Notes in Corporation Law

(Revised Corporation Code of the Philippines)

1. Can a corporation be held criminally liable?

No. A corporation cannot be held criminally liable. Philippine law generally

does not impose corporate liability for the commission of crimes. Rather, it is the
responsible officers – directors, officers or employees of the corporation who are
held responsible for crimes and therefore also charged and penalized for the same.

However, if the penal law creates an offense for which a corporation may be
punished and then prescribes a fine, or both fine and imprisonment as penalty, a
corporation may be prosecuted and, if found guilty, may be fined.

On the other hand, if the statute defines a crime that may be committed by a
corporation but prescribes that the penalty imposed on the officers, directors or
employees of such corporation or other persons responsible for the offense, only
such individuals will suffer such penalty.

Examples of Corporate Criminal Liability: Anti-Graft and Corrupt Practices

Act – Acting as Intermediaries for graft and corrupt practices (Sec. 166), Engaging
Intermediaries for Graft and Corrupt Practices (Sec. 167), Tolerating Graft and
Corrupt Practices (Sec. 168); AMLA – the penalty shall be imposed upon
responsible officers;

2. a. Subscription Contract – Any contract for the acquisition of

unissued stock in an existing corporation or a corporation still to be
formed.

b. Pre-incorporation Subscription – It is a preparatory contract

among incorporators and initial subscribers.

c. Doctrine of Indivisibility of Subscription – The law requires

“full payment of subscription. A subscription covers all stipulated
shares. The corporation accepted partial payment on the premise that
the non-payment of the balance renders all subscribed shares
delinquent.

A subscription of shares in a corporation still to be formed shall be

irrevocable for a period of at least six (6) from the date of subscription, unless all
other subscribers consent to the revocation or the corporation fails to incorporate
within the said period or within longer period stipulated in the contact of
subscription.

2. Stock Subscription - It is a contract, oral or written, between the

corporation and the subscriber.

3. Consideration for Stocks – Stocks shall not be issued for a

consideration less than the par issued price thereof.

Consideration for issuance of stock may be:

a. Actual cash paid to the corporation;

b. Property, tangible or intangible, actually received by the
corporation;
c. Labor actually performed for or services actually rendered to
the corporation;
d. Previously incurred indebtedness of the corporation;
e. Amounts transferred from an unrestricted retained earnings to
stated capital;
f. Outstanding shares exchanged for stocks in the event of
reclassification or conversion;
g. Shares of Stock in another corporation; and/or
h. Other generally accepted form of consideration.

Consideration other than actual cash, or consists of intangible

property, such as patents or copyrights, the valuation thereof shall initially
be determined by the stockholders or the board of directors, subject to the
approval of SEC.

Shares of stock shall not be issued on exchange of promissory notes or

future service.

The issue price of no-par value shares may be fixed in the articles of
incorporation or by the board of directors pursuant to the authority conferred
by the articles of incorporation or by the by-laws, or if not so fixed, by the
stockholders representing the majority of the outstanding capital stock at a
meeting called for the purpose.

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 The capital represents the value of assets that form as corporate trust
fund, for operation and to answer liabilities to creditors of the corporation.

4. Watered Stocks; a. shares for a consideration less than their par

value or issue price; b. shares for a non-cash consideration issued in
excess of its fair value.

5. Number and Qualifications of Incorporators –

a. Any person, partnership, association, or corporation,

singly or jointly with others, but not more than 15;

b. Incorporators who are natural persons must be of legal

age and have legal capacity to enter into a contract;

c. A single person may form a corporation sole or one-

person corporation (OPC);

d. Each incorporator of a stock corporation must own or be

subscriber to at least one (1) share of the capital stock.

e. Natural persons, partnerships or associations may only

form a corporation for the purpose of exercise of a
profession if so authorized by law.

6. Components of Corporation –

a. The components of the corporation include:

i. Shareholders or members;
ii. Directors or trustees
iii. Officers

b. Incorporators are those who form the corporation; the

ones who compose and fund the corporation are called corporators;
those who manage the corporation are directors or trustees;
corporators of stock corporation are called stockholders or
shareholders; corporators of non-stock corporation are called
members; officers are those who are specified and designated as such
or given that character by law, Articles of Incorporation or By-laws of

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the corporation; the officers perform the duties enjoined on them by
law or the by-laws of the corporation.

7. Formation of Corporation involves several processes:

a. Submission and reservation of corporate name;

b. Initial submission of the Articles of Incorporation and
By-laws for review by SEC’s processors;
c. Submission of signed and notarized Articles of
Incorporation and By-laws; and
d. Upon approval and payment of registration fees, issuance
of Certificate of Incorporation with attached Articles of
Incorporation and By-laws;

The corporate existence and juridical personality of a

corporation commences from the date the Securities and Exchange
Commission issues the Certificate of Incorporation under its official
seal.

8. Articles of Incorporation as Charter and Contract –

a. The Articles of Incorporation has been described as a

document that defines the charter of the corporation.

b. The Articles of Incorporation defines the contractual

relationships between the State and the corporation, the
stockholders and the State, and between the corporation
and its stockholders. (Lanuza, et al. vs. Court of Appeals,
et al., G.R. No. 131394, March 28, 2005)

c. The Articles of Incorporation are not only binding on the

corporation, but also on its stockholders. It also binds the
Sate.

d. The Articles of Incorporation constitutes the constitution

of the corporation.

9. Why is a corporate name important?

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 A corporate name is peculiarly important as necessary to the existence
of a corporation. Its name is one of its attributes, an element of its existence,
and essential to its identity. It could sue and be sued in its name and do all
legal acts.

A corporate name or trade name is a property right, a right in rem.

In SEC Memorandum Circular No. 12-2008, the Commission requires

that “a business or trade name which is different from the corporate x x x
name shall be indicated in the articles of incorporation x x x. A company
may have more than one business or trade name.

10.Why is place of principal office important?

The place of business of a corporation shall determine the venue of

court cases involving corporations; it may also determine if service of
summons and notices was properly served. (Sy vs. Tyson Enterprises, Inc.,
119 SCRA 367 (1987).

The place of principal office is where the corporation is required to

maintain its basic corporate records;

It is also the place where the corporation must hold its shareholders’
or members’ meetings;

For local tax purposes, the place of principal office determines the
LGU where it should register and principally pay its tax;

A specific address is now required. (SEC Circular No. 3, Series of

2006)

11.Purpose or purposes (Purpose Clause) –

A corporation may have a primary purpose or secondary purpose/s.

Why is purpose important?

a. The directors and officers will know within what scope of

business they are authorized to act.

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 b. Third person who has dealings with the corporation may know
by perusal of the articles whether the transaction or dealing he has with the
corporation is within the authority of the corporation.

12.Board of Directors or Trustees –

a. Repository of Corporate Powers (Corporate Management)

The board of directors or trustees shall exercise corporate

powers, conduct all business and control all properties of the
corporation.

b. Tenure

Directors shall be elected for a term of one (1) year from among
the holders of stocks registered in the corporation’s books, while
trustees shall be elected for a term of not exceeding three (3 ) years
from among the members of the corporation.

A director who ceases to own at least one (1) share of stock or a

trustee who ceases to be a member of the corporation shall cease to be
such.

A director or trustee shall hold office until the successor is

elected and qualified.

c. Qualifications and Disqualifications

As a rule, a director or trustee must have all the qualifications

and none of the disqualifications under the Corporation Code.

A director must have at least one (1) share registered under his
name in the corporation’s books.

Unlike in the Corporation Code of the Philippines, majority of

directors or trustees need not be residents of the Philippines.

Requirement of Independent Director - Corporations vested

with public interest shall have independent directors constituting at
least twenty (20%) percent of such board.

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 Independent director is a person who, apart from shareholdings
and fees received from the corporation, is independent of management
and free from any business or other relationship which could, or could
reasonably be perceived to materially interfere with the exercise of
independent judgment in carrying out the responsibilities as a director.

Corporations covered by Section 17.2 of Republic Act No.

8799, otherwise known as “The Securities Regulation Code”, namely
those whose securities are registered with the Commission,
corporations listed with an exchange or assets of at least Fifty million
pesos (P50,000,000.00) and having two hundred (200) or more
holders of shares, each holding at least one hundred (100) shares of a
class of its equity shares; and corporations mentioned in Paragraphs
(b) and (c) of Section 22, Revised Corporation Code.

A person shall be disqualified from being a director or trustee

of any corporation if within five (5) years prior to the election or
appointment as such, the person was:

(a) Convicted by final judgment:

(1) Of an offense punishable by imprisonment for a

period exceeding six (6) years;

(2) For violating this Code; and

(3) For violating Republic Act No 8799, otherwise

known as “The Securities Regulation Code”;

(b) Found administratively liable for any offense involving

fraudulent acts; and

(c) By a foreign court or equivalent foreign regulatory

authority for acts, violations or misconduct similar to
those enumerated in paragraph s (a) and (b) above.

The foregoing is without prejudice to qualifications or other

disqualifications, which the Commission, the primary regulatory

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agency, or the Philippine competition Commission may impose in its
promotion of good corporate governance or as a sanction in its
administrative proceedings.

d. Who shall exercise corporate powers?

The Board of directors or trustees shall exercise corporate

powers as provided by Section 22 of the Revised Corporation Code.

e. Reason for the Concentration of Power

The concentration of powers in the board is necessary for

efficiency in any large organization. Stockholders or members are too
numerous, scattered and unfamiliar with the business of a corporation
to conduct its business directly. And so, the plan to choose directors or
members who shall manage and supervise the conduct of corporate
business.

Speed and cost, motivation and expertise are also issues for
consideration.

f. Business Judgment Rule

Under this rule, the will of the majority of the board members
controls in corporate affairs, and contracts intra vires entered into by
the board of directors are binding on the corporation and courts will
not interfere unless such contracts are unconscionable and oppressive
as to amount to a wanton destruction of rights of the minority. Courts
cannot undertake to control the discretion of the board of directors
about administrative matters as to which they have legitimate powers
of action. Judges are not experts; they cannot replace their judgments
for the judgment of the directors on business matters.

The board is the business manager of the corporation and so

long as it acts in good faith its orders are not reviewable by the courts
or the Securities and Exchange Commission.

The directors are not liable to the stockholders in making

decisions using their business judgment.

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 Business Judgment Rule as a Defense –

Business judgment rule is a defense when: (a) the act is intra

vires, or is within the powers of the corporation; (b) the members of
the board observed due care; and (c) the action has rational business
purpose, with no obvious corporate waste.

g. Election of directors or Trustees

(1) The election process starts with nomination, followed by

a meeting duly called for the purpose. The names of the duly elected
directors or trustees must be immediately reported to the Commission.

(2) The nominees shall be presented in a shareholders’ or

members’ meeting duly called for the purpose. In order to have a valid
election, “there must be present, either in person or through a
representative authorized to act by written proxy, the owners of the
majority of the outstanding capital stock, or if there be no capital stock,
majority of the members entitled to vote.” In the absence of the
prescribed majority, there will be failure of election.

(3) Shareholders or members may vote in person or through

a written proxy. There may be voting through remote communication
or in absentia if so permitted in the by-laws, except in corporations
vested with public interest. The election may be by show of hands, or
if so requested by any shareholder or member, by poll or ballot.

(4) The law follows the plurality voting. The nominees who
receive the highest number of votes shall be elected as member of the
board. To highlight, one vote cast in favor of a director or trustee is
sufficient if he is the only nominee. There is no need of the support of
‘majority of the outstanding capital stock, of if non-stock, a majority
of the members entitled to vote’.

The election is generally done through straight voting. In a

stock corporation, cumulative voting shall always be permitted.
Cumulative voting is not generally permitted in a non-stock
corporation.

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 (5) Cumulative Voting. “In stock corporations, stockholders
entitled to vote shall have the right to vote the number of shares of
stock standing in their own names, x x x vote such number of shares
for as many persons as there are directors to be elected, x x x (and)
cumulate said shares and give one (1) candidate as many votes as the
number of directors to be elected multiplied by the number of shares
owned.”

As mentioned, the total number of votes cast should not exceed

500 (100 shares x 5 board seats). The controlling block may cast 400
voters (80 shares x 5 board seats), while the minority block may cast
100 votes (20 x 5 board seats). Where the minority block opts to
cumulate its vote, it may cast 100 votes for its representative. The said
votes are sufficient to elect such representative to one board seat. The
controlling bloc may fill in the remaining board seats. It should be
noted that the minority director only received 100 votes. He does not
have the support of shareholders representing “majority of the
outstanding capital stock.”

h. Removal of Directors or Trustees

The law provides shareholders and members the power to

replace directors and trustees, respectively, anytime and generally, for
whatever reason. This collective power of the shareholders or
members to dismiss the board (or ‘shotgun’ power) is essential to
address the inefficiency, failure or abuse of the concerned directors or
trustees.

Any director or trustee of a corporation may be removed from

office by a vote of the stockholders having or representing at least
two-thirds (2/3) of the outstanding capital stock, or in a non-stock
corporation by a vote of two-thirds (2/3) of the members entitled to
vote.

Removal shall take place either at a regular or special meeting

called for the purpose, in either case, after previous notice to the
stockholders or members of the corporation of the intention to propose
such removal at a meeting.

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 A special meeting of the stockholders or members for the
purpose of removing any director or trustee must be called by the
secretary on order of the president, or upon written demand of the
stockholders representing or holding at least majority of the
outstanding capital stock, or a majority of the members entitled to
vote.

If there is no secretary or, if the secretary, refuses despite

demand, fails or refuses to call the special meeting or to give notice
thereof, the stockholder or member of the corporation signing the
demand may call for the meeting b directly addressing the
stockholders or members. Notice of the time and place of such
meeting, as well as of the intention to propose such removal, must be
given by publication or by written notice prescribed by the Code.

Removal may be with or without cause.

Removal without cause may not be used to deprive minority

stockholders or members of the right of representation to which they
may be entitled under Section 23 and 25 of this Code.

The Commission shall, motu propio, or upon verified

complaint, and after due notice and hearing, order the removal of the
director or trustee elected despite disqualification, or whose
disqualification arose or is discovered subsequent to an election.

The Commission may impose other sanctions on the directors

or trustees who, with knowledge of the disqualification, failed to
remove such directors or trustee.

i. Filling of Vacancies

The law seeks to avoid a vacuum in the board. It may lead to

disruption in the operation of the corporation. Such vacuum may arise
from term expiration, removal, increase in number, death or
resignation of directors or trustees.

The law requires their immediate replacement, following the

procedure for their election, subject to notice to the Commission
prescribed in Sections 23 and 25 of by the shareholders or members.

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 When the vacancy is due to term expiration, the election shall
be held not later than the day of such expiration at a meeting called for
that purpose.

When the vacancy arises as a result of removal by the

stockholders or members, the election may be held on the same day of
the meeting authorizing the removal and this fact must be stated in the
agenda and notice of the said meeting.

When the vacancy arises as a result of other cases, the election

must be held no later than forty-five (45) days from the time the
vacancy arose. A director or trustee elected to fill a vacancy shall be
referred to as “replacement director or trustee” and shall serve only
for the unexpired term of the predecessor in office.

However, when the vacancy prevents the remaining directors or

trustees from constituting a quorum and emergency action is required
to prevent grave, substantial and irreparable damage to the
corporation, the Code has permitted the creation of the “Emergency
Board”.

The law authorizes the remaining members of the board, by

unanimous vote, to designate a “Replacement Director or Trustee” for
the sole purpose of addressing the emergency. The designee shall be
chosen from among the corporate officers. The corporation must
notify the Commission within three (3) days from creation of the
emergency board.

The tenure of the designee shall end within a reasonable time

from the termination of the emergency, or upon the election of the
replacement director or trustee (through shareholders or members
action, whichever is earlier.

j. Compensation of Directors or Trustees

The law does not generally authorize the payment of

compensation to a shareholder or member as director or trustee,
because the election or appointment to the board is a consequence of
ownership. An owner or member is ordinarily expected to assume the

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post of director or trustee and manage the corporation for his ultimate
benefit, except: (a) for reasonable per diem; (b) when there is any
provision in the by-laws fixing the the compensation of directors or
trustees; and (c) when the stockholders representing at least majority
of the outstanding capital stock or majority of the members may grant
directors or trustees with compensation and approve the amount
thereof at a regular or special meeting.

The total yearly compensation of directors or trustees must not

exceed ten percent (10%) of the net income before income tax of the
corporation during the preceding year.

Directors or trustees shall not participate in the determination of

their per diem or compensation.

Corporations vested with public interest shall submit to their

shareholders or members and the Commission, an annual report of the
total compensation of their directors or trustees.

k. Compensation of Executive Directors or Trustees

A director or trustee may be appointed as corporate officer, like

President. His compensation is not subject of limitation as provided
by Section 29. It is a product of negotiation between a corporation and
the corporate officer, for his services and not for his appointment as a
member of the board.

l. Three-fold Duties of Directors or Trustees (Section 30)

The three-fold duties of directors or trustees, i.e. duties of

obedience, care (diligence, and loyalty. Corporate officers have
similar duties as agents of the corporation. In such a case, the law on
agency primarily determines their civil liability in case of breach of
such duties.

The law provides consequences of breach of the concerned

directors or trustees, namely: (a) personal joint and several liability
for all resulting damages suffered by the corporation, its shareholders

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or members and other concerned stakeholders; (b) fiduciary liability
as trustee for profits that would have accrued to the corporation; and
(c) administrative and criminal liability.

(1) Duty and Obedience

Directors and trustees must “perform their duties

as prescribed by law, ruled of good corporate governance
and by-laws of the corporation. They can perform and
exercise the powers conferred on the corporation by the
Corporation Code” and “by its articles of incorporation
and except as necessary or incidental to the exercise of
the powers conferred.” Thus, a breach of duty of
obedience may arise from ultra vires acts or unlawful
acts.

(2) Duty of Care

Members of the board must exercise great care in

directing the affairs of the corporation. However, to make
them personally liable, there must be “gross negligence
of bad faith.” Simple negligence does not give rise to
such liability.

Members of the board must: (a) take steps to

sufficiently inform themselves of relevant information
before making a decision, and (b) act in good faith and in
the honest belief that their action is in the best interest of
the corporation. The first standard (process due care) is
objective and the second (substantive due care) is
subjective.

(3) Duty of Loyalty

In general, directors or trustees, and agents have

the duty to promote the interest of their respective
beneficiaries. It is the basic fiduciary duty. The members
of the board as special fiduciaries have the duty to
promote the success of the corporation. They must not
“acquire any personal al pecuniary interest in conflict

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 with their duty as directors or trustees.” Further, they
must not “attempt to acquire, or acquire any interest
adverse to the corporation in respect of any matter which
has been reposed in them in confidence, and upon which,
equity imposes a disability upon themselves to deal in
their behalf. ” Thus, they must not accept bribes or
commissions from third parties.

Observance of duty of loyalty is relevant when

directors or trustees enter into a contract with the
corporation (“self-dealing contract”), negotiate on their
compensation, and personally acquire a corporate
opportunity.

m. Disloyalty

There is disloyalty when a director or trustee takes away

for himself a business opportunity that property belongs to the
corporation, thereby obtaining profits to the prejudice of such
corporation.

The director or trustee must account for and refund to the

corporation all such profits.

n. Dealings of Director, Trustees or Officers with the

Corporation

The function of the directors, trustees or officers requires

their loyalty to the corporation. They must avoid conflict
of interest. In directing its affairs, they must not extract
profits from the corporation. They must neither sell
overvalued properties to or buy undervalued properties
from the corporation. They must consider its best interest
and take actions that will benefit the corporation.

o. Contracts Between Corporation with Interlocking

Directors or Trustees

As a rule, a self-dealing contract between corporations

with interlocking directors or trustees is valid.

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 This includes cases where both interests of the directors
and trustees in the contracting corporation is nominal or
substantial. However, there must be no fraud or
misrepresentation, and the contract must be fair and reasonable.

p. Concept of Corporate Opportunity

A corporate business opportunity can be in various

forms. It can be an opportunity developed by a director making
use of corporate information or properties.

It can be an opportunity developed by a director who has

been tasked by the board to precisely develop such opportunity.

It can be an opportunity that has come to the director,

because of his position in the corporation, and he would not
have it if not for such position in the corporation. Finally, it is
an opportunity within the corporation’s existing or expected
line of business.

It can be ratified by a vote of stockholders owning or

representing at least 2/3 of the outstanding capital stock.

q. Executive Committee and other Special Committees

The board may create executive committee or special

committees for operational efficiency. “In view of the multi-
faceted and comprehensive duties of the Board associated with
their over-all final responsibility of ‘managing the affairs of the
corporation,’ the Board needs to structure itself and adopt a
Board protocol to guide its own internal processes. It should
also consider creating specialized committees to aid it in the
performance of its functions.”

1. Executive Committee

The Board may delegate its managerial authority

to an executive committee, but only when authorized in

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 the by-laws. The executive committee must be comprised
of at least three directors or trustees.

The decision of the executive committee is

considered a decision of the board. It is also called a
“small Board”.

The said committee may act, by majority vote of

all its members, on such specific matters within the
competence of the board, as may be delegated to it in the
by-laws or by majority vote of the board.

However, the law does not permit an executive

committee to: (a) initiate extraordinary actions needing
stockholders’ or members’ approval; (b) fill vacancies in
the board, amend or repeal by-laws or any board
resolution which by its express terms is not amendable or
repealable; and (c) distribute cash dividends.

2. Special Committees

The board may create special committees, even if

not explicitly authorized in the by-laws. Such committees
need not be comprised of directors or trustees, and may
be temporary or permanent in nature. The Board may
determine the members’ terms, composition,
compensation, powers, and responsibilities.

A special committee may be created for ‘policy

formulation.’

The board may assign them to perform tasks for

consideration of the board. Their action does not have the
effect of a board decision.

13.Meetings

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 Corporate meetings may only be undertaken following the
collective decision of the concerned body, in a properly convened
meeting. The law provides very limited exceptions. All members of
such body must be given sufficient notice and reasonable opportunity
to prepare, attend, and actively participate in the meeting.

In order to have a valid meeting: (a) it must be held at the stated

date (per by-laws) and appointed time or at a reasonable time
thereafter; (b) there must be previous notice; (c) it must be called by
the proper person; (d) it must be held at the proper place; and (c) there
must be quorum. A mere referendum without a meeting is not
sufficient. The meeting permits shareholders or members to
participate during the deliberations.

a. For shareholders’ or members’ meetings –

(1) Annual meeting, in the absence of specific

provision in the by-laws, may be set “on any date after
April 15 of every year, “ substituting “on any date in
April of every year.”

(2) Notice must be sent at least 21 days

(replacing “at least two weeks”) prior to the meeting. At
least 21 days, which is longer than two weeks by seven
days, is the standard corporate governance practice.

(3) The closure of the stock and transfer book at

least 20 days for regular meetings, and seven days for
special meetings, before the scheduled date of the
meeting. The by-laws may provide for a longer period.

(4) Meetings may be held in the principal office

of the corporation as stated in the articles, or if not
practicable, in the city or municipality where such office
is located. Any city or municipality in Metro Manila,
Metro Cebu or Metro Davao, and other metropolitan area
shall be considered a city or municipality. This replaces
the order in the old Code mandating the meeting should
be held in the city or municipality where the principal
office is located, and if not practicable in the principal

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office of the corporation. This changes the concept that
of Metro Manila being considered as a big city or
municipality. The change thus limits place of meetings to
the principal office and the city or municipality where the
principal office is located, disregarding other cities of
municipalities even though parts of the same
metropolitan area.

(5) The Chairman (replacing the president)

presides meetings of the board, shareholders or members.
However, in the absence of the Chairman, the president
presides the meetings.

(6) The board must endeavor to present the

prescribed information to the shareholders or members.

(7) A director, trustee, stockholder, or member

may propose any other matter for inclusion in the agenda
at any regular meeting of stockholders or members.

(8) A stockholder or member may propose the

holding of a special meeting and items to be included in
the agenda.

(9) Should there be postponement of the annual

meeting, the prescribed notice must be sent to all
shareholders or members at least two weeks prior to the
next scheduled meeting. The shorter period is justified
since there has been a prior longer notice to the
postponed meeting.

(10) Secured creditors and administrators may

vote the shares through proxies.

b. For board meetings

(1) Notice of regular or special meetings of

directors or trustees must be sent to every director or
trustee at least two days (replaces “at least one day”)

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 prior to the scheduled meeting, unless othe4rwise
provided by the by-laws.

(2) The Code mandates that a director or trustee

to disclose a potential interest in, and to recuse from
voting on the approval of, the related party transaction,
subject to proper treatment of self-dealing contracts. This
reinforces the requirements that his presence should not
be necessary to constitute a quorum, and his vote for the
approval for the contract. Simply put, the conflicted
director or trustee is better off being absent at the
meeting. It is his mere physical presence that could be the
source of undue influence, even if such presence is not
necessary for quorum or his vote necessary for approval
of the contract.

(3) Despite the silence of by-laws, directors or

trustees who cannot physically attend or vote in person at
board meetings can participate and vote through remote
communication, such as videoconferencing,
teleconferencing, or other alternative modes of
communication that allow them reasonable opportunities
to participate.

The Code sets the framework for virtual meetings and

electronic means to send notices.

c. Kinds of meetings –

Meetings of directors, trustees, stockholders, or

members may be regular or special.

(1) Regular and Special Meetings of

Stockholders or Members

(i) Regular meetings of stockholders or

members shall be held annually on a date fixed in the by-laws,
or if not fixed on any date after April 15 of the of every year as
determined by the board of directors or trustees: Provided, That
written notice of regular meetings shall be sent to stockholders

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or members of record at least twenty-one (21) days prior to the
meeting, unless a different period is required in the by-laws,
law, or regulation: Provided further, that written notice may be
sent to all stockholders or members of record through electronic
mail or such other manner as the Commission shall allow under
the guidelines.

(ii) Special meetings of the stockholders or members

shall be held at any time deemed necessary or as provided in
the by-laws: Provided, however, That at least one (1) week
written notice shall be sent to all stockholders or members,
unless a different period is provided in the by-laws, law, or
regulation.

(iii) Notice of Meetings - Notice of meetings shall be

sent through means of communication as provided in the by-
laws, which notice shall state the time, place and purpose of the
meetings.

(iv) Notice of meeting may be waived, expressly or

impliedly, by any stockholder or member. General notice of
waivers in the articles of incorporation or by-laws shall not be
allowed. Attendance at a meeting shall constitute a waiver of
notice of such meeting, except when the person attends the
meeting for the purpose of objecting to the transaction of any
business, because the meeting is not lawfully called or
convened.

(v) Place and time of Meetings of Stockholders or

Members - The place and time of meetings of stockholders,
whether regular or special, shall be held in the principal office
of the corporation as set forth in the articles of incorporation, or
if not practicable, in the city or municipality where the principal
office of the corporation is located.

(vi) Quorum in Meetings – Unless provided in the

Code or by-laws, a quorum shall consist of the stockholders
representing a majority of the outstanding capital stock or a
majority of the members in case of non-stock corporations.

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 (vii) Quorum in Stock Corporation – Generally, there is
quorum when there is presence in person or proxy of
stockholder representing a majority of the outstanding capital
stock.

Shares in the name of the deceased stockholder should be

counted. As long as they have been duly appointed by the court,
executors or administrators do not need proxy in their favor
from the heirs.

(viii) Quorum in Non-stock Corporations – For

non-stock corporations, “only those who are actual,
living members with voting rights shall be counted in
determining the existence of a quorum during members
meetings. Dead members shall not be counted. X x x
(The) majority of the members representing the actual
number of voting rights, not the number or numerical
constant that may originally be specified in the articles of
incorporation, constitutes the quorum.” (Tan et al. v.
Sycip and Lim, G.R. No. 153468, dated August 17, 2006.
Generally, membership is non-transferable.

(ix) Quorum in Special Cases – In the election of

directors or trustees, the Code requires the presence of
“owners of majority of outstanding capital stock, or there
be no capital stock, a majority of the members entitled to
vote. It does not admit a contrary stipulation.

(x) Voting Requirement - As a rule, the vote of

“majority of the quorum” is sufficient to pass a
resolution. However, with regard to the election of
director or trustee, he shall be declared elected if he
receives the highest number of votes cast during the
meeting.

(2) Regular and Special Meetings of Directors or

Trustees

(i) Quorum - the law requires presence of

majority of directors or trustees to have quorum for the

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 meetings. However, the articles or by-laws may provide
for a greater majority.

(ii) Voting Requirement – As a rule the vote of

“majority of the quorum” is sufficient to pass a valid
resolution. However, the vote of the “majority of all the
members” of the board is necessary to appoint corporate
officers. This means 1/2 plus one of the total number of
directors or trustees, as fixed in the articles of
incorporation. The same is true even when there is
vacancy in the board, The majority of the quorum rule
does not apply.

(iii) Liability of Directors or Officers of Watered

Stocks

A director or officer of a corporation who:

(a) Consents to the issuance of stocks for a

consideration less than its par or issued value;

(b) Consents to the issuance of stocks

other than cash, valued in excess of its fair value;
or

(c) Having knowledge of the insufficient

consideration, does not file a written objection
with corporate secretary, shall be liable to the
corporation or its creditors, solidarily with the
stockholder concerned for the difference between
the value received at the time of issuance of the
stock and the par or issued value of the same.

14.Certificate of Stocks

a. Subscription Contract

Any contract for the acquisition of unissued stock in an

existing corporation or a corporation still to be formed. It is a
contract between a corporation and a subscriber.

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 A subscription of shares in a corporation still to be
formed.

b. Pre-incorporation Subscription

It is a preparatory contract among incorporators and

initial subscribers. It is irrevocable within the stipulated period
no earlier than six months from subscription. It may not be
revoked after the articles of incorporation is submitted to the
Commission.

c. Shares of Stock are personal properties

They represent political and economic rights over the

corporation.

Political rights: (a) attend meetings; (b) elect

and be elected as directors; (c) approve the exercise of special
corporate powers; (d) access basic corporate information
and inspect corporate records.

Economic Rights: (a) the right to dividends; (b) the

right to transfer shares; and (c) the right to receive residue
assets, following the corporation’s partial or full liquidation.

d. Certificate of Stocks and Transfer of Shares

The capital stock of a corporations is divided into shares

for which certificates signed by the president or vice president,
secretary or assistant secretary, and sealed with the seal of the
corporation, shall be issued in accordance with the by-laws.

Shares of stock so issued are personal property and may

be transferred by delivery of the certificate or certificates
indorsed by the owner, his attorney-in-fact, or any other person
legally authorized to make the transfer.

No transfer, however, shall be valid, except as between

the parties, until the transfer is recorded in the books of the

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corporation showing the names of the parties to the transaction,
the date of transfer, the number of the certificate or certificates,
and the number of shares transferred.

e. Issuance of Stock Certificates

No certificate of stock shall be issued to a subscriber

until the full amount of the subscription together with interest
and expenses (in case of delinquent shares), if any is due, has
been paid.

f. Rights of Shareholders or Members

(i) Political and economic rights

(ii) Right to disassociate from the corporation, and
(iii) File court action to protect their rights.

g. Right to Disassociate

The law permits the shareholders to exit the corporation

by sale, transfer or conveyance of their shares; members may
resign or terminate their membership therewith.

h. Right to Institute court Action

Shareholders or members may institute a court action to

protect, and seek redress for violation of their rights, such as:
individual suit, class suit, and derivative suit.

(1) Individual suit

An individual suit is filed when the cause of action

personally belongs to the shareholder or member. He
must bring the action in his own name, and pay for the
corresponding costs of litigation. Example: Stockholder
is denied the right to receive dividends.

(2) Class Suit

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 A class suit is filed when the cause of action
belongs to a group of shareholders or members. This
refers to claims involving oppression of minority
shareholders, shareholders voting rights, and pre-emptive
rights; shareholder may exercise his appraisal right.

(3) Derivative Suit

It is an action initiated by a shareholder or member

in the name of and for the benefit of the corporation
against the management of controllers of the corporation.
The cause of action belongs to the corporation. The cause
of action is generally premised on the breach of duty,
care and loyalty. The benefits of the action will accrue to
the corporation and not to the shareholders of members
who instituted the action.

In Cua, Jr. vs. Tan, GR No. 181455-56 and

182008, December 4, 2009, differentiates derivative suit
and an individual/class suits:

“Xxx where a stockholder or member is denied of

inspection, his suit would be individual because the
wrong is done to him personally and not to other
stockholders or members or the corporation. Where the
wrong is done to a group of stockholders, as where
preferred stockholders’ rights are violate, a class or
representative suit will be proper for the protection of all
stockholders who belong to the same group. But where
the acts complained of constitute a wrong to the
corporation itself, the cause of action belongs the
corporation and not to the individual stockholders or
members. X x x.”

Requirements in filing a derivative suit:

To institute a derivative suit, the petitioner must

allege in his complaint that he is suing for and in behalf
of the corporation based in the derivative cause of action;

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 He must implead the corporation as an
indispensable party, which will be bound the court’s
judgment.

In such actions, the suing stockholder or member

is regarded as the nominal party, with the corporation as
the party-in-interest.

In a derivative suit, the petitioning stockholder or

member must specifically allege that:

(a) Violation of directors’ or trustees’ duties to

the prejudice of the corporation;

(b) Prior demand to the board to initiate the

required action;

(c) Unjustified refusal of the board to institute

such action;

(d) The exercise of appraisal right is not

available;

(e) The action is not a nuisance suit;

(f) Further, the action must be filed within the

prescribed period.

As a rule, a stockholder or member must make a demand

to the board to redress the wrong. Derivative suit is the final
recourse of the stockholder or member, after all remedies to
obtain relief sought had failed.

i. Interest on Unpaid Subscription

Subscribers of stocks shall be liable to the corporation for

interest on all unpaid subscriptions from the date of
subscription, if so required, at the rate of interest fixed in the

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 subscription contract. The prevailing legal rate shall apply.

j. Payment of Balance of Subscription

The unpaid subscription must be paid in accordance with

terms of the subscription contract. In the absence of such terms,
the payment must be made upon call of the board and on the
date specified in the call. The corresponding interest, if
stipulated, must be paid together with the unpaid subscription
that is due on the stipulated date or call. If no payment is made
within thirty (30) days, from the said date, all stocks covered by
subscription shall therefrom become delinquent and shall be
subject to sale.

The subscriber is not considered a corporate debtor for

the unpaid subscription. There is no interest on unpaid
subscription, unless expressly stipulated in the subscription
contract.

i. Delinquency Sale

The law allows the collection of the entire amount

through a public auction. The winning bidder will pay the entire
amount due, for the least number of shares. It covers the unpaid
subscription, accrued interest, if any, costs of advertisement,
and expenses of sale.

In theory, it is the shareholder who sells the delinquent

shares. There is agency by operation of law. The corporation is
merely regarded as agent of the delinquent shareholder, with
the authority to use the sale proceeds to pay for the amount due.

Procedure:

The Board declares the delinquency, following the non-

payment of subscription and accrued interest, if any, within the
30-day grace period.

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 The board shall offer the delinquent shares through a
public auction, set on date, at a time and place, and in a manner
that permits many persons to bid. The auction must not be
earlier than 30 days nor more than 60 days from the date of
shares become delinquent, i.e., from the end of the grace period.

The corporation must send notice to the delinquent

shareholder and the plan to sell the delinquent shares through
public auction. The notice may be sent by registered mail,
personal service or through other means sanctioned by the by-
laws. The delinquent shareholder shall be given all
opportunities to stop public auction, by paying the entire
amount due prior to the sale.

The corporation can: (a) recognize the winning bidder as

new owner for the shares sold, and (b) issue the corresponding
stock certificates to the winning bidder, and to the shareholder
for the remaining shares, if any.

Should there a failure of bidding, there will be a second

bid. The corporation may participate in such bid, provided it
has sufficient unrestricted retained earnings. If there is no
highest bidder, the corporation may be declared winner and
considered owner of such shares.

Court Action to Recover Unpaid subscription

Public auction sale of delinquent share is a speedy and

adequate remedy to collect the entire amount due. However,
there my be a need for a judicial action, when there is failure of
bidding and the corporation cannot acquire the shares in the
absence of unrestricted retained earnings.

Loss or Destroyed Certificates

The certificate of stock is a tangible representation of a

person’s rights over the corporation. There should be no two
certificates covering the same underlying shares.

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 The law provides the following procedure before a
corporation issues a new stock certificate in lieu of a lost, stolen
or destroyed certificate:

The registered shareholder must submit to the

corporation an affidavit, attesting to the circumstances of the
loss, theft or destruction of the subject certificate.

After verification of the information stated, the

corporation must cause the publication essentially stating the
name of corporation, the registered owner, the details of the
subject certificate and the underlying shares, and issuance of
replacement certificate after one year.

A one-year period is given to any interested party to

contest the issuance of the replacement certificate. If there is no
contest filed within the one-year period, the corporation may
issue a replacement certificate, and the requesting shareholder
must file a bond or other security for the benefit of any person.

Corporate Books and Records

Every corporation shall keep and carefully preserve at its

principal office all information relating to the corporation,
including, but not limited to:

(a) The articles of incorporation and by-laws of the

corporation and all their amendments;

(b) The current ownership structure and voting rights

of the corporation, including list of stockholders or
members, group structures, intra-group relations,
ownership data, and beneficial ownership;

(c) Names and addresses of all the members of the

board of directors or trustees and the executive
officers;

(d) A record of all business transactions;

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(e) A record of the resolutions of the board of
directors or trustees and of the stockholders or
members;

(f) Copies of the latest reportorial requirements

submitted to the Commission; and

(g) The minutes of all meetings of stockholders or

members or of the board of directors or trustees.

The minutes of meetings must contain basic

information, such as: (a) the time and place of
meeting and how it was held; (b) the notice
given and the agenda; (c) the purpose of meeting;
and (d) the persons present and absent.

The minutes must also reflect the matters

action taken, the time when any participant entered
or left the meeting, the yeas and nays, and the
protest on any action or proposed action.

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