the book
value may be greater than the par value.
It should be recalled that the ACS is present
only if the shares of a corporation have par
value. It is possible to calculate and state the
subscribed capital by multiplying the number
of subscribed shares with the par value.

 Deposit on Subscription
The deposit on stock subscription refers to an
amount of money received by the corporation
as a deposit with a possibility of applying the
same as payment for the future issuance of
capital stock.
Section 63. Certificate of stock and transfer
of shares.
 Quasi-Negotiable
Stock certificates are non-negotiable
instruments under the NIL.
However, it has been said that stock certificates
are quasi-negotiable because they can be
transferred by indorsement coupled with
delivery. [Delos Santos, et.al. vs. MacGrath,
et.al.]
Nevertheless, the transferee of the stock
certificate takes it subject to such rights or
defenses as the registered owner or transferor’s
creditors may have under the law except
insofar as such rights or defenses are subject to
limitations imposed by the principle of
estoppel. [Tan vs. SEC]
 How Transfer is Made
Voluntary transfer of a share that is represented
by a certificate must strictly comply with the
following conditions to be considered binding
on the corporation:
a. There must be delivery of the
certificate;
b. The share must be indorsed by the
owner or his agent; and
c. To be valid to the corporation and
third parties, the transfer must be
recorded in the books of the
corporation.
 Who Will Transfer
The shareholder of record in the books of the
corporation has the right to transfer the shares.
However, the shares may be held in trust for
another person or entity.
The SC ruled in the case of Ponce vs. Alsons
Cement Corp. [2002], that if the corporation
never issued certificates, the transferee cannot
demand for the issuance of the certificates of
stock in his name. The Court explained that it is
the basic rule that a transfer of shares of stock
not recorded in the Stock and Transfer Book of
the corporation is non-existent as far as the
corporation is concerned.
Mandamus should not issue to compel the
secretary of the corporation to make a transfer
of the stock on the books of the corporation
unless it affirmatively appears that he has failed
or refused to do so upon demand either of the
person whose name the stock is registered or
of some person holding a power of attorney for
that purpose from the registered owner of the
stock.
It was explained in Lao vs. Lao, that absent a
written document, the alleged transferee must
prove, at the very least, possession of the
certificates of shares in the name of the alleged
48
seller.
 Rationale of Registration Requirement
The law requires registration of the transfer in
the books of the corporation in order to be
valid to third persons and the corporation itself.
What should be registered in the Stock and
Transfer Book are transfers. Transfer means any
act by which property of person is vested in
another and “transfer of shares” implies any
means whereby one may be divested of and
another acquire ownership of stock. [Chemphil
Export & Export Corp. vs. CA]
Consequently, registration in the STB is not
necessary if the conveyance is by way of chattel
mortgage. However, there must be due
registration with the ROD. [Chua Guan vs.
Samahang Magsasaka, Inc.]
 Unpaid Claim
The term “unpaid claim” refers to any unpaid
claim arising from unpaid subscription and not
to any indebtedness which a subscriber may
owe the corporation arising from any other
transactions. [China Banking Corp. vs. CA]
 Transfer Through Other Modes
Puno vs. Puno Enterprises, Inc.
Upon the death of a stockholder, the heirs
do not automatically become stockholders
of the corporation and acquire the rights
and privileges of the deceased as
shareholders of the corporation. The
stocks must be distributed first to the heirs
in estate proceedings, and the transfer of
the stocks must be recorded in the books
of the corporation. Until a settlement and
division of the estate is effected, the
administrator or executor holds the stocks
of the decedent. Consequently, during
such time, it is the administrator or
executor who is entitled to exercise the
rights of the deceased as stockholder.
Reyes vs. RTC
 An heir of the deceased stockholder has
no right to inspect the books of the
corporation until the transfer to the heirs
is recorded in the books of the
corporation. Without registration in the
books, the heir is also not entitled to the
right to file a derivative action.
 Execution Sale
A third party buyer of shares that were sold in
an execution sale is entitled to the registration
in the books of the corporation. The pendency
of the case between the judgment debtor and
judgment creditor is not a bar to such
registration. [Lee vs. Hon. Trocino]
However, the sale is without prejudice to the
proceedings to determine the liability of the
parties against each other.
 Regulation of Transfer
Shares of corporate stock, being regarded as
property, may be disposed by the owner as he
sees fit unless the corporation is dissolved, or
unless the right to do so is properly restricted
or the owner’s privilege is hampered by his
actions. [Padgett vs. Babcock & Templeton,
Inc.]
The corporation may regulate the transfer of its
stocks by providing certain formalities and
procedure in the By-Laws.
Any restriction on right to transfer must be
construed strictly. For instance, the corporation
may not put a stamp on the certificates that the
same are non-transferable.
 Remedies
The right of a transferee or assignee to have
the stocks transferred to his name is an
inherent right flowing from his ownership of
the stocks. Mandamus will lie against the
corporate officers who unduly bar the
registration of the transfer. [Rural Bank of
Salinas, Inc. vs. CA]
Mandamus will not lie against the corporation
where the shares of stock in question are not
indorsed by the registered owner who is
resisting registration thereof in the Stock and
Transfer Book. [Rivera vs. Florendo]
In some case, the transferee is given the right
to rescind the transfer of shares if the transferor
failed to comply with his reciprocal obligations.
However, rescission will not be permitted if
there is merely slight or casual breach. [Fontana
Resort and Country Club, Inc. vs. Spouses Tan]
Prescription
Considering that the law does not prescribe a
period within which the registration of the
transfer of shares should be effected, the action
to enforce the right does not accrue until there
has been a demand and a refusal concerning
the transfer. Hence, the action can be filed even
24 years after the transfer. [Ponce vs. Alsons
Cement Corp.]
 Right of First Refusal
The Articles may provide a right of first refusal
to stockholders as a limitation on transfer.
49
Section 64. Issuance of stock certificates.
 Stock Certificates
A certificate of stock is the paper
representation or tangible evidence of the
share but it is not the share itself. [Lincoln
Philippines Life vs. CA]
It is prima facie evidence that the holder is a
shareholder of a corporation. However,
evidence can be presented to determine the
real owner of the shares. [Bitong vs. CA]
Requirements for issuance:
a. The certificate must be signed by the
president or vice-president,
countersigned by the secretary or
assistant secretary;
b. The certificate must be sealed with the
seal of the corporation;
c. The certificate must be delivered;
d. The par value as to par value shares or
full subscription as to no par value
shares, must first be fully paid; and
e. The original certificate must be
surrendered where the person
requesting the issuance of a certificate
is a transferee from a stockholder.
It is also an implicit requirement for the
issuance of the certificate that the corporation
must be authorized to issue the stocks.
 Stockholder’s Right to Stock Certificate
While the issuance of a stock certificate is not a
condition precedent to render one a
stockholder, every stockholder has a right to
have a proper certificate issued to him by a
corporation, upon demand, as soon as he has
complied with the conditions which entitle him
to said certificate.
 Partial Payment
The effect of partial payment on the right to
transfer was discussed by the SEC in this wise:
“If the stockholder has not paid the full amount
of his subscription, he cannot transfer part of it
in view if the indivisible nature of subscription
contract. It is only upon full payment of the
whole subscription that a stockholder can
transfer the same to several transferees.
However, the entire subscription, although not
yet fully paid, may be transferred to a single
transferee, who as a result must assume the
unpaid balance.”
 Remedies for Non-Issuance
a. Action for specific performance;
b. Action for damages if (a) is not
available;
c. Petition for Mandamus for the issuance
of the certificate; and
d. Rescind the subscription agreement
with the consequent mutual restitution.
Section 65. Liability of directors for watered
stocks.
 Watered Stocks (defined under Section 62)
should be distinguished from Bonus Stocks.
Bonus stocks are stocks that are issued without
any valuable consideration. However, bonus
stocks are also covered by the prohibition
under the first sentence of Section 62.
Section 66. Interest on unpaid subscriptions.
Section 67. Payment of balance of
subscription.
 Liability
A stock subscription is a subsisting liability
from the time the subscription is made. The
subscriber is as much bound to pay his
subscription as he would be to pay any other
debt. The right of the corporation to demand
payment is no less incontestable. [Nava vs.
Peers Marketing Corp.]
My be subject to garnishment or ay sued for
recovery of indebtedness of the corporation
under Rule 39 of the Rules of Court. [Atilano II
vs. Judge Asali]
 Call
A call is therefore the resolution or formal
declaration of the board that the unpaid
subscriptions are due and payable. The unpaid
subscription is not due and payable without the
call. No cause of action until the call is made.
[Lingayen Gulf Electric Power Company vs.
Baltazar]
A call is not necessary in two cases:
a. When the date of payment is specified
in the subscription agreement; and
b. When the corporation is insolvent.
When insolvency supervenes upon a in his favor; and
corporation and the court assumes jurisdiction
to wind it up, all unpaid stock subscription
become payable on demand and are at once
recoverable in action instituted by the assignee
or receiver appointed by the court. [Velasco vs.
Poizat]
 No Set-Off
A corporation cannot deduct from any amount
due to an employee, the latter’s unpaid
subscription of shares. There can be no set-off
if there is no notice or call for the payment of
unpaid subscription. In the absence of a notice
or call of payment, the subscription price is not
demandable. [Apocada vs. NLRC]
50
Section 68. Delinquency sale.
Section 69. When sale may be questioned.
Section 70. Court action to recover unpaid
subscription.
 Available Remedies
The first and most special remedy given by the
statute if the shareholder is in default in paying
the subscription consists in permitting the
corporation to put up the unpaid shares for
sale and dispose of it in a delinquency sale for
the account of the delinquent subscriber.
[Velasco vs. Poizat]
The second remedy is the court action under
Section 70.
The offsetting of the debt of a stockholder
against his shareholdings is not permissible.
 Delinquency Sale (requisites)
a. Resolution. The Board shall issue
resolution ordering the sale of
delinquent stock;
b. Notice. Notice of said sale, with a copy
of the resolution, shall be sent to every
delinquent stockholder either
personally or by registered mail;
c. Publication. The notice shall
furthermore be published once a week
for 2 consecutive weeks in a newspaper
of general circulation in the province or
city where the principal office of the
corporation is located;
d. Sale. The delinquent stock shall be sold
at public auction to be held not less
than 30 days nor more than 60 days
from the date the stocks become
delinquent;
e. Transfer. The stock so purchased shall
be transferred to such purchaser in the
books of the corporation and a
certificate for such stock shall be issued
f. Credit of Remainder. The remaining
shares, if any, shall be credited in favor
 of the delinquent stockholder who
shall likewise be entitled to the
issuance of a certificate of stock
covering the same.
Section 71. Effect of delinquency.
 Unavailable Rights of Delinquents
The delinquent stockholder is not entitled to
any right of a stockholder.
The only exception is the right to dividends.
Stockholders who are not entitled to vote
because of delinquency should not be included
in the determination of the quorum.
Section 72. Rights of unpaid shares.
 Accrual of Rights of Shareholders
A pre-incorporation subscriber becomes a
shareholder from the moment the Certificate of
Incorporation is issued (inception of the
corporation).
One right which is not available if the shares
are not fully paid, is the right to secure a stock
certificate or to have the any subsequent
transfer registered in the books of the
corporation; Mandamus will not lie; transfer is
effective only between parties. [Nava vs. Peers
Marketing Corporation]
 Basic Rights
a. Voting rights
b. Right to remove directors
c. Right to dividends
d. Appraisal right
e. Right to issuance of stock certificate for
fully paid shares
f. Proportionate participation in the
distribution of assets in liquidation
g. Right to transfer of stocks in corporate
books
h. Pre-emptive right
i. Right to inspect books and records
j. Right to be furnished of the most
recent financial statement/financial
report
k. Right to recover stocks unlawfully sold
for delinquent payment of subscription
l. Right to file individual suit,
representative suit, and derivative suits.
 Obligations
a. Liability to the corporation for unpaid
subscription;
b. Liability to the corporation for interest
in unpaid subscription if so required by
the by-laws;
c. Liability to the creditors of the
corporation for unpaid subscription;
d. Liability for watered stock; and
e. Liability for dividends unlawfully paid.
 Derivative Actions
These are suits brought by one or more
stockholders/members in the same and on
behalf of the corporation to redress wrongs
committed against it, or to protect or vindicate
corporate rights whenever the officials of the
corporation refuse to sue, or the ones to be
sued, or has control of the corporation.
Rules for Derivative Actions are provided under
the Interim Rules of Procedure Governing Intra-
Corporate Controversies under R.A. 8799.
Exhaustion of Intra-Corporate Remedies
51
In order that a stockholder may sue on behalf
of the corporation, he must allege with some
particularity in his complaint that he has
exhausted his remedies within the corporation
by making a sufficient demand upon the
directors or other officers for appropriate relief
with the expressed intent to sue if relief is
denied. [Reyes vs. RTC]
Exhaustion of intra-corporate remedy is
typically deemed futile when a majority of the
directors have participated or approved the
alleged wrongdoing or are otherwise financially
interested in the challenged transaction.
[Kamen vs. Kemper Financial Services, Inc.]
 Individual Actions
These are actions brought by the shareholder
in his own name against the corporation when
a wrong is directly inflicted against him
personally and to determine his individual
right. A stockholder may file an individual
action or suit against another stockholder or
even against the corporation itself if he has
sufficient cause of action. [Guy vs. Guy, et.al.]
 Representative Actions
These are actions brought by the stockholder in
behalf of himself and all other stockholders
similarly situated when a wrong is committed
against a group of stockholders.
 2009 Code of Corporate Governance
The Code provides that the Board shall respect
the rights of the stockholders as provided for in
the Corporation Code.
Section 73. Lost or destroyed certificates.
 Outline of Procedure
1. Affidavit. The registered owner shall
execute and file an affidavit regarding
share and the circumstances regarding
its loss;
 2. Verification. The corporation shall
verify the affidavit and other
information evidence with the books
of the corporation;
3. Publication. The corporation shall
publish a notice in a newspaper of
general circulation published in the
place where the corporation has its
principal office, once a week for three
consecutive weeks at the expense of
the registered owner of the certificate
of stock that has been lost, stolen or
destroyed;
4. One-Year Waiting Period. There shall
be waiting period of one year from the
date of the last publication during
which a contest can be interposed;
5. Contest. If a contest has been
presented to said corporation or if an
action is pending in court regarding
the ownership of said certificate of
stock which has been lost, stolen or
destroyed, the issuance of new
certificate of stock in lieu thereof shall
be suspended until the final decision
by the court regarding the ownership
of said certificate of stock which has
been lost, stolen or destroyed; and
6. Replacement. If there is no contest
within the one-year period, the
corporation shall then replace the
certificate. The replacement of
certificate can only be made before the
expiration of the one-year period if a
bond is posted.
TITLE VIII
CORPORATE BOOKS AND RECORDS
Section 74. Books to be kept; stock transfer
agent.
 Corporate Books
The books that are required to be maintained
by the corporation under this Section are:
a. Book of minutes of stockholders’
meetings;
b. Books of minutes of board meetings;
c. Record or book of all business
transactions; and
d. Stock and Transfer Book.
The Minutes need not be a word-for-word
transcription of the proceedings.
The Minutes of Meeting of the BOD may be
proof of the existence of a contract. [PNB vs.
Aznar, et.al.]
Stock and Transfer Book as Evidence
The Stock and Transfer Book is the best
evidence of the transactions that must be
entered or stated therein. However, the entries
are considered prima facie evidence only and
may be subject to proof to the contrary. [Bitong
vs. CA]
Only the corporate secretary is duly authorized
to make entries on the STB. Hence, entries
made by the Chairman or President are invalid.
Any officer other than the secretary cannot
cause the registration of a transfer of shares in 52
the STB. [Torres, Jr. vs. CA]
Stockholder’s Right to Inspect
A stockholder can inspect the books of the
corporation. This right is part of the right of
shareholders to information. It is a right that is
personal to each stockholder. Hence, it can be
granted only upon demand by a shareholder.
[Cua, Jr. vs. Ocampo Tan]
The SC ruled in the case of Gonzalez vs. PNB,
that a stockholder who wants to avail of his
right to inspect must set forth in his request for
inspection the reasons or purpose of his
inspection.
Improper purposes include:
a. Learning business secrets to aid
competitor corporation;
b. To secure prospects of personal
business;
c. To look for defects in corporate
transactions for blackmail and
extortion purposes; or to pursue one’s
social or political goals.
Criminal liability for unlawful denial may be
imposed under Section 144 of the Corporation
Code. The case can prosper only against
officers who denied the demand for the
exercise of the right to inspect. An officer who
did not deny cannot be held liable. [Cua, Jr. vs.
Ocampo Tan]
Section 75. Right to financial statements.
 Submission to the SEC
Under Section 141 of the Corporation Code,
the corporation must submit to the SEC a
report of its operations together with audited
financial statements covering the preceding
fiscal year.
 TITLE IX
MERGER AND CONSOLIDATION
Section 76. Plan or merger of consolidation.
Section 77. Stockholder’s or member’s
approval.
Section 78. Articles of merger or
consolidation.
Section 79. Effectivity of merger or
consolidation.
Section 80. Effects of merger or
consolidation.
 Concept of Merger and Consolidation
Consolidation signifies a union that necessarily
results in the creation of a new corporation and
the termination of the constituent ones,
whereas a merger signifies the absorption of
one corporation by another which retains its
name and corporate identity with the added
capital, franchises and powers of a merged
corporation. [Bank of Commerce vs. Radio
Philippines Network, Inc.]
 Summary of Effects of Merger and
Consolidation
a.The constituent corporations shall become a
single corporation;
b.The separate existence of the constituents
shall cease except that of the surviving
corporation (in merger) or the consolidated
corporation (in consolidation);
c. The surviving or the consolidated corporation
shall possess all the rights, privileges,
immunities and shall be subject to all duties
and liabilities of a corporation;
d.The surviving or the consolidated corporation
shall possess all the rights, privileges,
immunities and franchises of each constituent
and properties shall be deemed transferred to
the surviving or the consolidated corporation;
and
e.All liabilities of the constituents pertain to the
surviving or the consolidated corporation.
 Effect on Employees
Bank of Philippine Islands vs. BPI
Employees Union [2010]
The SC observed that “there is nothing
in the Corporation Law and the merger
agreement mandating automatic
employment as regular employees by
the surviving corporation in the
merger.” The employees are not assets
and liabilities that are considered
absorbed. The Court stated that “the
Corporation does not also mandate the
absorption of the employees of the
non-surviving corporation by the
surviving corporation in case of
merger”.
 Reorganization
It should be noted that merger and
consolidation are included in the different
forms of corporate reorganizations that are
resorted to by corporations in weak financial
conditions.
 De Facto Merger and Consolidation
Bank of Commerce vs. Radio
Philippines Network, Inc.
The SC adopted the definition of de
facto merger “a de facto merger can be
pursued by one corporation acquiring all
or substantially all of the properties of
another corporation in exchange of
shares of stock of the acquiring
corporation. The acquiring corporation 53
would end up with the business
enterprise of the target corporation;
whereas, the target corporation would
end up with basically its only remaining
assets being the shares of stock of the
acquiring corporation.”
TITLE X
APPRAISAL RIGHT
Section 81. Instances of appraisal right.
 Exclusivity of Grounds
With respect to the grounds relied upon in the
exercise of the appraisal right, there are SEC
opinions to the effect that the right is available
only in the cases expressly provided for under
the Code.
There is no appraisal right in the absence of an
express provision because there may be a
violation of the Trust Fund Doctrine.
Appraisal is allowed only under the instances
provided in the Corporation Code, particularly
Sections 42, 81, and 105.
Section 82. How right is exercised.
Section 83. Effect of demand and
termination of right.
Section 84. When right to payment ceases.
Section 85. Who bears cost of appraisal.
Section 86. Notation on certificates; rights of
transferee.
 Conditions for Exercise as adopted by SEC
a. Any of the instances set forth by law for
the exercise of the appraisal right by a
dissenting stockholder must be
present;
b. The dissenting stockholder must have
voted against the proposed corporate
action;
 c. The demand for payment must be
made by the dissenting stockholder
within 30 days from the date a vote is
taken thereon. Failure to make such
demand within such period shall be
deemed a waiver of the appraisal right;
d. The price of the shares must be based
on the fair value as of the day prior to
the date on which the vote was taken
as determined in accordance with
Section 82;
e. Submission by the withdrawing
stockholder of his share certificates to
the corporation for notation as
dissenting shares within 10 days from
written demand;
f. Payment of shares must be made only
when the corporation has unrestricted
retained earnings in its books to cover
such payment; and
g. The stockholder must transfer his
shares to the corporation upon such
payment by the corporation.
 Remedy
The aggrieved stockholder may file the
appropriate action before the RTC to compel
the corporation to allow him to exercise his
appraisal right.
 Effect of Transfer
Transfer of shares of a dissenting shareholder
will result in the abandonment of the appraisal
right.
TITLE XI
NON-STOCK CORPORATIONS
Section 87. Definition.
 Non-Stock Corporation
CIR vs. Club Filipino de Cebu
The SC ruled that even if there is a
statement of capital stock, the corporation
is still not a stock corporation if dividends
are not supposed to be declared, that is,
there is no distribution of retained
earnings.
 Non-Profit
A corporation is non-profit “if it does not
distribute any part of its income to stockholders
or members”. Indeed, non-profit is not the
same as charitable.
 Nationality
The nationality of a non-stock corporation is
computed on the basis of nationality of its
members and not premised on the membership
contribution.
 Profitable Business
The SC explained that it does not follow that
because a corporation “is registered as a non-
stock corporation and thus exists for a purpose
other than profit, the company can no longer
makes profits. Earning profits is merely its
secondary, not primary, purpose. [Republic vs.
Sunlife]
 Conversion
A non-stock corporation cannot be converted
into a stock corporation by mere amendment
of the Articles. The amendment would be 54
inconsistent with the nature of a non-stock
corporation because the same will have the
effect of distributing the assets of the non-
stock corporation to its members so that the
latter can become its shareholders.
What the non-stock corporation should do is to
dissolve itself and the members may decide to
organize a stock corporation thereafter.
Chapter I – MEMBERS
Section 89. Right to vote.
 Voting Rights
The voting rights may be broadened in the
Articles or By-Laws of a non-stock corporation
by providing for a formula in determining the
number of votes to which a member is entitled.
Generally, the right to be present and to vote in
a meeting is determined by the time in which
the meeting is held. [Tan vs. Sycip]
The limitation that may be imposed is regional
elections for trustees so long as such mode of
election is provided for in the By-Laws. [Ao-As
vs. CA]
 Quorum of Members’ Meeting
The principle for determining the quorum for
stock corporations is applied by analogy t non-
stock corporations, only those who are actual
members with voting rights should be counted.
Section 90. Non-transferability of
membership.
 Exception
The rule proscribing transfer of membership
admits of an exception because the Articles or
By-Laws may provide for transferability of
membership.
The word “transfer” includes all transactions
whereby the property of one person becomes
that of another, whether by descent and
purchase.
Section 91. Termination of membership.
 One’s status as member of non-stock
corporation is not within the absolute control
of the member but is generally within that of
the Board.
Arroyo, et.al. vs. Rosal Homeowners
Association
Members may be expelled for non-
payment of dues and for non-attendance
of meetings as expressly sanctioned by the
By-Laws of the non-stock corporation. The
expulsion is valid if the same was made by
virtue of a board resolution and after
according the member the right to due
process including the procedure provided
for in the By-Laws.
 When Property Rights are Involved
There are instances when the membership
involves property rights (like membership in a
club) where the purchase of a share is a sine
qua non. In those cases when the loss of
membership in a non-stock corporation also
entails the loss of property rights, the manner
of deprivation of such property right should be
in accordance not only with the provisions of
the Articles and By-Laws but also with the
provisions of the Civil Code including Articles
19,20,and 21 thereof. It is unmistakably wise
public policy to require that the termination of
membership in a non-stock corporation be
done in accordance with substantial justice.
[Valley Golf & Country Club, Inc. vs. Caram]
Non-payment of dues may be ground for
termination or suspension of membership.
The non-stock corporation may also suspend,
expel, or otherwise terminate the membership
if the member is guilty of acts of disloyalty, for
making or reporting fictitious or false matters,
or acting in any way in bad faith, dishonesty or
dishonorably.
 Notice
For the termination of membership to be valid,
there should be:
a. Reasonable notice to the member
concerned; and
b. Fair opportunity to be heard in his
defense.
A non-stock corporation may be liable for
damages sustained by a member for the
termination of his membership that was done
in bad faith. [Calatagan Golf Club, Inc. vs.
Clemente, Jr.]
 Effect of Death of Member
Membership in and all rights arising from a
non-stock corporation are personal and non-
transferable unless the Articles or the By-Laws
provide otherwise.
Until a settlement and division of the estate is
effected, the stocks of the decedents are held
by the administrator or the executor. [Tan vs.
Sycip]
Dead members who are dropped from the
membership roster in the manner and for the 55
cause provided for in the By-Laws are not to be
counted in determining the requisite vote in
corporate matters or the requisite quorum for
the annual members’ meeting.
Chapter II – TRUSTEES AND OFFICERS
Section 92. Election and term of trustees.
Section 93. Place of meetings.
 Number of Trustees
While there appears to be no maximum limit
(even more than 15 trustees), the number
should not exceed the number of members of
the corporation.
 Qualifications
The only qualification for a trustee is
membership. Cessation of membership of the
member disqualifies him to be a trustee.
 Term
While the term may vary under the Articles or
By-Laws, lifetime or unlimited term of the
trustees is not allowable.
 Vacancy
Trustees may fill vacancies in the board,
provided that those remaining still constitute a
quorum.
In one case, the members replaced the trustees
who died. The SC ruled that while a majority of
the remaining corporate members were
present, the “election” of the four trustees
could not be legally upheld because the
election was held in an annual meeting of the
members, not the board of trustees. [Tan vs.
Sycip]
Chapter III – DISTRIBUTION OF ASSETS IN
NON-STOCK CORPORATIONS
 Specific qualifications Qualifications of
to be eligible as stockholders are not
Section 94. Rules of distribution. stockholder are normally prescribed.
usually provided for.
Section 95. Plan of distribution of assets.
Public offering of
Public offering of
shares is prohibited.
shares is not
prohibited.
 Distribution of Assets May be managed It is managed by the
directly by board of directors and
Non-stock corporations do not contemplate stockholders. not the stockholders.
distribution of gains, profits, or dividends to
their members on invested capital.
 “Closed Corporation” and “Closely Held
Corporation”

The term “closed” emphasizes a determination

on the part of the participants in the enterprise 56
to keep outsiders from acquiring any interest in
the business and may include that they have
taken steps to accomplish that objective by
TITLE XII shareholders’ agreement or provision in the
Articles or by-laws. In a “closed corporation”,
CLOSE CORPORATIONS
the shares are transferable but by agreement,
the provisions of the Articles or by-laws, the
components thereof opted to close its doors on
Section 96. Definition and applicability of other persons and effectively bar such other
Title persons from becoming shareholders.

 Requisites “Closely held” focuses more on the number of

a. All the corporation’s issued stock of all
classes, exclusive of treasury shares,
shall be held of record by not more
than a specified number of persons,
not exceeding 20;
shareholders in the corporation at that
particular time, indicating that they are few in
minutes. Thus, a “closely held corporation” has
been defined as a corporation the shares of
which are owned by a relatively limited number
of stockholders.

b. All the issued stock of all classes shall

be subject to one or more specified
Section 97. Articles of Incorporation
restrictions on transfer permitted by
Title XII of the Code; and Section 98. Validity of restrictions on
transfer of shares
c. The corporation shall not list in any
stock exchange or make any public Section 99. Effects of issuance or transfer of
offering of any of its stock of any class. stock in breach of qualifying conditions

Section 100. Agreements by stockholders

In San Juan Structural and Steel Fabricator’s,  Restriction on Transfer

Inc. vs. CA, 99.866% of the capital stock of the
subject corporation belonged to the spouses
involved in the case. However, the corporation
was not considered a close corporation because
the requisites specified under Section 96 are
not stated in the Articles.
It is mandatory for Articles of a close
corporation to provide that all of the issued
stocks of all classes shall be subject to one or
more restriction.
 Good Faith

Actual absence of knowledge on the part of the

CLOSE ORDINARY transferee will not free him from the mandatory
CORPORATION CORPORATION restriction.
There is a limitation There is no limit as to
on the number of the number of  Stockholders as Managers
stockholders to a shareholder.
The unity of the decision-making function and
maximum of 20.
the risk-bearing function in one group can
There must be a A restriction need not
avoid the sometimes costly agency problem of
restriction on the be provided for.
protecting passive shareholders who need
transfer of shares.
some method of monitoring the performance
of the corporation’s managers and insuring that
the management’s decisions are aligned with
the shareholder interests.
Effects:
 It is no longer necessary to elect
directors;
 The stockholder shall be deemed the
directors;
 The stockholder shall have the same
liabilities as directors;
 To the extent that the stockholders are
actively engaged in the management
or operation of the business and affairs
of a close corporation, the stockholders
shall be held to strict fiduciary duties to
each other and among themselves; and
 The stockholders shall be personally
liable for corporate torts unless the
corporation has obtained reasonably
adequate liability insurance.
Section 101. When board meeting
unnecessary or improperly held
 Board of Directors
The board is the governing body in an ordinary
corporation. In acting for the corporation, what
is normally required is a meeting whereby
resolutions will be approved by the board.
Section 102. Pre-emptive right in close
corporations
Section 103. Amendment of articles of
incorporation
Section 104. Deadlocks
Section 105. Withdrawal of stockholder or
dissolution or corporation
 Deadlock
There is deadlock when the directors or
stockholders are so divided respecting the
management of the corporation’s business and
affairs that the votes required for any corporate
action cannot be obtained, with the
consequence that the business and affairs of
the corporation can no longer be conducted to
the advantage of the stockholders generally.
TITLE XIII
SPECIAL CORPORATIONS
Chapter I – EDUCATIONAL CORPORATIONS
Section 106. Incorporation
Section 107. Pre-requisites to incorporation
Section 108. Board of trustees
 The term for educational corporations is also
50 years.
 The word “shall” in Section 108 indicates that
the provisions as to the number of directors
and that the member shall be in multiple of five
is mandatory.
 Constitutional Provisions
Section 17 of Article II of the Constitution
provides that the State shall give priority to
education, science and technology, arts, culture,
and sports to foster patriotism and nationalism,
accelerate social progress, and promote total 57
human liberation and development.
 Education Act
Section 25 of the Education Act of 1982
provides that any private school proposed to
is
be established must incorporate either a non-
stock corporation or stock educational
corporation.
Chapter II
RELIGIOUS CORPORATIONS
Section 109. Classes of religious
corporations
Section 110. Corporation sole
Section 111. Articles of incorporation
Section 112. Submission of the articles of
incorporation
Section 113. Acquisition and alienation of
property
Section 114. Filling of vacancies
Section 115. Dissolution
Section 116. Religious societies
 Registration not Mandatory
A religious domination, sect or church, society,
or organization which does not want to acquire
juridical personality separate and distinct from
its member need not register with the SEC.
An unregistered religious group does not
acquire all the rights and attributes of a juridical
person if not registered.
 Nature of Corporation Sole
A corporation sole is a special form of
corporation usually associated with the clergy.
A corporation sole consists of one person only,
and his successors (who will always be one at a
time), in some particular station, who are
incorporated by law in order to give them some
legal capacities and advantages, particularly
that of perpetuity which in their natural persons
they could not have had. [Roman Catholic
Apostolic Administration of Davao, Inc. vs. LRC]
 No Jurisdiction Over Ecclesiastical Affairs
The State cannot meddle into the purely
ecclesiastical affairs of the religious corporation.
However, courts can take cognizance of the
cases involving a religious corporation if the
matter does not involve purely ecclesiastical
affairs.
Even with their religious nature, the SEC may
exercise jurisdiction over them in matters that
are legal and corporate. [UCCP, Inc. vs. Bradford
United Church of Christ, Inc.]
 Term
The Code does not provide for the term of
religious corporations. Hence, they may be
allowed to exist perpetually.
 Merger
A merger between a corporation sole and
another religious corporation, if not forbidden
by the Constitution and the rules and
regulations or discipline of the religious
denomination, sect, or church may be allowed
since there is no provision in the Corporation
Code that prohibits such merger.
TITLE XIV
DISSOLUTION
Section 117. Methods of dissolution
Section 118. Voluntary dissolution where no
creditors are affected
Section 119. Voluntary dissolution where
creditors are affected
Section 120. Dissolution by shortening
corporate term
Section 121. Involuntary dissolution
 Dissolution defined
Dissolution is the extinguishment of the
franchise of a corporation and the termination
of its corporate existence.
 Modes
a. Voluntary
b. Involuntary
c. Shortening of Term
d. Expiration of Term
e. Revocation of the Certificate of
Incorporation by the SEC
 Power to Dissolve
The dissolution of the corporation must be in
accordance with the procedure prescribed by
law.
 Voluntary Dissolution
This may involve cases when no creditors are
affected and cases when creditors are affected.
58
Read Section 118 and 119.
 Expiration and Shortening of Term
A corporation is deemed dissolved if its term
provided for in the Articles of Incorporation
expired, without a valid extension having been
effected. [Majority Stockholders of Ruby
Industrial Corp. vs. Lim]
This may be a form of involuntary dissolution.
 Involuntary Dissolution
Modes
a. Filing a verified complaint under
Section 121;
b. Revocation of the Articles of
Incorporation by the SEC under PD
902-A;
c. Quo warranto proceedings.
 Effects of Dissolution
The corporation ceases as a body corporate to
continue the business for which it was
established; subject to 3 years winding-up
period.
 Incorporation of New Corporation
The stockholders are not prevented from
conveying their respective shareholdings
toward the creation of a new corporation to
continue the business of the old. [Chung Ka Bio
vs. IAC]
However, there must be liquidation and the
shareholder who obtains the property may
assign the same to the new corporation or may
use the property to pay for the new
subscription.
 Rehabilitation
Rehabilitation shall refer to the restoration of
the debtor to a condition of successful
operation and solvency, if it is shown that its
continuance of operation is economically
feasible and its creditors can recover by way of
the present value of payments projected in the
plan, more if the debtor continues as a going
concern than if it is immediately liquidated.
Rehabilitation contemplates a continuance of
corporate life and activities in an effort to
restore and reinstate the corporation to its
former position of successful operation and
solvency. [San Jose Timber Corp. vs. SEC]
Kinds
a. Voluntary rehabilitation
b. Involuntary rehabilitation
One of the required attachments to a Petition
for Rehabilitation is a Rehabilitation Plan.
Cram Down Rule
The Rehabilitation Plan confirmed by the court
shall be binding upon the debtor and all
persons who may be affected by it, including
creditors, whether or not such persons have
participated in the proceedings, or opposed the
Plan, or whether or not their claims have been
scheduled.
Stay Order
The Stay Order is included in the
Commencement Order to be issued by the
court having jurisdiction over the rehabilitation
case under Section 6 of FRIA.
The Stay or Suspension Order shall:
a. Suspend all actions or proceedings , in
court or otherwise, for the enforcement
of claims against the debtor;
b. Suspend all actions to enforce any
judgment, attachment or other
provisional remedies against the
debtor;
c. Prohibit the debtor from selling,
encumbering, transferring, or disposing
in any manner any of its properties
except in the ordinary course of
business; and
d. Prohibit the debtor from making any
payment of its liabilities outstanding as
of the commencement date except as
may be provided herein.
Suspended Claims
Claim shall refer to all claims or demands of
whatever nature or character against the debtor
or its property, whether for money or
otherwise, liquidated or unliquidated, fixed or
contingent, matured or unmatured, disputed or
undisputed, including, but not limited to:
a. All claims of the government, whether
national or local, including taxes, tariffs
and customs duties; and
b. Claims against directors and officers of
the debtor arising from acts done in
the discharge of their functions falling
within the scope of their authority.
Administrative Expenses
Certain administrative expenses should be paid
even if there is a Stay Order.
Solidary Creditors
The stay order does not apply to sureties who
are solidary liable. Thus, a claim against a bank
that issued a letter of credit can be pursued
because in the absence of stipulation to the
contrary, the obligation of banks issuing letters
of credit is solidary with the person who 59
applied for its issuance.
Secured Creditors and Foreclosure
The Order will stay all action for claims against
the debtor including claims by secured and
unsecured creditors. What is sought to
achieved is equality in equity. [New Frontier
Sugar Corp. vs. RTC]
Stage of Suspended Actions
All actions for claims against a corporation
pending before any court, tribunal, or board
shall ipso jure be suspended in whatever stage
such actions may be found upon the
appointment by the SEC of a management
committee or rehabilitation receiver.
Criminal Cases Not Suspended
The filing of a criminal case is not a claim that
can be enjoined under PD 902-A.
Effect on Contracts
The suspension of claims does not result in
amendment of contracts.
Management
The existing Board and/or Management of the
debtor shall continue.
Alternative Court Action
The Court may either:
a. Give due course to the Petition;
b. Dismiss the Petition; or
c. Convert the proceedings into
Liquidation Proceedings.
Out-of-Court Rehabilitation
Instead of a court supervised proceeding, an
out-of-court or informal restructuring
agreement or Rehabilitation Plan that meets
the minimum requirements is recognized under
the FRIA.
Liquidation Process
The liquidation of a corporation can result by
virtue of direct petition for liquidation of an
insolvent corporation. Alternatively, the
liquidation can originate from a rehabilitation
proceeding that was converted by the court to
a liquidation proceeding.
Simply put, liquidation is the proceeding where
claims are filed and the assets of the insolvent
debtor are disposed and the proceeds are
divided among the creditors.
Rights of Secured Creditors
The Liquidation Order shall not affect the right
of the secured creditor to enforce his lien in
accordance with the applicable contract or law.
Distribution of Assets
The assets of the insolvent debtor shall be
divided among the creditors in accordance with
the Liquidation Plan submitted by the
Liquidator and approved by the Court.
If the rehabilitation of the corporation is no
longer feasible and the assets of the
corporation are finally liquidated the rules on
concurrence and preference of credit already
applies. [Consuelo Metal Corp. vs. Planters
Development Bank]
Right of Minority to File
The general rule is that the minority
stockholders have no authority to sue for the
dissolution of the corporation. However,
jurisprudence acknowledges cases where even
the minority can ask for the dissolution of the
corporation under the theory that such minority
members if unable to obtain redress in the
corporation itself should not be left without a
remedy. [Financing Corporation of the
Philippines vs. Hon. Teodoro]
Section 122. Corporate liquidation
 Liquidation Defined
Liquidation means winding up of the affairs of
the corporation by reducing its assets, paying
its debt, and apportioning the profit or loss.
 Modes of Liquidation
1. Liquidation through the Board of
Directors;
2. Liquidation through a trustee to whom
the properties are conveyed; and
3. Liquidation through a receiver.
 Effect on Board Authority
If liquidation is through a receiver, the
appointment of a receiver operates to suspend
the authority of a corporation and its directors
and officers over the properties and effects.
Such authority is reposed on the receiver. [Yam
vs. CA]
 Period
Liquidation is supposed to be made within 3
years. However, if full liquidation can only be
effected after the 3-year period and there is no
trustee, the directors may be permitted to
complete the liquidation by continuing as
trustees by legal implication. [Clemente vs. CA]
 Effect on Rights
There is nothing that bars recovery of the debts
of the corporation after the 3-year liquidation 60
period. The claim of the creditors follows the
assets of the corporation. [Republic vs.
Marsman Development Company]
Corporate creditors may follow its assets as in
the nature of trust fund into the hands of the
stockholders. [Tan Tiong Bio vs. CIR]
 Liquidating Dividends
Liquidating dividends shall be distributed after
the corporation is dissolved and all its creditors
have been paid. They are nor paid on account
of earnings or profits but as a return of capital.
TITLE XV
FOREIGN CORPORATIONS
Section 123. Definition and rights of foreign
corporations
Section 124. Application to existing foreign
corporations
Section 125. Application for a license
Section 126. Issuance of a license
 Incorporation Test
Section 123 incorporates what is known as the
Incorporation Test under which a corporation is
determined to be foreign based on the place of
incorporation. However, there is a restrictive
provision imposed by Section 123 in so far as it
requires reciprocity.
 Modes of Doing Business
a. Subsidiary;
b. Branch Office;
c. Representative Office; or
d. Regional Headquarters/Regional
Operating Headquarters
 Branches
Instead of incorporating a subsidiary, a foreign
corporation may create “a branch in the
Philippines, which would not be legally
independent unit, and simply obtain a license
to do business in the Philippines”. A branch of a
foreign corporation is without legal personality
that is separate from the parent company.
[PDIC vs. Citibank]
Deposit of Securities of Branch
A branch office of a foreign corporation is
required to deposit securities with the SEC
which will be returned upon withdrawal of the
foreign corporation. The requirement is meant
to provide reasonable assurance that the
branch shall be able to settle its obligations to
the Philippine government and residents.
 License
Before a foreign corporation can transact
business in the Philippines, it must secure
proper authorizations under existing laws.
[Avon Insurance PLC vs. CA]
 Meaning of “Doing Business”
Mentholatum Co. Mangaliman
The SC explained in the case that the true
test seems to be whether the foreign
corporation is continuing the body or
substance of the business or enterprise
for which it was organized.
According to the Court, the doing
business implies a continuity of
commercial dealings and arrangements
and contemplates to that extent the
performance of acts or works or the
exercise of some of the functions
normally incident to, and in progressive
prosecution of, the purpose and object of
its organization. This “Twin-
Characterization test” includes the
“Substance Test” and the “Continuity
Test”.
To be doing or “transacting business in the
Philippines” for purposes of Section 133 of the
Corporation Code, the foreign corporation
must actually transact business in the
Philippines, that is, perform specific business
transactions within the Philippine territory on a
continuing basis in its own name and for its
own account.
Foreign Investments Act of 1991
Doing Business (at least 5):
a. Soliciting orders;
b. Entering into service contracts;
c. Opening offices, whether called
“liaison” offices or branches;
d. Appointing representatives or
distributors domiciled in the
Philippines;
e. Participating in the management,
supervision, or control of any domestic
business, firm, entity, or corporation in
the Philippines.
Not Doing Business (at least 5):
a. Mere investment as a shareholder by a
foreign entity in domestic corporations
duly registered to do business;
b. Having a nominee director or officer to
represent its interest in such
corporation;
c. The publication of general
61
advertisement through any print or
broadcast media;
d. Consignment by a foreign entity of
equipment with a local company to be
used in the processing of products for
export;
e. Collecting information in the
Philippines.
 Acting as Headquarter
A foreign corporation is doing business in the
Philippines if for several years, it has been
performing functions such as supervision,
communications and coordination for its home
office’s affiliates in Singapore, and in the
process has named its local agent and has
employed Philippine nationals. From this
uninterrupted performance by the foreign
corporation of acts pursuant to its primary
purpose and functions as a regional/area HQ
for its home office, it is clear that the petitioner
is doing business in the country. [Georg
Grotjahn GMBH & Co. vs. Hon. Isnani]
Insurance Corporations
A foreign corporation with a settling agent in
the Philippines that issued twelve marine
policies covering different shipment to the
Philippines is considered doing business in the
Philippines. One of its employed in its country
was appointed and sent to the Philippines as
the settling agent. [General Insurance Corp. of
the Philippines vs. Union Insurance Society
of the Philippines]
However, in Aboitiz Shipping Corp. vs.
Insurance Company of North America, the SC
ruled that a foreign insurance company may
sue in the Philippine courts upon a marine
insurance policy issued by it abroad to cover
international-bound cargoes shipped by a
Philippine carrier even if it has no license to do
business in the Philippines.
Distributors
If a foreign corporation that is engaged in
selling of goods has a local distributor, the
foreign corporation can still be considered as
not doing business if the distributor is
transacting business in its own name
independently of the foreign corporation and in
its own account and not in the name or for the
account of the foreign corporation. [La Chemise
Lacoste, S.A. vs. Hon. Fernandez]
Exporter to the Philippines
The mere act of exporting from one’s own
country, without doing any specific commercial
act within the territory of the importing
country, cannot be deemed as doing business
in the importing country.
Thus, in Cargill, Inc. vs. Intra Strata Assurance
Corp., the SC ruled that the petitioner, which is
a foreign company importing molasses from
Philippine exporter, is not doing business in the
Philippines.
 Liability of Liaison Office
If a foreign corporation establishes a fully
subsidized extension or liaison office in the
Philippines, the liaison office may be charged
with the liabilities of the foreign corporation.
The liability may be solidary. [Mavest (USA), Inc.
vs. Sampaguita Gamrnet Corp.]
Section 127. Who may be a resident agent
Section 128. Resident agent; service of
process
 Appointment of Resident Agent
The power of a resident agent is limited to
receive, for and in behalf of the corporation,
services and legal processes in all actions and
other legal proceedings against the foreign
corporation. He is not the attorney-in-fact of
the corporation.
 Substitution or Addition
In case of substitution or addition of a resident
agent, the foreign corporation shall file with the
SEC a petition for change or substitution of
resident agent within 30 days after the
acceptance of the appointment by the new
resident agent.
Section 129. Law applicable
Section 130. Amendments to articles of
incorporation or by-laws of foreign
corporations
Section 131. Amended license
Section 132. Merger or consolidation
involving a foreign corporation licensed in
the Philippines
 When Foreign Law Applies
The following matters are governed by the law
of the country of the foreign corporation and
not by Philippine Laws:
a. Creation, formation, or organization of
the foreign corporation;
b. Dissolution of the foreign corporation;
c. Rules which fix the relations, liabilities,
responsibilities, or duties of
stockholders, members, or officers of
the corporation to each other or to the
corporation.
62
Section 133. Doing business without a
license
 Summary of Rules
a. If a foreign corporation does business
in the Philippines without a license, it
cannot sue before the Philippine courts;
b. If a foreign corporation is not doing
business in the Philippines, it needs no
license to sue before Philippine courts
on an isolated transaction or on a
cause of action entirely independent of
any business transaction;
c. If a foreign corporation does business
in the Philippines with the required
license, it can sue before Philippine
courts on any transaction; and
d. If a foreign corporation does business
in the Philippines without a license, a
Philippine national who has contracted
with said corporation might be stopped
from challenging the foreign
corporation’s personality in a suit
before Philippine courts.
 Criminal Liability
Read Section 144 of the Code.
 Contract Not Void
The contract entered into by a foreign
corporation is not necessarily void ab initio.
Thus, if a foreign corporation which is doing
business without a license enters into a contract
with another party, any defect is cured if it will
subsequently obtain a license to do business.
The contract is enforceable and his requirement
of registration affects only the remedy. [Home
Insurance Company vs. Eastern Shipping]
 Estoppel
Merril Lynch Futures vs. CA
The SC ruled that a party is estopped to
challenge the personality of a corporation
 after having acknowledged the same by Section 139. Incorporation and other fees
entering into a contract with it.
Section 140. Stock ownership in certain
In Pari Delicto corporations

Top-Weld Manufacturing, Inc. vs. ECED, S.A. Section 141. Annual report of corporations

The SC adopted the in pari delicto rule holding Section 142. Confidential nature of
that no remedy could be afforded to the parties examination results
because of their presumptive knowledge that
the transaction was tainted with illegality. Section 143. Rule-making power of the SEC

 Subsequent Compliance
 Internal Organization of SEC
The Court ruled in Home Insurance Company
The SEC, as a collegial body, is composed of a
vs. Eastern Shipping Liner, that subsequent
chairperson and 4 Commissioners, appointed
acquisition of the license will cure the lack of 63
by the President for a term of 7 years each and
capacity at the time of the execution of the
who shall serve as such until their successor
contract.
shall have been appointed and qualified.

 Access to Reports

Section 134. Revocation of license Generally, all information filed with the SEC in
compliance with the requirements of the
Section 135. Issuance of certificate of Corporation Code and the SEC is required to be
revocation made available to the public.

 Revocation Not Penalty  Transferred Jurisdiction

The revocation of the license to do business
given to a foreign corporation is not an
infliction of a penalty. It is also not a
deprivation of a right but a withdrawal of
privilege.
Section 5.2 of the SRC provides that the SEC’s
jurisdiction over all cases enumerated under
Section 5 of PD 902-A has been transferred to
the Courts of general jurisdiction or the
appropriate RTC.

The following are within the jurisdiction of the

RTC:
Section 136. Withdrawal of foreign
corporations a. Fraudulent devices and schemes
employed by directors detrimental to
 State Discretion the public interest and to other firms;
b. Intra-corporate dispute and with the
It is discretionary upon the State to grant
state in relation to their franchise and
foreign corporations the privilege of engaging
right to exist as such;
in business in the Philippines.
c. Controversies in election, appointment
 Withdrawal of directors or trustees; and petition to
be declared in state of suspension of
At any rate, while a foreign corporation has the payments;
discretion to withdraw, it will not be allowed to d. Appointment of Rehabilitation Receiver
formally withdraw and no certificate of or Management Committee.
withdrawal will be issued unless its obligations
are paid.
Fraud

To fall within this jurisdiction, there must be

sufficient nexus showing that the corporation’s
TITLE XVI nature, structure, or powers were used to
facilitate the fraudulent device or scheme.
MISCELLANEOUS PROVISIONS [Reyes vs. RTC of Makati]

Intra-Corporate Controversies

Section 137. Outstanding capital stock In the case of DMRC Enterprises vs. Esta del
defined Sol Mountain Reserve, Inc., the Court
introduced the Nature of Controversy Test. It
Section 138. Designation of governing
was declared in this case that it is not the mere
boards
existence of an intra-corporate relationship that
gives rise to an intra-corporate controversy; to
rely on the relationship test alone will divest the
regular courts of their jurisdiction for the sole
reason that the dispute involves a corporation,
its directors, officers or stockholders.

With respect to election of officers, the

threshold question is whether or not the officer
is a corporate officer. If the officer is not a
corporate officer, original jurisdiction is with the
labor arbiter.

Section 144. Violations of the Code

 Penal Clause
64
It is the National Prosecution Service of the
Department of Justice that has the primary
jurisdiction to investigate and prosecute
criminal offenses under the Code.

In Baviera vs. Paglinawan, a case decided

when the Revised Securities Act was still in
force, the SC enunciated that a criminal
complaint is first filed with the SEC, which
determines the existence of probable cause,
before a preliminary investigation can be
commenced by the DOJ.

Section 145. Amendment or repeal.

Section 146. Repealing clause

Section 147. Separability of provisions

Section 148. Applicability to existing

corporations

Section 149. Effectivity