ADOPTION OF BY-LAWS

BY-LAWS
The rules of action adopted by a corporation for its internal government and for the
government of its stockholders or members and those having the direction,
management and control of its affairs in relation to the corporation and among
themselves (Loyola Grand Villas Homeowners (South) Association Inc. vs. Court of
Appeals (276 SCRA 681).

By-laws apply only to the components of a corporation – stockholders, members, and

officers of the corporation

NATURE AND FUNCTIONS OF BY-LAWS

 The nature of power to have by-laws is inherent in every corporation. It is not
essential to a corporation and not a condition precedent for the corporation to exist.
 The by-laws supplement the AOI.
 The function of by-laws is to define the rights and duties of corporate officers and
directors or trustees, and of stockholders or members towards the corporation and
among themselves with reference to the management of corporate affairs and to
regulate transaction of the business of the corporation in a particular way.
 Distinguished from a resolution; approved by-laws is a permanent rule of action and
mode of conduct of corporate affairs while a resolution ordinarily applies to a single
act of the corporation.
 When it is in conflict with AOI, the AOI prevails.

PROCEDURE FOR ADOPTION OF BY-LAWS

Before Incorporation
- It is to be approved and signed by all incorporators and filed simultaneously
with the articles

After incorporation
- Within a month after receipt of the certificate of incorporation.

 By-laws are adopted by the affirmative vote of stockholders or members

representing a majority of the outstanding capital stock or its members (Sec. 45)

Note: Sec 45 does not mention any approval that comes from the Board prior to
adoption. It simply makes mention of an adoption by affirmative vote of stockholders
or members and such vote must be by a majority. The reason for this is that the
terms “stockholders” or “members” are already inclusive of “Directors” or “Trustees”.

 It is to be signed by stockholders or members and is kept in the principal office

subject to inspection.
 A copy certified by a majority of the directors / trustees countersigned by the
corporate secretary is filed with the SEC and attached to the Articles.

*The By-laws are rendered valid upon the issuance by the SEC of a certification that it is
not inconsistent with the Code.

*If the corporation is regulated by specific agencies, it requires a certification from said
agency that the by-laws are in accord with the laws. The SEC shall not accept for filing
or any amendment thereto of a bank, banking institution, building and loan association,
trust company, insurance company, public utility, educational institution or other special
corporations governed by special laws unless accompanied by a certificate of the
appropriate government agency to the effect that such by-laws are in accordance with
law.

NON-ADOPTION OF BY-LAWS

 The non-adoption of by-laws does not result in the demise of the corporation. This
can be implied from the act that while it is given the power to adopt by-laws, it
doesn’t make it a matter of necessity to exercise the power to ensure corporate life
or to validate corporate acts (Gokongwei Jr. v SEC (89 SCRA 3364).
This can be implied from the given power to a corporation to adopt by-laws and
absence of any provision that makes it a matter of necessity for the corporation to
adopt by-laws for it to have corporate existence or for corporate acts to be validated.

 However, if the provision is interpreted to require by-laws, the non-adoption can be

ground for a suspension or a revocation of its corporate franchise, as it constitutes a
violation of the Code.

ELEMENTS OF VALID BY-LAWS

(a) they must not be contrary to the code, it is void if contrary to the code
(b) not contrary to moral or public policy
(c) must not impair obligations of contract - as a general rule
(d) they must be general and uniform in application
(e) they must be consistent with the Charter / Articles
(f) they must be reasonable or capable of compliance.

THE FOLLOWING HAVE BEEN HELD TO BE VOID STIPULATIONS: 

 
1.) Requiring the attendance of 4 members of a 5-member board for a meeting to void a
resolution enacted by 3 members although constituting a majority (Pena v. CA 193
SCRA 717).
Explanation: When we speak of a quorum, we mean one half plus one. So when,
in this particular case, the 3 members of a 5-member Board had already decided
upon the subject action, the provision on the by-laws where 4 out of the 5 can
void the resolution, was considered to be contrary to the Code.
 
2.) Granting a shareholder permanent representation in the board (Grace Christian High
School v. CA 281 SCRA 133).
Explanation: Membership in the Board is pursuant to an election.
 
3.) The amendment of a by-law provision to undermine the right to security of tenure of
a regular employee of the corporation cannot be allowed. Admittedly, the right to amend
the bylaws lies solely in the discretion of the employer, this being in the exercise of
management prerogative or business judgment. However this right, extensive as it may
be, cannot impair the obligation of existing contracts or rights. A contrary interpretation
would not find justification in the laws or the Constitution. If we were to rule otherwise, it
would enable an employer to remove any employee from his employment by the simple
expediency of amending its bylaws and providing that said position shall cease to exist
upon occurrence of a specified event (Salafranca vs. Philamlife Village Homeowners
Association 300 SCRA 469).

EXAMPLE OF VALID PROVISIONS IN BY-LAWS:

1. Declaring a person employed in the service of a rival company to be ineligible for
the Corporation’s BOD
2. A director who is ineligible, if elected, subjects him to removal, if he is also a
director in a corporation whose business is in competition with or is antagonistic
to the corporation.

BINDING EFFECT OF BY-LAWS ON THIRD PERSONS

General Rule: The by-laws binds only the stockholders or members, officers, and the
members of the Board and the Corporation itself. Insofar as a third person, the by-laws
is not binding.

Exception: Unless he has been specifically notified of a provision in the by-laws that
would have a material effect on the transaction with the Corporation.

By-laws cannot bind or affect 3rd persons that deal with the corporation unless they
have full knowledge of the pertinent portion of the by-laws affecting their transaction. A
contract signed by the chairman of the board, even if not mentioned in the by-laws as
an authorized signatory is valid (PMI Colleges v NLRC 277 SCRA 462). Absent any
knowledge or indication that they are notified of a by-law provision that would be
material to their dealings with or transactions with the Corporation, then any provision in
the by-laws would not affect them.

The purpose of by-laws is to regulate the conduct and define the duties of stockholders
or members towards the corporation and among themselves. They are self-imposed
and, although adopted pursuant to statutory authority, have no status as public law.
Notice to third persons will not be presumed (China Banking Corporation v Court of
Appeals 270 SCRA 503).
DOCTRINE OF APPARENT AUTHORITY
- otherwise known as Doctrine of Ostensible Authority
- By the Doctrine of Apparent Authority, the corporation will be estopped
from denying the agent’s authority if it knowingly permits one of its officers
or any other agent to act within the scope of an apparent authority and it
holds him out to the public as possessing the power to do those acts.
- “When in the usual course of business of the corporation, an officer or
agent is held out by such corporation, or has been permitted to act for it in
such way as to justify third persons who deal with him in assuming that he
is doing an act or making a contract within the scope of his authority, the
corporation is bound thereby even though such officer or agent does not
have the actual authority to do such act or make such contract.

 Notice to third persons will not be presumed.

 A contract signed by the chairman of the board, even if mentioned in the by-laws as
an authorized signatory is valid.
 No provision in the By-Laws may be adopted if it is contrary to law. (Tolerance
cannot be considered ratification. The practice no matter how long continued cannot
give rise to vested right if it is contrary to law.)

CONTENTS OF BY-LAWS (Sec. 46)

1) Time, place, manner of calling and conduct and regular or special meetings of
Directors or Trustees, stockholders or members and the mode of notifying them
2) Required quorum in meetings of stockholders or members and the manner of
voting
3) The mode by which a stockholder, member, director or trustee may attend
meetings and case their vote
4) Form of proxies of stockholders or members and the manner of voting them
5) Directors’ or trustees’ qualifications, duties and responsibilities, the guidelines for
setting compensation for directors or trustees or officers, and the maximum
number of other board representations that an independent director or trustee
may have which shall, in no case, be more than the number prescribed by the
SEC
6) Time of the holding of elections of Directors/Trustees and the manner of giving
notice thereof
7) Manner of election or appointment and the terms of officers other than
Directors/Trustees
8) Penalties for violation of By-laws
9) In stock corporation manner of issuing certificates
10)Such other matters as may be necessary for the proper conduct or convenient
transaction of its corporate business and affairs.

An arbitration agreement may also be provided.

Note: In determining whether a particular situation shall be in the by-laws or shall be
allowed to be in the by-laws, ascertain if the situation is applicable to those within or
inside the Corporation. If yes, then it shall be in the by-laws. Otherwise, it shall not.

AMENDMENTS TO THE BY-LAWS (SEC. 47)

2 Ways:
1.) It can be undertaken by a majority vote of the Board and majority vote of
stockholders or members in a meeting duly called for that purpose; or
2.) By vote of the Board, if the power to amend has been delegated by 2/3 vote of
the outstanding capital stock or members.
Provided that the delegated authority may be revoked by majority vote of
stockholders or members at a regular or special meeting. Note the omission of
the phrase “at a meeting duly called for the purpose”. In other words, the
revocation can happen in any meeting. There is no necessity for a meeting to be
called specifically for purposes of a revocation.

The amendment is then attached to the original by-laws in the office of the corporation
and a copy thereof duly certified under oath by the secretary and a majority of the Board
is filed with the SEC. It is effective upon issuance by SEC of a certification that it is not
inconsistent with the Code and other relevant laws.

If the corporation is regulated by specific agencies, it requires a certification from said

agency that the amendments are in accord with the laws.

BY-LAWS ARTICLES
By-laws provide rules or regulations Articles is the fundamental law of the
Corporation
By-laws are usually executed after Articles executed before incorporation
incorporation
The filing of By-laws may be a condition The filing of Articles is a condition
subsequent precedent to incorporation
In case, of a conflict between the Articles
and the By-laws, the former shall prevail
as the Code provides that the contents of
the latter shall be subject to the contents
of the former. Hence, if the articles
provide for a definite number of directors,
a contrary provision in the By-laws must
yield to the stated number in the articles
(Loyola Grand Villas Homeowners)