d) POWERS THAT MAY BE EXERCISED - a corporation can only exercise powers

CORPORATION LAW REVIEWER

allowed by law while a partnership can exercise powers not contrary to law or public
policy.
e) MANAGEMENT - a corporation is managed by a board, while a partnership is
A. INTRODUCTION AND PRELIMINARIES managed by the managing partner.
f) SUCCESSION - a corporation enjoys the right of succession, while a partnership does
not.
g) PERSONAL LIABILITY - as a general rule, stockholders do not have personal
1. In the Philippines, business enterprises are organized principally in one of four forms, the single
liability beyond the value of their shares, while partners are liable beyond what they
proprietorship, the general partnership, the limited partnership, and the corporation. The choice
have contributed.
of the form of organization is usually made by the original organizers and is dictated by the
h) TRANSFERABILITY OF INTEREST - one's interest in a corporation is transferable
requirements of the business.
without consent of the stockholders, while that in partnership, it requires consent of
a. Normally, a single proprietorship will be resorted to if there is a single owner who has the
the other partners.
''necessary resources” for the intended business activity. Resort to partnerships and
i) TERM OF EXISTENCE - a corporation can exist for terms of no more than 50 years at
corporations are determined, to a large extent, by the need for resources and limitation of
any given time but subject to extension, while a partnership is not limited as to term.
liability. The choice between a partnership and a corporation on the other hand, is
(Old Law)
determined by economic factors.

- Section 11, of Revised Corporation Code, RA 11232

b. Perhaps, the most significant economic reason for the continued use of partnership is tax
based. A partnership's distributable income is taxed once, while that of the corporation is
SEC. 11. Corporate Term. – A corporation shall have perpetual existence unless its
taxed twice, once at the corporate level and once again at the stockholder level. Then again,
articles of incorporation provides otherwise.
the same reason may be advanced in favor of a corporate structure as the imposition of tax
at the stockholder level may be delayed until there is a declaration of dividends.
Corporations with certificates of incorporation issued prior to the
effectivity of this Code, and which continue to exist, shall have perpetual existence,
c. Another, though not necessarily less significant, is the nature of the business. Traditionally,
unless the corporation, upon a vote of its stockholders representing a majority of
partnerships are ideal for short term business ventures, where the organizers do not
its outstanding capital stock, notifies the Commission that it elects to retain its
foresee the continuance of their union after completion of the business activity and would
specific corporate term pursuant to its articles of incorporation: Provided, That any
like to liquidate their investments quickly.
change in the corporate term under this section is without prejudice to the
appraisal right of dissenting stockholders in accordance with the provisions of this
Code.

B. CORPORATION VS PARTNERSHIP A corporate term for a specific period may be extended or shortened by
amending the articles of incorporation: Provided, That no extension may be made
earlier than three (3) years prior to the original or subsequent expiry date(s) unless
there are justifiable reasons for an earlier extension as may be determined by the
1. They are distinguished as follows:
Commission: Provided, further, That such extension of the corporate term shall
take effect only on the day following the original or subsequent expiry date(s).

a) MANNER OF CREATION - a corporation is created by law, while a partnership is created A corporation whose term has expired may apply for a revival of its
by agreement. corporate existence, together with all the rights and privileges under its certificate
b) NUMBER OF INCORPORATORS - a corporation generally requires a minimum of 5 and of incorporation and subject to all of its duties, debts and liabilities existing prior to
a maximum of 15 incorporators, while a partnership requires a minimum of 2. The its revival. Upon approval by the Commission, the corporation shall be deemed
exception is a corporation sole. revived and a certificate of revival of corporate existence shall be issued, giving it
c) COMMENCEMENT OF EXISTENCE - a corporation commences to have existence upon perpetual existence, unless its application for revival provides otherwise.
the issuance of a certificate of incorporation while a partnership commences to have
existence upon agreement.

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 No application for revival of certificate of incorporation of banks, banking
and quasi-banking institutions, preneed, insurance and trust companies, non-stock
savings and loan associations (NSSLAs), pawnshops, corporations engaged in money
service business, and other financial intermediaries shall be approved by the
Commission unless accompanied by a favorable recommendation of the appropriate
government agency
j) DISSOLUTION – a corporation cannot be dissolved without the consent of the state,
while a partnership can be dissolved without the consent of the state.
involving the appointment of a trustee by a trustor for the administration, holding,
management of funds and/or properties of the trustor by the trustee for the use, benefit or
advantage of the trustor or of others called beneficiaries.
In the United States, a business trust is called the "Massachusetts Trust" because they
were developed in Massachusetts from 1910 to 1925. It is defined as an unincorporated
business association established by a declaration or deed of trust, and governed
contributions to the capital required and accepting a fair share of the risks and benefits
of the undertaking in accordance with universally accepted cooperative principles.

c. joint ventures

2. The Similarities are: d. Cooperatives

a) both have juridical personality e. Syndicates is a group of people who come together to work for a common aim. This
b) can act only through its agent unincorporated business association is often encountered among insurance companies
c) both are composed of an aggregate of individuals who may be underwriting a large risk or bonks who are lending 3 huge amount.
d) distribution of profits is given to those who have contributed capital Syndication therefore is the practice of dividing investment risk between several
e) both can only be organized if there is a law authorizing its registration persons in order to minimize individual risk.
f) both are taxed as corporation

Nonetheless, what is prevalent is the use of the corporate structure as the preferred
business organization. Reasons advanced for its use are: limitation of liability, capital generation C. ADVANTAGES AND DISADVANTAGES OF A CORPORATION
from equity, debt and income retention, organizational control, free transferability of
ownership, and succession.
1. The advantages are:
a. the capacity to act as a legal unit;
b. limitation of or exemption from, individual liability of shareholders;
3. Other forms of business organizations that have been utilized to varying degrees are: c. continuity of existence;
d. transferability of shares;
a. joint accounts or sociedad de cuentas en participacion are arrangements among merchants e. centralized management of board of directors;
who interest themselves in the transactions of other merchants, contributing thereto the f. professional management;
part of the capital they may agree upon, and who participate in the favorable or g. standardized method of organization and finance; and
unfavorable results thereof in the proportion they may determine. h. easy capital generation.

It is a form of business Association in which two or more persons interest themselves in the
business of another contributing thereto money, property or industry, and participating in 2. The disadvantages are:
the results of the business in the proportion that they may determine. a. it is prone to double taxation;
b. they are subject to greater governmental regulation and control;
b. business trusts is a legal relation whereby one person, called the trustor, conveys a c. corporation may be burdened with inefficient management if stockholders
property to another for the benefit of a person called the beneficiary. The person in whom cannot organize to oppose management;
confidence is reposed as regards the property is called the trustee. d. limited liability of stockholders may at times translate into limited ability to
raise creditor capital;
A trust agreement can actually be entered into with a trust department of a commercial or e. it is harder to organize compared to other business organizations;
universal bank. Pertinent regulations issued by the Bangko Sentral ng Pilipinas defines the f. it is harder or more complicated to maintain; and
term "trust business" as any activity resulting from a trustor-trustee relationship or trusteeship

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 g. the "owners" or stockholders do not participate in the day to day management. - SECTION 3, ARTICLE XII: Private corporations or associations may not hold such
alienable lands of the public domain except by lease, for a period not exceeding
twenty-five years, renewable for not more than twenty-five years, and not to exceed
D. SUBJECT COVERAGE one thousand hectares in area.

- These notes cover the Corporation Code, SEC Code of Corporate Governance,
Corporate Recovery, Securities Regulation Code, and other related laws.
E. THE CONSTITUTIONAL BASIS FOR ENACTMENT OF THE CORPORATION CODE (1980)
- SECTION 11, ARTICLE XII: No franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted except to citizens of
the Philippines or to corporations or associations organized under the laws of the
Philippines at least sixty per centum of whose capital is owned by such citizens, nor
shall such franchise, certificate, or authorization be exclusive in character or for a
longer period than fifty years.

- The constitutional basis for the Code is Section 4, ARTICLE XIV of the 1973
CONSTITUTION which provides: ‘The National Assembly shall not, except by general
The participation of foreign investors in the governing body of any public utility
law, provide for the formation, organization, or regulation of private corporations, unless
enterprise shall be limited to their proportionate share in its capital, and all the
such corporations are owned or controlled by the government or any subdivision or
executive and managing officers of such corporation or association must be citizens of
instrumentality thereof.
the Philippines.

- SECTION 16, ARTICLE XII OF THE 1987 CONSTITUTION: The Congress shall not,
F. SCOPE OF THE CORPORATION CODE
except by general law, provide for the formation, organization, or regulation of private
corporations. Government-owned or controlled corporations may be created or established
by special charters in the interest of the common good and subject to the test of economic
viability. The Corporation Code

- SECTION 2, ARTICLE XII: The exploration, development, and utilization of natural
resources shall be under the full control and supervision of the State. The State may
directly undertake such activities, or it may enter into co-production, joint venture, or
production-sharing agreements with Filipino citizens, or corporations or associations at
least sixty per centum of whose capital is owned by such citizens. Such agreements may be
for a period not exceeding twenty-five years, renewable for not more than twenty-five
years, and under such terms and conditions as may be provided by law.
a. Provides for the incorporation, organization and regulation of private corporations,
both stock and non-stock, including educational and religious corporations
b. Statement of corporate powers and provides for dissolution
c. Fixes the duties and liabilities of directors/trustees/officers
d. Declares the rights of stockholders or members
e. Prescribes the conditions under which it may conduct business
f. Provide penalties for violation of the Code
g. Repeal all laws or parts thereof that are inconsistent

- The President may enter into agreements with foreign-owned corporations involving
either technical or financial assistance for large-scale exploration, development, and
utilization of minerals, petroleum, and other mineral oils according to the general terms
and conditions provided by law, based on real contributions to the economic growth and
general welfare of the country.

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CORPORATION DEFINED - The corporation is said to be an artificial being that is invisible and intangible, it is said to
exist only in contemplation of law.
- The corporation as a juridical person has a personality separate and distinct from the
persons composing it.
The law defines a corporation as an artificial being created by operation of law having the right of
- In fact, this separate personality is recognized under the Civil Code which begins the
succession and the powers, attributes and properties expressly authorized by law or incident to its
minute it is said to be duly constituted according to law.
existence.

A. CONSEQUENCES: PROPERTY AND LIABILITY

THE ATTRIBUTES OF A CORPORATION

- It may acquire and possess property of all kinds as well as incur obligations and
1. created by operation of law
bring civil or criminal actions in conformity with laws and regulations of their
2. it is an artificial being
organizations.
3. it only has the power, attributes and property expressly allowed by law or incident to its existence
- Property so acquired or conveyed to the corporation is the property of the
4. it has the right of succession
corporation and vice versa. It has no personality to bring action for recovery of
property belonging to stockholders or its members.
- The interest of a stockholder/member is inchoate. It becomes actual, direct and
existing only upon liquidation of the assets of a corporation and its eventual
assignment to him.
1. CREATED BY OPERATION OF LAW

B. DOCTRINE OF SEPARATE JURIDICAL PERSONALITY

- When a corporation is said to be created by operation of law, it means that it cannot come into
existence without the consent or any grant of authority from the sovereign government.
- The grant of authority by the sovereign government is a concession. Thus the concept known
as the “Concession Theory ” or Government Paternity Theory" or the "Franchise Theory".
- This doctrine holds that a corporation is a juridical entity with legal personality
separate and distinct from those acting for and in its behalf and in general, from
the people comprising it.
- This affects liability for acts or contracts, right to bring actions, acquisition of property,
jurisdiction, and changes in the identity of stockholders or members.

- Distinguishing between Plenary or Corporate or General - franchise which refers to the

privilege enjoyed by individuals to form a corporation, and the; Secondary or Special C. DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION
Franchise which refers to the privilege enjoyed by the corporation to be and to act as a
corporation.

- Private corporations are generally organized and formed under the provisions of the
Corporation Code.
- They can also be formed under special laws or charters which then shall be the primary law
that will govern them to be supplemented by the Corporation Code.
2. IT IS AN ARTIFICIAL BEING
- It is a doctrine that allows the State to disregard for certain justifiable reasons the
notion that a corporation has a personality separate and distinct form the persons
composing it.
- It also known as the Doctrine of Disregarding the Fiction of Corporate Entity or
Corporate Alter Ego Doctrine.
- It is an exception to the Doctrine of Separate Juridical Personality because the
application of the doctrine seeks to hold the stockholder or members of the
corporation personally liable for corporate obligations.
- Before piercing, determine if it is a corporate obligation.

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 D. EFFECT OF PIERCING THE VEIL OF CORPORATE FICTION
1) The corporation will be treated merely as an association or collection or persons
undertaking business as a group and the stockholders or members will be considered
as a corporation, that is, liability will attach personally r directly to the officers and
stockholders
2) Where there are two corporations, they will be merged into one, one being merely
regarded as the instrumentality, agency, conduit, or adjunct of the other
3) The corporation continues for other legitimate objectives, the corporate character not
necessarily abrogated.
E. GROUNDS FOR PIERCING THE VEIL
G. RESIDENCE OF A CORPORATION
1) If the fiction is used to perpetrate fraud (fraud test)
2) The complete control of one corporate entity to another which perpetuated the wrong is
the proximate cause of the injury (control test)
3) If a certain corporation is only an adjunct or an extension of the personality of the
corporation (alter ego or instrumentality test)
4) If the fiction is pierced to make the stockholders liable for the obligation of the corporation
(objective test)
H. NATIONALITY OF A CORPORATION
F. TESTS TO DETERMINE APPLICABILITY
1) EQUITY CASES
- when the corporation is used to defeat public convenience as when the corporate fiction is
used as a vehicle for the evasion of an existing obligation. The convenience is the
creation of a separate and distinct person from the stockholder or members to facilitate
the transaction of business.
2) CONTROL TEST
- In fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or
defend a crime
3) ALTER EGO CASES
- Where a corporation is merely a farce since it is 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 an adjunct of
another corporation.
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- To sustain the application of the doctrine to alter-ego cases, resort has been had to the
instrumentality rule. The requisites of which are:
a. There is complete domination of control of policy and business practice
b. The control is used to commit the fraud
c. The control used is the proximate cause of injury or loss
4) OBJECTIVE TEST
- Where the end result in piercing the veil is to make the stockholders liable for debts
and obligations of the corporation.
- The residence of a corporation is ordinarily the place of incorporation. For
venue purposes, a domestic corporation is a resident of a particular province, city
or municipality.
As a general rule, nationality is determined by place of incorporation.
- The “control test” as a means of determining nationality looks at the nationality of the
stockholders or members of the corporation. Under the above-quoted SEC Rules,
there are two cases in determining the nationality of the Investee Corporation. The
first case is the ‘liberal rule’, later coined by the SEC as the Control Test in its 30
May 1990 Opinion, and pertains to the portion in said Paragraph 7 of the 1967 SEC
Rules which states, ‘(s)hares belonging to corporations or partnerships at least 60%
of the capital of which is owned by Filipino citizens shall be considered as of
Philippine nationality.’ Under the liberal Control Test, there is no need to further
trace the ownership of the 60% (or more) Filipino stockholdings of the Investing
Corporation since a corporation which is at least 60% Filipino-owned is considered
as Filipino.
- The “grandfather test” as a means of determining nationality looks at the percentage
of foreign holdings in a corporation which is a stockholder in a Filipino
corporation to determine whether or not the percentage requirement of Filipino
ownership has been met. The second case is the Strict Rule or the Grandfather Rule
Proper and pertains to the portion in said Paragraph 7 of the 1967 SEC Rules which
states, "but if the percentage of Filipino ownership in the corporation or
partnership is less than 60%, only the number of shares corresponding to such
 percentage shall be counted as of Philippine nationality." Under the Strict Rule or
Grandfather Rule Proper, the combined totals in the Investing Corporation and the
Investee Corporation must be traced (i.e., "grandfathered") to determine the total
percentage of Filipino ownership.
- Look at the business where it is engaged in – fully-nationalized of partially nationalized
- If fully-nationalized, nationality and ownership of OCS
- If partially-nationalized, at least 60% of the OCS must be owned by Filipino nationals
GAMBOA V. TEVES
- The ruling in Gamboa v. Teves (652 SCRA 690, June 28, 2011) prescribes that in
determining the meaning of the term “capital” as prescribed in Section 11, Article XII,
National Economy and Patrimony of the Constitution it is deemed to refer to shares of stock
that can vote in the election of directors of the corporation.
- The heart of the controversy is the interpretation of Section 11, Article XII of the
Constitution, which provides: "No franchise, certificate, or any other form of authorization
for the operation of a public utility shall be granted except to citizens of the Philippines or
to corporations or associations organized under the laws of the Philippines at least sixty
per centum of whose capital is owned by such citizens x x x."
ROY VS SEC, G.R. NO. 207246 (2017)
- it is the SEC which is the government agency with the competent expertise and the
mandate of law to make such determination.
- The Gamboa Decision already held, in no uncertain terms, that what the Constitution
requires is "[fJull [and legal] beneficial ownership of 60 percent of the outstanding capital
stock, coupled with 60 percent of the voting rights x x x must rest in the hands of Filipino
nationals x x x." And, precisely that is what SEC-MC No. 8 provides, viz.: "x x x For
purposes of determining compliance [with the constitutional or statutory ownership], the
required percentage of Filipino ownership shall be applied to BOTH (a) the total number of
outstanding shares of stock entitled to vote in the election of directors; AND (b) the total
number of outstanding shares of stock, whether or not entitled to vote x x x."
- This case validated the SEC-MC No. 8.
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I. CORPORATE TORT LIABILITY
- Tort liability can be imposed on a corporation because generally speaking, the rules
governing liability of a principal or master for a tort committed by an agent or servant
are the same whether the principal or master be a natural person or a corporation.
- Hence, when a tortuous act is committed by an officer or agent of a corporation under
express direction or authority of the corporation, it would be liable.
J. CORPORATION AS A PERSON
- A corporation is a person, in proper cases, within the due process and equal
protection clause of the Constitution.
- Just like a natural person, it cannot be deprived of its life and property due
process.
- However, it cannot exercise constitutional rights inconsistent with its being an
artificial being, such as protection of liberty.
- Note however that while a corporation can invoke the right against unreasonable
search and seizure, there is a legal way to obtain the required information as a
corporation cannot refuse to produce its books and records lawfully required rely
by the appropriate government agency.
- Hence, it has been held that when a corporation, vested with special privileges and
franchises is charged with abuse of such privileges and franchises cannot claim a
right against self-incrimination when directed to produce its books and records.
K. CRIMES
- As a rule, no criminal action can lie against a corporation. A corporation cannot
commit felonies as provided for in the Revised Penal Code because artificial
beings are incapable of intent, nor can it actually perform an overt act.
- To make a corporation criminally liable, the Supreme Court clarified that it is
necessary that the statute, by express words or by necessary intendment include
corporations within the persons who could offend against criminal laws and the
legislature must at the same time establish a procedure applicable to corporations. The
law should clearly state who shall suffer imprisonment.
 - Hence, the court acquitted the president of a corporation who signed a trust receipt as
the law prevailing prior to the enactment of the Trust Receipts Law did not provide
for the existence of corporate criminal liability.
L. MORAL DAMAGES
incidental to its existence because they attach to a corporation upon its creation
and said to be inherent such as the right of succession or to sue. Natural persons or
partnerships, on the other hand can exercise or perform any act provided it is not
contrary to law. The reason being that corporations owe their existence to the state,
while natural persons or partnerships.

Express and Implied powers can further be distinguished as follows:

- It cannot be entitled to moral damages.
(a) Express powers deal with main business, object or purposed of the corporation, while
- Note the ruling in "Mambulao-Lumber vs. PNB” allowing recovery of moral damages Implied powers deal with the means and methods of attaining the object or purpose;
for a besmirched reputation which was modified by the case of Acme Shoe vs. Court (b) Express powers are determined by the language of the law and its charter while Implied
of Appeals when the Supreme Court said that: mental suffering can only be powers may change according to time, place and circumstances;
experienced by one having a nervous system and it flows from real ills, sorrows and (c) Test of Express powers is whether they are found in the words of the law or charter
grief of life, all of which cannot be suffered by respondent banks as an artificial while the Test of Implied powers is whether they are purely incidental to its express
person. The subsequent case of Solid Homes vs. Court of Appeals provided that there powers and is reasonably necessary to their being carried out.
is no abandonment of the Mambulao ruling because it is not an en banc decision. This
was followed by Asset Privatization Trust vs. Court of Appeals, which restated
Mambulao, then again by ABS-CBN vs. Court of Appeals stated that Mambulao is an 4. HAS RIGHT OF SUCCESSION
obiter dictum, then BPI vs. Casa Montessori Internationale, which again cited
Mambulao and held that for breach of the fiduciary duty required of a bank, a
corporate client may claim moral damages when its good reputation is besmirched by
- The right of succession refers to its continued existence unaffected by anything that
the breach, and social humiliation results therefrom.
happens to its stockholders or members limited only by the term stated in its Articles of
Incorporation.
- The latest is Filipinas Broadcasting Network, Inc. vs. Ago Medical and Educational
• It does not contemplate Corporate Immortality but rather a continuity of existence
Center where it was held that Article 221 of the the Civil Code allows the recovery of moral
irrespective of that of its components.
damages on cases of libel, slander or any other form of defamation without qualification as to
• Under the Code, the term of a corporation is fifty (50) years is subject to renewal.
whether the plaintiff is a natural or juridical person. While the court may allow the grant of
moral damages to corporations, it is not automatically granted; there ’must be proof of the
existence of actual basis of the damage and its causal relation to the defendant's acts.

3. HAS POWERS OR PROPERTIES EXPRESSLY AUTHORIZED BY LAW OR INCIDENT TO

ITS EXISTENCE

- When a corporation is said to have only those powers or properties expressly authorized by
law or incident to its existence, we look to what is provided for by law or its charter first, then
determine the causal connection between the act or power with what is express.
• This attribute is a recognition of what is known as the "Theory of Special or Limited
Capacities”. The opposite of this theory is the "Theory of General Capacities" which
states that a corporation can exercise any and all powers that may be exercised by
persons.
• Corporations can only exercise those expressly authorized by law, can be implied or are
necessary to carry out its purposes, such as acts in the usual course of business or

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 KINDS OF CORPORATIONS maximum of 21 directors

1 year until their successors are Subject to the provisions of AOI and
A. GENERAL TYPES OF CORPORATIONS elected and qualified, subject to the by-laws, 3 years on a staggered basis
provisions of AOI and by-laws
1. A stock corporation is one whose capital stock is divided into shares and are authorized to
distribute to the holders of such shares dividends or allotments of the surplus profits on
It may have any number of trustees as
the basis of the shares held.
fixed in the Articles of Incorporation
or By-law from the ranks of its
2. A non-stock corporation is one where no part of its income is distributable as dividends to
membership.
its members, trustees or officers, and when any profit is obtained as an incident of its
operations shall, whenever necessary or proper be used for the furtherance of the
purpose/s for which the corporation was organized.
Term of office The term of the original trustees is
of directors such that 1/3 of their number shall
serve for a year, the second 1/3 for
- These general types of corporations have also been distinguished as civil corporations referring
two years and the third 1/3 for three
to those organized for the benefit, pecuniary or otherwise, of its members as opposed to an
years
eleemosynary or charitable corporation that is organized to administer a charitable trust.

- The provisions on stock corporations apply in the absence of specific provisions covering non-
stock corporations.0 Trustees subsequently elected shall
then serve for a term of three years.
Trustees elected to fill vacancies, shall
only serve for the unexpired portion.
B. DIFFERENCES BETWEEN STOCK AND NON-STOCK CORPORATIONS

By the BOD The members elect corporate officers,

AS TO STOCK NON-STOCK
Election of unless otherwise provided by Articles
Has capital stock divided into No capital stock. officers of Incorporation or By-Laws.
Existence of shares
capital stock Its capital is in the form of
contributions or donations.
SH’s meeting shall be held in city May be held at any place outside the
Purpose Organized for profit. Not organized for profit. or municipality where the principal principal place of business of the
office is located or at the principal corporation
Through dividends Not distributed. Place of office
Distribution of meeting
Any profits earned is used for the
profit Provided, there be notice of the date,
furtherance of the purpose/s for
which it was organized. time, and place and should always be
in the Philippines.
Number of Not less than 5 but not more than Not less than 5 and may be more than
15. Except corporation sole and 15 except non-stock educational SH can resort to cumulative voting No cumulative voting unless allowed
directors or
banks (in case of merger and institutions, max of 15 trustees Right to vote by the AOI
trustees
consolidation which can have a
Only preferred and redeemable
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 shares can be denied the right to
vote subject to some exceptions.
Voting of directors may be made
only through general voting.
Regional and district voting of
directors are not allowed.
Transferability Shares may be transferred with or
of without consent of the corporation
shares/Membe
rship
SH may be expelled only for
grounds provided by law
Right to expel
members
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Right to vote may be limited,
broadened or denied by the AOI or
by-laws.
Unless so provided, each member is
entitled to one vote.
In exercising the right, he may vote by
proxy and also by mail or other
similar means as authorized by the
Articles of Incorporation or By-Laws
with the approval of and under
conditions prescribed by the SEC
Regional and district voting of
trustees are allowed.
Membership is personal in character
and is not transferable unless allowed
by the AOI or by-laws
Membership shall be terminated in
the manner and for the causes
provided in the AOI or by-laws
Note that courts have no power to
strip membership as it constitutes an
unwarranted and undue interference
with the right of a corporation to
determine its membership.
Termination of membership carries
with it all rights to property and other
privileges unless the By-Laws provide
otherwise. Note that admission is an
expressly granted power in the
Corporation Code.
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Assets of stock corporation shall be Assets of non-stock corporation shall
distributed in the following order: be distributed in the following order:
1. Payment of claims of creditors 1. Payment of claims of creditors
who are not stockholders
(based on preference of credit) 2. Assets held on condition of return
Distribution of
2. Payment of claims of SHs as or subject to limitation of use shall be
Assets in case returned, transferred or conveyed.
of dissolution creditors
3. Residual balance is distributed
3. Distribution to member based on
proportionately to preferred
distributive rights stated in AOI or
shares, if any, then to common
by-laws
stock.
In case of default, distribution
pursuant to Plan of Distribution of
Assets.
C. NON-STOCK CORPORATIONS
- A non-stock corporation cannot amend its Articles of Incorporation and convert itself
into a stock corporation as the members are not entitled to share in the profits of the
corporation as all present and future profits belong to the corporation.
1. CONVERSION:
- By converting to a stock corporation it will be deemed to have distributed
corporate assets among members without a prior dissolution. On the other hand,
if it were a stock corporation at the onset, it may be converted to a non-stock
corporation as the corporation is not distributing assets without dissolution, but
rather, they are waiving their rights to any profits/dividends.
2. PROBLEM:
XY is a recreational club which was organized to operate a golf course for its members
with an original authorized capital stock of PHP 100,000,000.00. The Articles of Incorporation
or the By Laws provided for declaration of dividends although there was a provision that after
its dissolution all its assets shall be given to a charitable corporation. In this case, XY is a stock
corporation as the power to declare dividends is inherent in a stock corporation and the
 provision allowing for distribution of its assets to a charitable corporation does not prohibit a
declaration of dividends before dissolution.
a. DOMESTIC CORPORATION - if incorporated under Philippine law

3. PURPOSE OF NON-STOCK CORPORATIONS

b. FOREIGN CORPORATION - if incorporated under the laws of another country.
- May be organized for the following purposes: charitable, recreational, fraternal, Note though that for purposes of transacting business in the Philippines, it must be
religious, trade, cultural, educational, literary, scientific, professional, social, civic one whose state of incorporation allows Filipino corporations or citizens to do
service, industry, agricultural, chambers or any combination subject to special business therein.
provisions.

2. As to whether it is open to the public or not

4. DISTRIBUTION OF ASSETS UPON DISSOLUTION of a non-stock corporation

a. CLOSE CORPORATION - when it limits stockholders to a number not exceeding 20,

a. Liabilities and obligations of the corporation shall be paid, satisfied or discharged, has limitations on transfers and does not list in the stock exchange or makes any
or adequate provisions made thereof; public offering of its shares or it is an

b. Assets held under a condition requiring return, transfer, conveyance and which
condition occurs by reason of dissolution shall be returned, transferred, and b. OPEN CORPORATION - when its stocks are publicly traded
conveyed;

c. Assets received and held by the corporation subject to limitations permitting use
only for charitable, religious, benevolent, educational or similar purposes, but not - A corporation that goes from close to open is said to be “going public”
subject to return, transfer or reconveyance by reason of dissolution shall be while one that goes from being open to close is said to be “going private”.
transferred to corporations undertaking similar activities pursuant to the plan of
dissolution;
3. As to whether it is a public or private corporation
d. Other assets shall be distributed in accordance with the Articles of Incorporation or
By-Laws determining the distributive rights of its members or as provided;

e. In any other case, assets shall be distributed to such persons, societies or a. PUBLIC CORPORATION - is one that is formed for the government of a portion of
organizations whether organized for profit or not as provided in the plan of the state for the general good
distribution.

- The plan of distribution must be consistent with the distribution rules above-outlined. b. PRIVATE CORPORATION - is one that is formed to undertake a private activity
This plan is adopted pursuant to a majority vote of the Board of Trustees, then which includes government owned or controlled corporations. It also includes quasi-
submitted for the affirmative vote of 2/3 of the members having voting rights at a public corporations that have accepted from the state a franchise involving the
regular or special meeting, prior notice having been given. performance of a public activity for profit.

D. ADDITIONAL DISTINCTIONS BETWEEN CORPORATIONS

E. DE JURE vs. DE FACTO

1. As to the state of incorporation

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1. As to legal right to exist 3. DIFFERENCE BETWEEN DE FACTO AND DE JURE CORPORATION

a. DE JURE - A de jure corporation is one that is considered as a legally constituted DE FACTO DE JURE
corporation, having fully complied with all the requirements of law.
One which actually exists for all practical One created in strict or substantial
purposes as a corporation but which has no conformity with the mandatory statutory
legal right to corporate existence as against the requirements for incorporation.
b. DE FACTO – A de facto corporation is one that is so defectively created as not be a de jure state.
corporation, but nevertheless is the result of bona fide attempt to incorporate under
existing statutory authority coupled with the exercise of the corporate powers and is There is a colorable compliance with the There is substantial compliance with the
recognized by the courts as such upon grounds of public policy in all proceedings, except requirements of the law creating the requirements of the law creating the
upon a direct attack by the state questioning its corporate existence. corporation. corporation.

Can be attacked directly but not collaterally. Its right to exist as a corporation cannot be
successfully attacked or questioned by any
2. REQUISITES OF A DE FACTO CORPORATION party even in direct proceeding for that
purpose by the state.

Stockholders enjoy exemption from corporate liability for corporate obligations.

1) There is a valid law under which the corporation may be recognized.
2) There is a bona fide attempt in good faith to incorporate
3) There is an actual valid exercise of corporate powers.
F. CORPORATION BY ESTOPPEL
- In general, a de facto corporation is deemed to have substantial legal existence except as
against the state.
- A corporation by estoppel arises when the persons assume to act as a corporation knowing
- Consequently it has the same corporate power and liabilities like a de jure corporation. It is it to be without authority to do so; in this case said persons shall be liable as general
obliged to pay taxes. Contracts that are entered into are valid and binding. It is allowed to partners for debts, liabilities and damages and it cannot, as a defense, neither can one
bring suit. dealing with it, resist performance. Hence, one who assumes an obligation to an ostensible
corporation as such cannot resist performance thereof on the ground that there was in fact
- A de facto corporation can be a de jure corporation; a de facto can be corporation by no corporation.
estoppel; and a corporation by estoppel can be de jure.

- Its existence is not open to a collateral attack. The only way by which is can be attacked is
by way of quo warranto proceedings to determine the right to the use or exercise of a G. CORPORATION BY PRESCRIPTION
franchise or office and to oust the holder from his enjoyment of the same.

- A corporation by prescription is one that is not formally organized as such but has been
- Quo warranto proceeding is initiated by the Solicitor General because:
duly recognized for a substantial length of time as a corporation with rights and duties that
are enforceable under the law. In the Philippines, the Roman Catholic Church is recognized
(a) it is the state's right or authority that is usurped
as such.
(b) it would produce endless confusion if it's existence is questioned in every suit that it
is a party to
(c) it is in the public interest to maintain the validity of the business transactions
entered into with de facto corporations. H. AS TO NUMBER OF COMPONENTS

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- CORPORATION - if it is composed of more than one member

- CORPORATION SOLE - if it consists only one member. A corporation sole is an ecclesiastical

corporation as it is composed entirely of a spiritual personas established to further a religion
and perpetuate the rights or a church. The opposite of an ecclesiastical corporation is a lay
corporation.

I. COMPONENTS OF A CORPORATION

a. Corporators - are those who compose the corporation either as stockholders or members

b. Incorporators - are those stockholders or members mentioned in the articles as originally

forming the corporation and are signatories thereof.

Other components are:

- Promoters - are those who bring about the incorporation and organization of a
corporation. He has joint personal liability for a corporation that was never formed. When
the corporation has been formed, upon ratification by the board of his contracts, he
becomes an agent of the corporation. Liability then is borne by the corporation in its
capacity as principal.

- Subscribers - are those who have agreed to take out and pay for original unissued shares
of a corporation formed or to be formed. They enjoy the rights of a SH as long as they are
not delinquent.

- Subscribers become stockholders - upon payment of the agreed consideration for the
purchase of shares as provided for in their subscription contracts.

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 INCORPORATION AND ORGANIZATION OF
PRIVATE CORPORATIONS
A. NUMBER AND QUALIFICATIONS OF INCORPORATORS (Sec. 10, RCC)
The required number and qualification of Incorporators are:
a. Any person, partnership, association or corporation, singly or jointly with others 5 persons
but not more than fifteen (15) in number, may organize a corporation for any lawful
purpose or purposes
- natural persons who are licensed to practice a profession, and partnerships or
associations organized for the purpose of practicing a profession, shall not be allowed
to organize as a corporation unless otherwise provided under special laws.
Incorporators who are natural persons must be of legal age.
b. Each incorporator of a stock corporation must own or be a subscriber to at least one (1)
share of the capital stock.
B. CAPITALIZATION (Sec. 12, RCC)
a. GR: Stock corporations shall not be required to have a minimum authorized capital stock.
b. EXCEPTION: As otherwise provided by special laws, subject, to the provisions of Section 13
providing that 25% of the authorized capital stock must be subscribed and 25% of which must
be paid up, the remaining balance to be payable on a date fixed or upon call, which in no case
shall be less than Php 5,000.00.
- Examples of capitalization requirements as fixed by law are:
Universal Bank- PHP 4,950,000,000.00. Commercial Bank PHP
2,400,000,000.00, Thrift Bank in Metro-Manila PHP 325,000,000.00 and a Rural Bank in
Baguio PHP 6,500,000.00.
- Corporations may subscribe but cannot be considered in determining compliance with
25/25 rule because they are not incorporators. Such however is debatable as Section 13
states authorized capital stock without qualification.
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C. PROCESS OF INCORPORATION:
- The process of incorporation begins with the execution of the Articles of
Incorporation, which upon return by the SEC, together with the Certificate of
Incorporation constitutes it as the charters of the corporation.
D. THE ARTICLES OF INCORPORATION
- Is 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 the state.
- is the document prepared by the person's region of decomposing the corporation and
subsequently filed with the SEC containing requirements of law.
- When a group of persons which to create a corporation, they would have to execute
documents and comply with the requirements of this state before being given juridical
personality, since such is a mere privilege. This is another explanation for what is
known as the “Concession Theory”. In addition, since incorporation involves the
execution of contracts among members, between members and the Corporation, and
between members or the Corporation and the state, the process of incorporation is
known as the “Contract Theory”.
THREE-FOLD NATURE OF THE AOI
It is a contract between:
1. The state and the corporation
2. The corporation and the stockholders
3. The stockholders inter se.
E. CONTENTS OF THE ARTICLES OF INCORPORATION (Sec. 13, RCC)
1. The name of the corporation OR the CORPORATE NAME
- - it is from the name that a corporation acquires juridical personality; it is through the
name that it exercises the power of succession; and it is how it is distinguished from
another corporation.
 LIMITATIONS ON THE USE OF CORPORATE NAME
- A corporation shall have perpetual existence unless its articles of incorporation
provides otherwise. (Already discussed on page 1)
a) It must not be identical, deceptively or confusingly similar to that of an existing
corporation, or to any name already protected by law DOCTRINE OF RELATION OR RELATING BACK DOCTRINE
b) It must not be patently deceptive
c) It must not be contrary to law

- The change of name does not dissolve the corporation and becomes effective only upon
approval of the amendment of the articles.
- Use of corporate name is a right in REM. If a corporate name of another corporation is
confusingly similar to its corporate name, it is entitled to seek its cancellation as the
appropriation of a dominant part is considered an infringement. Test is priority adoption.
- The SEC has authority to deny the registration of the corporate name that is in its
estimation it will cause confusion.
- It must not be contrary to law. Example: Section 1, RA 226 which prohibits the use of the
emblem, seal, and name of the United Nations.
2. The specific purpose or purposes for which the corporation is being incorporated.
- Where a corporation has more than one stated purpose, the articles of incorporation shall
state which is the primary purpose and which is/are the secondary purpose or purposes.
- This refers to the retroactivity of the filing of the amendment to extend the
corporate term to the date of the passage of the appropriate resolutions to extend
the term in instances when the failure to file the amended articles is due to the
neglect of the officer with whom it is required to be filed or a wrongful refusal to
receive it.
- If delay in affecting amendment is due to the neglect of the office with whom it is
required to be filed or a wrongful refusal on its party to receive it, it would be
considered as having been filed before the expiry date. If due to force majeure
without the intervention of the Corporation, it can also be considered as filed on
time.

- Provided, that a non-stock corporation may not include a purpose which would change or RE-INCORPORATION
contradict its nature as such.

- In the event of failure to have the term extended, the remedy is to re-incorporate.
REASONS WHY THE PURPOSE CLAUSE IS REQUIRED The requisites of which are:

a. This operates as authorization to management to enter into contracts, the directors, a. Meeting of stockholders to affirm the decision to re-incorporate. Those who are
officers are made aware of the scope of the allowable business activity. not willing will have to be there until after provisions for liabilities have been
b. Persons who invests will know where and in what kind of business their money will made.
go. b. Copy of passed resolution signed by all stockholders voting for re-
c. Third persons can be made aware whether the corporation’s transaction is within its incorporation countersigned by the president and secretary is submitted to the
authority. SEC with the new articles of incorporation.
c. Deed of assignment of assets and liabilities, including the name of the defunct
3. The place where the principal office of the corporation is to be located which must be within the corporation to the new one is to be attached to the Articles.
Philippines
5. The names, nationalities and residences of the incorporators
- It refers to the place where the books and records are kept.
- Statement of name, nationalities and residences of incorporators determines prima
- Change of address to another city or municipality requires amendment of the articles. facie compliance with constitutional and legal requirements.
Otherwise, note is sufficient.
6. The number of directors or trustees, which shall not be less than five (5) nor more than
4. The term for which the corporation is to exist or CORPORATE TERM fifteen (15).

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 - The authorized capital stock when divided into shares may further be divided into
7. The names, nationalities and residences of persons who shall act as directors or trustees until classes/series or both, having rights, privileges or restrictions as stated in the
the first regular directors or trustees are duly elected and qualified in accordance with this Articles. Absent such, they are equal in all respects. This classification may also be
Code. undertaken for the purpose of complying with constitutional or legal
requirements.

9. If it be a non-stock corporation, the amount of its capital, the names, nationalities and
8. If a stock corporation, the following must be stated:
residences of the contributors and the amount contributed by each; and

1. the amount of authorized capital stock

10. Such other matters as are not inconsistent with law and which the incorporators may deem
2. the number of shares into which it is divided; if it be with or without par value
necessary and convenient.
3. the names, nationalities, residences of original subscribers and the amount subscribe
and paid.
F. FORM AND ATTACHMENTS TO ARTICLES

DEFINING TOPIC OF STOCK AND RELATED TERMS The Articles, as have been in Filipino or English, must be accompanied by

- AUTHORIZED CAPITAL STOCK - is the amount fixed in the articles to be subscribed a. treasures affidavit indicating compliance with the 25/25 rule
and paid, or agreed to be paid by stockholders in money, property services or other b. favorable recommendation, if required, and
means at the organization of the corporation and afterwards and upon which it is to c. should be acknowledge to guard against fictitious names and signatures.
conduct business
G. AMENDMENT of ARTICLES OF INCORPORATION (Sec. 15, RCC)
- SUBSCRIBED CAPITAL STOCK - is the amount of capital stock that is subscribed
1. GENERAL RULE:
- OUTSTANDING CAPITAL STOCK - is the portion of capital stock issued and held by
persons other than the corporation itself

- UNISSUED CAPITAL STOCK - is the portion of capital stock not issued or subscribed
- PAID UP CAPITAL STOCK - is the portion of subscribed or outstanding capital stock
that is paid
- LEGAL CAPITAL - is the amount equal to the aggregate par value in or issued value of
outstanding capital stock.
- Amendments may take place by a majority vote of the board, and 2/3 vote or written
assent of stockholders or members. The original and amended articles are then
submitted to the SEC with underscoring, duly certified by corporate secretary (except
corporation sole) and majority of the directors that it has been duly approved by the
required vote and in case of corporations that are regulated by another government
agency, a favorable recommendation must be submitted likewise. The rule that allows
written assent does not apply when the object of the amendment is to extend or shorten the
term or increase or decrease capital stock.

SHARES OR STOCKS

2. EXCEPTION:

- is the representation of ones’ right or interest in a corporation, its management, the

right to vote, incorporate earnings may be of dividends, and property upon dissolution.
- Unless otherwise provided by the code or special law.

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3. WHEN EFFECTIVE b. purpose is unconstitutional, illegal, immoral or contrary to government rules or
regulations

c. treasurer’s Affidavit is false

a. Upon approval by the SEC, or
d. required percentage of ownership of capital stock has not been complied with
b. From date of filing with the SEC, if not acted upon within six months from date of filing
for a cause not attributable to the corporation. e. no favorable recommendation fo rbanks, banking and quasi-banking institutions,
preneed, insurance and trust companies, NSSLAS, pawnshops, and other financial
intermediaries
- This rule is not applicable if the amendment is to shorten the term as a means to
dissolve the corporation because consent of the state is necessary in these act.
- Provided, that the Corporation be given by the SEC a reasonable time within which to
correct or modify the objectionable portions of the articles or amendments thereto.
4. NON-AMENDABLE ITEMS

H. COMMENCEMENT OF CORPORATE EXISTENCE

a. Names of incorporators;

b. Names of original subscribers to the capital stock of the corporation and their subscribed REGISTRATION AND ISSUANCE OF CERTIFICATE OF INCORPORATION
and paid up capital;

c. Names of the original directors;

- A corporation commences to have existence from the issuance by the SEC of a certificate of
d. Treasurer elected by the original subscribers; incorporation under its official seal. The effect of which is to constitute its stockholders or
members and their successors as a BODY POLITIC and CORPORATE under the name
e. Members who contributed to the initial capital of the non-stock corporation; and
and for the term stated in the articles.
f. Witnesses to and acknowledgement of the articles.
- It is said to have been given de jure existence or can be said to be incorporated.

5. AMENDMENT OF AOI of FOREIGN CORPORATION - The exception is a Corporation Sole, which is deemed incorporated upon filing of its
Articles

- If it is a foreign corporation amending its articles, it must file within 60 days, and an
authenticated copy of its articles of incorporation must be submitted which should not I. WHAT MUST A CORPORATION DO AFTER INCORPORATION?
enlarge or alter the purpose for which it was granted a license.

- A corporation has to formally organize and commence transaction of business within

6. GROUNDS FOR REJECTION OR DISAPPROVAL 2 years from date of incorporation. If it fails to do so, its corporate powers cease and it
is deemed dissolved

a. not substantially in accordance with the prescribed form - If it commences, but becomes continuously inoperative for 5 years, the same is ground
for suspension or revocation of the certificate.

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 CLASSIFICATION OF SHARES

A. COMMON vs PREFERRED SHARES

1. COMMON SHARES

- entitled to a pro-rata division of profits

- If shares are classified as common, they may or may not have par value except when
it is a bank, trust company, insurance company, public utility, building or loan association.

2. PREFERRED SHARES

- are given preference in the distribution of assets, dividends or other privileges,

provided such are not in violation of the Corporation Code or do not have a right
greater than corporate creditors.

- Such preferences must appear in the Articles.

- Such preferences are decided by the board, as it may be authorized to fix terms and
conditions, which shall be effective only upon filing of the appropriate certificate with
the SEC.

- If the shares are classified as preferred, it should always have par value. The
certificate must state the issued value.

- if the par value is 1 peso per share but was sold at 10 pesos, there is a profit or surplus
of 9 pesos which can be declared for dividend.

- It may be deprived of voting rights, together with redeemable shares but if so, there
must be class/series which shall have full voting rights or in addition, even if voting
rights are not enjoyed, holders of such shares shall still vote in the following instances:

1) merger/consolidation
2) amendment of AoI
3) Sale, lease, exchange, pledge or other disposition of all or substantially all of
corporate property
4) increase/decrease of corporate bonded indebtedness
5) increase/decrease of corporate authorize capital stock
6) investment in another Corporation or business, and

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 7) dissolution
8) adoption or amendment of by laws
- are classified in the Articles as having been given certain rights or privileges not enjoyed
- If shares are without par value, they: by others.
a. are considered fully paid and none assessable, meaning the stockholder is no longer
liable to the corporation - Provided, That such exclusive right shall not be allowed if its exercise will violate
b. cannot be issued for less than P5.00 Commonwealth Act No. 108, otherwise known as the Anti-Dummy Law”; Republic Act
c. entire consideration is treated as capital, thus not available for dividends No. 7042, otherwise known as the “Foreign Investments Act of 1991”; and other pertinent
laws.

- Provided, if the exclusive right to vote and be voted for in the election of the Board of
B. WITH PAR VS NO PAR VALUE (Sec. 6, RCC) Directors, it should be for a limited period not exceeding 5 years subject to SEC approval.

- The shares or series of shares may or may not have a par value. Provided, That banks, trust, D. REDEEMABLE SHARES (Sec.8, RCC)
- insurance, and preneed companies, public utilities, building and loan associations, and
other corporations authorized to obtain or access funds from the public, whether publicly
listed or not, shall not be permitted to issue no-par value shares of stock. - Corporation may issue redeemable shares when expressly allowed by the Articles.

- Redeemable shares may be purchased and taken up by the Corporation upon the
expiration of a fix period, regardless of the existence of unrestricted retained earnings
1. WITH PAR VALUE
and such other terms and conditions stated in the articles and the certificate of stock.
- referring to a fixed minimum issue price stated in the articles and the certificate
- Note though that they hold the power that the Supreme Court has held in the case of
- ALWAYS WITH PAR - bank, trust company, insurance company, public utility, building or loan Republic Planters Ban v. Agana, Sr. that the Corporation after redemption, must have
association. sufficient assets in its books to cover debts and liabilities inclusive of capital stock.

- Redemption, therefore, may not be made where the corporation is insolvent or if such
redemption will cause insolvency or inability of the corporation to meet its debts as they
2. WITH NO PAR VALUE
mature.
- referring to the absence of any stated value in the articles and the certificate.

E. TREASURY SHARES (Sec.9, RCC)

- Shares of capital stock issued without par value shall be deemed fully paid and
nonassessable and the holder of such shares shall not be liable to the corporation or to its
creditors in respect thereto: Provided, That no-par value shares must be issued for a - are shares that have been issued and paid for but subsequently reacquired by purchase,
consideration of at least Five pesos (P5.00) per share: Provided, further, That the entire redemption, donation or any other lawful means.
consideration received by the corporation for its no-par value shares shall be treated as
capital and shall not be available for distribution as dividends. - It may again be disposed of for a reasonable price as determined by the board.

- Note that its acquisition must always be funded by surplus profits, otherwise it violates
the TRUST FUND DOCTRINE as capital is impaired.

C. FOUNDERS’ SHARE, (PREFERRED SHARES) (Sec. 7, RCC)

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 What are the rules on non-voting shares?

BOARD OF DIRECTORS/TRUSTEES AND OFFICERS

- Preferred shares may be deprived of voting rights, together with redeemable shares but
if so, there must be a class/series which shall have full voting rights.

NON-VOTING SHARES MAY VOTE A. THREE LEVELS OF CONTROL IN THE CORPORATE HIERARCHY

- Nevertheless, even if voting rights are not enjoyed, holders of such shares shall still a. The board - which Dicker means corporate policy and prescribes the manner of general
vote in the following instances: management of its business activities. Towards this end, the law provides that all
corporate powers of all corporations formed under it shall be exercised, all business
conducted and all property held by a board of directors or trustees. This is for the
purpose of efficiency in exchange for profits. Their primary duty is to set the policies for
(1) amendment of articles the accomplishment of the corporate objectives.
(2) adoption or amendment of by laws
b. The corporate officers – are charged with the mandate to execute the decisions of the
(3) sale, lease, exchange, pledge or other disposition of all or substantially all of board and who, oftentimes, determine the best manner by which the business is to be run.
corporate property They are tasked to carry out the policies laid down by the board, the AOI, and the by-
laws.
(4) increase/decrease of corporate bonded indebtedness

(5) increase/decrease of authorize capital stock

c. The stockholders or members - who are considered as having residual power over
(6) merger/consolidation fundamental corporate changes as they are required by law to give their assent by the
exercise of the right to vote. Note though that they hold the power to elect themselves to
(7) investment in another corporation or business, and the board. In fact, the authority to elect is vested solely in them. Directors cannot
indirectly usurp such authority or disregard an election conducted pursuant to such
(8) dissolution
authority. They can also vote on important matters that are reserved to them as
stockholders of the corporation.

❖ Note, if the corporation is to engage in nationalized business activity, a prohibition must

be stated that it will not allow any transfer of stock or interests that will reduce its
DOCTRINE OF CENTRALIZED MANAGEMENT
ownership to less than the percentage required by law.

- States that all corporate powers shall be exercised, all business conducted and all
property held by a Board of Directors or Trustees. It is the board which determines
corporate policy and prescribes the manner of general management of its business
activities. This is so for the purpose of efficiency in exchange for profits.

- The directors are the executive representatives of the Corporation who are charged
with the administration of its internal affairs and management and use of its assets. A
corporation can only act through its directors and officers.
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 - The board is the central power, which authorizes the executive agents to enter into
contracts and to embark on the business.
THREE INSTANCES WHERE DOCTRINE DOES NOT APPLY
1. In case of delegation to the EXECOM duly authorized in the by-laws
2. Authorization pursuant to a contracted manager, which may be an individual, a
partnership, or a corporation
3. In case of close corporations, the stockholders may manage the business of the corporation
instead of a board, if stated in the AOI
BUSINESS JUDGMENT RULE
- States that questions of policy or management are left solely to the honest decision of
officers or directors of a corporation and the courts or the SEC cannot interfere unless the
acts are so unconscionable and oppressive so as to amount to a wanton destruction of the
rights of the minority or the directors are in bad faith or committed gross negligence.
- The board is the business manager of the corporation and so long as they are undertaken
in good faith, they are not reviewable.
- The principal remedy to internal dissension or corporate elections as the majority must be
allowed to rule as long as he keeps within the powers provided in the charter.
B. TERM OF OFFICE OF THE BOARD (Sec.22, RCC)
GENERAL RULE: The director shall hold office for 1 year while trustees shall be elected for a term
not exceeding three (3) years from among the members of the corporation.
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EXCEPTION: If no election is held, the directors and officers will continue to occupy position
even after the lapse of 1 year under a hold-over capacity until their successors are elected and
qualified.
C. QUALIFICATIONS OF THE BOARD
1. He must own at least one share or at least it should be listed in his name as owner, if it is a
non-stock corporation, he must be a member.
- What matters is legal title to the share.
- A person who does not hold beneficial title, like the voting trustee in a voting trust
agreement is allowed to be elected as a director.
- A pledgee/mortgagee on the other hand cannot be elected. She may not be a stockholder
for the present time but upon assumption of office, it is absolutely necessary that he must
own at least one share of stock.
- One who has been elected director as a nominee of the PCGG which holds the shares
pursuant to sequestration is a de facto director as the shares may only be voted by its
members or proxies.
- Ownership is absolutely necessary upon the assumption to the office of an elected
director. Hence, a person can be elected even if he does not own the stock at the time of
election. If he is not a stockholder, he may be considered an ex-officio member without
voting rights in the board.
- Between husband and wife, if both are listed as owners, they are qualified to be elected
but only one can be elected, unless they own shares listed in their individual names.
2. Every director must continuously own at least a share during his term, otherwise, you shall
cease to be a director.
- Any subsequent purchase does not return the director to his previous position.
- This is important for a director to share the purpose of the corporation because of his
pecuniary interest.
3. The majority must be residents of the Philippines as the business is primarily undertaken in
the Philippines.
4. Not convicted by final judgment of an offense punishable by a period in excess of 6 years or a
violation of the code, committed within a period of five years prior to the date of election. D. DISQUALIFICATIONS OF THE BOARD/TRUSTEES/OFFICERS (Sec.26, RCC)

5. Citizenship in the instances required by law.

A person shall be disqualified from being a director, trustee or officer of any corporation if,
within five (5) years prior to the election or appointment as such, the person was:
- Example: corporation engaged in mass media is required to be 100% owned and managed
by Filipinos; transportation 60/60 but 100 Filipino management

(a) Convicted by final judgment:

6. Such other qualifications that may be provided by the by-laws.

- the by-laws must specifically and expressly provides for other qualifications 1) Of an offense punishable by imprisonment for a period exceeding six (6) years;

- Example: he must have paid for his subscriptions in full. 2) For violating this Code; and

- Disqualifications may also be provided. 3) For violating Republic Act No. 8799, otherwise known as “The Securities Regulation
Code”;
- Example: engaging in competing business, unjustified absences during the previous term,
unless the stockholder resigns his current employment with the corporation.

- It would not be acceptable, however, if the by-laws will provide that the qualifications or (b) Found administratively liable for any offense involving fraudulent acts; and
disqualifications shall be subject to the judgment or determination of the board. What is
required is that the same shall be expressly spelled out in the by-laws.

- Absent a provision, a corporation cannot require additional qualifications other than that (c) By a foreign court or equivalent foreign regulatory authority for acts, violations or
prescribed by law.
misconduct similar to those enumerated in paragraphs (a) and (b) above.
- A proposal that the directors come from the ranks of corporate officers is not in accordance
with law. They must come from the stockholders or members of the Corporation.

- While no age requirement has been provided by law, a stipulation allowing a minor to be
elected as a member of the board is not some corporate practice as they have limited capacity E. HOW BOD ELECTED:
to act. It has also been said that since incorporators are required to be of legal age, the same
requirement should be applied to subsequent directors.

1. From among the holder of shares or members or a term of one year until their successors
are elected and qualified.
ADDITIONAL QUALIFICATIONS UNDER REVISED CODE OF CORPORATE
GOVERNANCE

2. Note though that in a non-stock corporations, the term of trustees is between 1 to 3 years
for the original trustees, then 3 years for those subsequently elected and for educational
1) College education and equivalent academic degree corporations it is between 1 to 5 years for those subsequently elected.
2) Practical understanding of the business of the corporation
3) Membership in good standing in relevant industry, business or professional
organizations
4) Previous business experience. F. DIFFERENT METHODS OF VOTING
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 - Cumulative Voting is allowed if no election can be had because the required majority of
stockholders or members cannot be had but it cannot be adjourned sine die or
1. STRAIGHT VOTING – every stockholder may vote such number of shares for as many indefinitely.
persons as there are directors to be elected

- Neither is voting by phones as implied from section 24 when it says that the majority of
2. CUMULATIVE VOTING FOR 1 CANDIDATE – a stockholder is allowed to concentrate his the capital stock or members is required to be present in a meeting.
votes and give one candidate as many votes as the number of directors to be elected
multiplied by the number of his shares shall equal

- Note that the SEC only allows teleconferencing or via video conferencing for meetings of
the board.
3. CUMULATIVE VOTING BY DISTRIBUTION – a stockholder may cumulate his shares by
multiplying the number of his shares by the number of directors to be elected and distribute
the same among as many candidates as he shall see fit.
- Stock that is delinquent or in the treasury do not have voting rights.

G. REQUIREMENT FOR A VALID ELECTION

H. NUMBER OF DIRECTORS/TRUSTEES

a. the presence of a majority of the stockholders or members authorized to vote

- The number of directors to be elected in a stock corporation are 5 but not more than 15.
b. election must be made by ballot, if requested

c. number of votes to elect must be obtained

- In a non-stock corporation, there should be at least 5 but in the non-stock educational
corporation, there should be at least 5 not more than 15 and in multiples of 5.

- In a non-stock corporation, unless otherwise provided in the Articles / By-Laws, a member

has as many votes as there are trustees but only one vote goes to each candidate.
- In a close Corporation, there may be no board when the stockholders equity to manage
the corporation themselves. In a corporation sole, there is no board.

- In a stock corporation, a stockholder has as many votes as he has shares, if the by-laws are
silent, he can vote in three ways.
I. INDEPENDENT DIRECTORS

EXAMPLE:
- An independent director is a person who, apart from his fees and shareholdings, is
independent of management and free from any business or other relationship which could, or
reasonably perceived to interfere with his exercise of independent judgment in carrying out his
100 shares x 5 directors means he has 500 votes and he can give one candidate or he may responsibilities as a director.
distribute to as many candidates as he deems fit PROVIDED that the total number of
shares cast shall not exceed the number of shares owned multiplied by the number of
directors to be elected.
- Independent directors should always attend board meetings. Unless otherwise provided
in the by-laws, their absence shall not affect the quorum requirement. However, the

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 Board may, to promote transparency, require the presence of at least one independent director J. LIMITATIONS ON THE EXERCISE OF CORPORATE POWERS BY THE BOARD
in all its meetings.

1. The matter of stockholders’ approval

QUALIFICATIONS

2. Powers vested only to stockholders or members

1) He must not have any personality, financial, or professional ties with the corporation, its
affiliates, and subsidiaries that may adversely affect his ability to act objectively. Example: investment of corporate funds in another corporation or business other than the
primary business of the corporation.
2) He must not have been employed in an executive capacity by the corporation, related to
companies or any of its substantial shareholders within the last five years.

3) He must not engaged in any transaction with the corporation, good companies or any of its K. REMOVAL OF DIRECTORS/TRUSTEES (Sec.27, RCC)
substantial shareholders, other than those conducted at arm’s length and are immaterial or
insignificant.
1. It must take place at the regular meeting of the corporation or special meeting called for
4) Ownership of at least one share
that purpose;
5) - An independent director must not own more than 2% of the shares of the company
and/or covered companies or any of its substantial shareholders as per RA 8799. Object is
to minimize the incidence of front of and conduct can the board and is meant to call 2. There must be previous notice to stockholders or members of the intention to propose
attention the deviations from the path of good corporate governance. such removal. The notice must be specific and in writing, by publication or sending of a
copy of the notice; and
6) College graduate or has engaged or exposed to business of the corporation for not less than
five years, and

7) A person of integrity, probity and must be hard-working. 3. The removal is affected by 2/3 vote of capital stock / members entitled to vote except that
a director elected by cumulative voting cannot be removed as it deprives the minority
stockholders or members of their representation.
WHERE INDEPENDENT DIRECTORS REQUIRED

- Any special meeting for the removal of directors is to be called by the Secretary on
a. Issuers of registered securities to the public - requires at least 2 independent directors order of the President or upon written demand of stockholders representing at least a
or 20% of the board, whichever is lesser. majority of the outstanding capital stock or of the members.

b. In a bank - requires at least 2.

c. A stock or securities exchange - requires at least 3, and the president must be an
independent director.
d. Finance companies, investment houses, brokers, investment companies, pre-need
companies and subsidiaries of foreign corporations operating and are listed in the
Philippine Stock Exchange - requires at least 1.
- If there is no secretary, or if the secretary, 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 by 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
in this Code.

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 - Removal may be with or without cause: Provided, That removal without cause may not be Commission within three (3)days from the creation of the emergency board, stating
used to deprive minority stockholders or members of the right of representation to which therein the reason for its creation.
they may be entitled under Section 23 of this Code.

- Any directorship or trusteeship to be filled by reason of an increase in the number of

- The election of new directors may take place in the same meeting. In close corporations, directors or trustees shall be filled only by an election at a regular or at a special meeting
when its articles provide that it be managed by the stockholders. of stockholders or members duly called for the purpose, or in the same meeting
authorizing the increase of directors or trustees if so stated in the notice of the meeting.

4. The Commission shall, motu proprio or upon verified complaint, and after due notice and
hearing, order the removal of a director or trustee elected despite the disqualification, or M. COMPENSATION OF DIRECTORS OR TRUSTEES.(Sec.29, RCC)
whose disqualification arose or is discovered subsequent to an election. The removal of a
disqualified director shall be without prejudice to other sanctions that the Commission may
impose on the board of directors or trustees who, with knowledge of the disqualification,
- GENERAL RULE: Directors do not receive compensation other than reasonable per
failed to remove such director or trustee.
diems.

L. HOW VACANCIES FILLED (Sec.28, RCC)

- EXCEPTIONS:

1. Vacancies are filled by the stockholders or members if the cause is:

1. Fixed in the by-laws
a. removal;
2. Granted by a majority vote of stockholders at the regular or special meeting but in
b. expiration; no case shall total annual compensation exceed 10% of the net income before
income tax of the preceding year. In computing any additional compensation, per
c. other causes when the remaining members of the board do not constitute a quorum or diems are not included to determine whether the limit has been reached.
leaves the filling up of the vacancy to them;
3. When board members render service as officers.
d. when there is an increase in the number of directors/trustees.

- In no case shall the total yearly compensation of directors exceed ten (10%) percent of the
2. A vacancy can also be filled by the board if the cause of the vacancy is not removal or net income before income tax of the corporation during the preceding year. Directors or
expiration and the remaining members still constitute a quorum. This can only be exercised by trustees shall not participate in the determination of their o
the board if they acting within their term.

N. LIABILITY OF FIRECTORS, TRUSTEES OR OFFICERS (Sec.30, RCC)

- when the vacancy prevents the remaining directors from constituting a quorum and
emergency action is required to prevent grave, substantial, and irreparable loss or damage to
the corporation, the vacancy may be temporarily filled from among the officers of the - Directors or trustees who willfully and knowingly vote for or assent to patently
corporation by unanimous vote of the remaining directors or trustees. The action by the unlawful acts of the corporation or who are guilty of gross negligence or bad faith in
designated director or trustee shall be limited to the emergency action necessary, and the term directing the affairs of the corporation or acquire any personal or pecuniary interest in
shall cease within a reasonable time from the termination of the emergency or upon election of conflict with their duty as such directors or trustees shall be liable jointly and severally for
the replacement director or trustee, whichever comes earlier. The corporation must notify the

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 all damages resulting therefrom suffered by the corporation, its stockholders or members and GENERALLY, the exercise of corporate powers can be delegated.
other persons.

EXCEPTIONS:
- A director, trustee, or officer shall 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 1. Power rests only with stockholders / members
which, equity imposes a disability upon themselves to deal in their own behalf; otherwise the
2. Effect of delegation is to cede entire supervision/ control over the corporation
said director, trustee, or officer shall be liable as a trustee for the corporation and must account
for the profits which otherwise would have accrued to the corporation. 3. When the by-laws or authorization for an act restricts the delegation.

PERSONAL/SOLIDARY LIABILITIES OF A DIRECTOR - A valid delegation can take place when the Corporation, acting through board and by
resolution, designates a particular person/s or entity to exercise specific corporate power
subject to the above stated limitations or when an executive committee has been created
1. Willfully and knowingly assents or votes about the unlawful act of the Corporation by and under the provisions of the by-laws.

2. Guilty of gross negligence or bad faith in directing the affairs of the Corporation. P. EXECUTIVE COMMITTEE and OTHER SPECIAL COMMITTEES (Sec.34, RCC)

Example is illegal dismissal of employees when attended by bad faith or malice,

where they would be solidarily liable with the Corporation.
- If the bylaws so provide, the board may create an executive committee composed of at
least three (3) directors. 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
3. Acquisition of any personal or backing any interest in conflict with his duty in respect bylaws or by majority vote of the board,
of matter reposed in him in confidence

- The board of directors may create special committees of temporary or permanent nature
4. Consents to the issuance of watered stocks or having knowledge of the issuance of and determine the members’ term, composition, compensation, powers, and
watered stock does not quantify the corporate secretary in writing of the fact of responsibilities.
issuance

LIMITATIONS OF EXECOM
5. Agrees to be personally liable

(a) Approval of option requiring stockholder or member approval

6. Made liable by specific provision of law
(b) Filling of vacancies in the board

(c) Amendment or repeal of by-laws in the adoption of a new by-laws

O. DELEGATION OF CORPORATE POWERS
(d) Amendment or repeal of any board resolution which by its terms is not so repealable or
amendable

(e) Distribution of cash dividends to stockholders (also stock dividends)

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 - Designating the losing candidate who polled the highest number of votes in the
immediately preceding election to fill up a vacancy which is automatic in nature is
Q. FORMAL ORGANIZATION contrary to law as an election is required.

- Where a heartbreak office is not specifically indicated in the roster of corporate offices in
the by-laws of the corporation, the board of directors may also be empowered under the
- Immediately after the election, the directors of the corporation must formally organize, by the
by-laws to create additional offices as may be necessary.
election of a president, who shall be the director, a treasurer, who may or may not be a
director, a secretary who must be a resident and citizen of the Philippines and such others as
may be provided for in the by-laws.
S. BOARD OF ADVISORS

- Any person may hold concurrent positions except that of the President-Secretary or President-
Treasurer. - If the by-laws provide, the board may create a board of advisors - function should be
purely advisory and should not in any manner be granted the authority to participate in
the management and control of the affairs of the corporation since they belong exclusively
to the board.
- An appointive or elected public official cannot serve as a corporate officer of any private bank
except when the service is incidental to the financial assistance provided by the government or
a GOCC to the bank or unless otherwise provided.
- A newly elected board is not bound by the choice of officers of the previous board as it
violates the law as immediately after the election, the newly elected board must formally
organize by electing the corporate officers.
BY-LAWS NOT STATED IN THE BY-LAWS

Can be removed by the board Subject to rules on regular employees

- A provision that provides that the incumbent Vice-Chairman should automatically be the
Intra-corporate disputes – special NLRC
Chairman of the succeeding board, if elected, is not allowed.
commercial courts

- The power to elect corporate officers is a power that is to be exercised by the board and
R. AFTER ELECTION OF OFFICERS
cannot be delegated.

- 30 days after election, the secretary or any other officer shall submit to the SEC the names,
T. HOW CORPORATE POWERS EXERCISED
nationalities and residents of the directors/trustees/officers elected.

- Should any one of them die, or cease to hold office, such shall immediately be reported to the
SEC. - Corporate powers are exercised and performed by the board through meetings.

- Should a vacancy arise due to causes other than removal or expiration, it may be filled by the
board by majority vote of the remaining directors if still constituting a quorum. Otherwise, the
vacancy should be filled by the stockholders or members in a regular or special meeting, the - This so because it must act as a body and a decision must always be reached after
stockholder or member so designated or elected shall only serve the unexpired portion of the affording opportunity for consultation.
term.

- In addition, directors or trustees have the power to act other than as a board.
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 The exceptions are: - Compliance with the duty of diligence requires the exercise of reasonable care, prudence,
and equate knowledge and skill.
a) directors happened to be the only stockholders

b) act is undertaken by someone authorized by the board

- The meaning and extent of the duty of diligence is to be understood to mean that those
c) stockholders wave the necessity of having a meeting who voluntarily take the position of directors undertake that they possess, at least,
ordinary knowledge and skill, and that they will use such in the performance of their
d) when there is an executive committee
obligations.
e) when the Corporation enters into a management contract

f) when the act is ratified at a subsequent meeting.

- The level of care, skill and diligence that is required is that which an ordinary prudent
man will exercise in similar circumstances (Campos and Lopez-Campos).

U. WHAT IS CORPORATE GOVERNANCE AND CORRESPONDING GENERAL

RESPONSIBILITY OF DIRECTORS/TRUSTEES
- Such, however, varies, depending on the nature of the business of the corporation.
Example: a director of a banking corporation is held to a higher standard of diligence as
compared to a director in a manufacturing corporation.
- Corporate governance is a system whereby shareholders, creditors, and other stakeholders of
a corporation ensure that management enhances the value of the corporation as it competes in
an increasingly global marketplace.
- Consequently, a director should exert effort to obtain a basic understanding of the
business of the corporation. He must be familiar with its operations. He should be able to
prepare himself for board meetings to be able to make an informed decision.
- It prescribes that the board of directors is primarily responsible for the governance of a
corporation.

- This duty is specifically imposed by the Corporation Code, when it provides that: directors
or trustee who willfully and knowingly vote for or assent to patently unlawful acts of the
- Hence, a director’s office is one of trust and confidence. He should act in the best interest of corporation or who are guilty of gross negligence in directing its affairs shall be liable jointly and
the Corporation in a manner characterized by transparency, accountability and fairness. He severally with all damages resulting therefrom suffered by the corporation, its stockholders or
should exercise leadership, prudence and integrity in directing the corporation towards members and other persons.
sustained progress over the long-term.

- Corollary to this duty of diligence is the protection afforded to directors under the
- A director assurance certain responsibilities the different constituents or stakeholders, who “BUSINESS JUDGMENT RULE”. If in the course of management, they arrive at the
have the right to expect that the institution is being run in a prudent and sound manner. decision for which there is a reasonable basis and they acted in good faith, as the result of
their independent judgment, and uninfluenced by any consideration, other than what
they believe to be for the best interests of the Corporation, it is not the function of the
court to say that it should have acted differently and to charge the directors for any loss or
THREEFOLD DUTIES OF DIRECTORS
expenditures incurred.

1. They must be DILIGENT.

2. They must be LOYAL to be keeping the interest of the corporation above personal motives.
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 - Compliance with this duty requires that the director act in a manner characterized by
transparency, accountability and fairness.
- The basic principle to be observed is that a director should not use his position to make profit
or to acquire benefit or take advantage for himself and/or his related interests.
If however, conditions (a) and (b) are absent, the contract may be ratified by
2/3 vote of the outstanding capital stock in the meeting duly called for such
purpose with full disclosure of the adverse interest being made at the meeting
and that the contract is nevertheless fair and reasonable. Note that there is no
requirement that the corporation suffers damage.

B. INTERLOCKING DIRECTORS (Sec. 32, RCC)

- He should avoid situations that may compromise his impartiality. If an actual or potential
conflict of interest should arise on the part of directors or senior's executives, it should be fully
disclosed and the concerned director should not participate in the decision-making. GENERAL RULE: Contract between corporations with interlocking directors is valid
as long as there is no fraud and the contract is fair and reasonable.

- A director who has a continuing conflict of interest of a material nature should consider
incubating or resigning.
- This duty is specifically imposed by the Corporation: in the provisions regarding self-dealing
directors, interlocking directors and disloyal directors.
EXCEPTION: Voidable at the option of the corporation if a director's interest in one
corporation is substantial in his interest in the other corporation/s is nominal. The
contract shall be subject to the provisions of Section 32 insofar as the Corporation/s
where he has a nominal share as it is as if the Corporation is transacting with the self-
dealing director. Shareholdings in excess of 20% of the outstanding capital stock shall
be considered substantial.

A. SELF-DEALING DIRECTORS (Sec. 31, RCC)

C. DISLOYAL DIRECTORS AKA DOCTRINE OF CORPORATE OPPORTUNITY (Sec.
33, RCC)

GENERAL RULE: A contract between a self-dealing director and a corporation is voidable

at the option of the Corporation.
- When a director is disloyal by virtue of his office, he acquires for himself a
business opportunity which should belong to the corporation, thereby
obtaining profit, he must account for it by refunding the same to the
Notwithstanding, the contract shall be valid when corporation, even if the director risked his own funds in the venture, unless, his
act is rectified by a vote of the stockholders owning or representing 2/3 of
outstanding capital stock.
a) presence of the director/trustee in the board meeting in which the contract was
approved was not necessary to constitute a quorum
THE PROVISION DOES NOT APPLY IF:

b) his vote is not necessary to approve the contract

1. he acts in good faith

c) that the contract is fair and reasonable under the circumstances. In the case of an officer,
the contract has previously approved by the board.
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 2. the Corporation is unable to undertake the opportunity or the same is not essential respect to a matter reposed in him in that is reposed on a director.
to the corporation confidence as to which equity imposes a
disability to deal in his own behalf, he shall
be liable as trustee and must account for all
the profits that would have otherwise accrued
- The duty of loyalty of a director precludes the director from acquiring an opportunity that
to the Corporation.
is open to the Corporation because that is in effect competing with the Corporation,
oftentimes with the advantage of inside information thus depriving it of the profits that it What is violated is the trust specifically
would have otherwise earned. reposed.

Thus there is no ratification. Rectified by a vote of the stockholders

owning or representing 2/3 of
- Whether the particular opportunity is one which properly belongs to the Corporation is a
outstanding capital stock
question of fact which must be decided in the light of the circumstances of each case. This
rule is premised on the principles of “trust”. It is the position of domination and control
that makes the thing of corporate opportunity objectionable.
3. They must be OBEDIENT by keeping within the powers of the corporation.

DISTINGUISHING BETWEEN SECTION 31 AND SECTION 34

- The duty of obedience simply means that directors are bound to observe the limits of
their authority.
SECTION 31 SECTION 33

Liability of directors, trustees, or officers Disloyalty of a director

(1) He willfully and knowingly votes or
assents to patently unlawful acts of the
corporation;
(2) He is guilty of gross negligence (not mere
"want of ordinary prudence" or bad
- They should not perform acts which are beyond the powers of the corporation, they
He acquires for himself a business should be shown to act in situations where the law has given such prerogative to the
opportunity which should belong to the stockholders. Should they go beyond the limits, they are personally responsible for
corporation. any damages which the Corporation may suffer unless they acted in good faith and
with due care in the exercise of their business judgment.

faith in directing the affairs of
corporation; and
(3) He acquires any personal or pecuniary
interest in conflict with his duty as such
director or trustee.
The erring board members or officers
shall be held jointly and severally (or
solidarily) liable for all damages resulting
therefrom suffered by the corporation, its
stockholders or members, or other persons.
It speaks of the acquisition of any personal or
pecuniary interest in conflict with his duty in
JB Pascua
the - This means that the board must keep within the powers of the institution as
prescribed in the articles of incorporation, by-laws, and existing laws, rules and
regulations.
- Conduct and maintain the affairs of the institution within the scope of its authority as
prescribed in the charter and in existing laws, rules and regulations.
He must account for it by refunding the
same to the corporation, even if the
director risked his own funds in the
venture. - The above principle is embodied in the concept of ULTRA VIRES which is
pronounced in the Corporation code that: No corporation under this Code shall possess or
exercise any corporate powers except those conferred by this Code or by its articles of
incorporation and except such as are necessary or incidental to the exercise of the powers so
It speaks of a violation of the general trust
conferred.
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 CORPORATE POWERS

A. GENERAL CAPACITY V. SPECIFIC CAPACITY

- The general capacity theory maintains that a corporation is said to hold such powers
as are not prohibited or withheld from it by general law.

- The specific capacity theory maintains that the corporation cannot exercise powers
except those expressly/impliedly given.

B. GENERAL POWERS

Every corporation incorporated under this Code has the power and capacity to:

1. adopt and use a corporate seal;

- Note that Section 63 requires stock certificates to be sealed, although not a mandatory
requirement, it has been held to be desirable to have a seal as it is prima facie evidence
that the instrument to which it is attached is the act of the corporation

2. establish pension, retirement, and other plans for the benefit of its directors, trustees,
officers and employees;

3. sue and be sued in its corporate name

4. adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the
same in accordance with this Code

5. make reasonable donations, including those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation,
domestic or foreign, shall give donations in aid of any political party or candidate or for
purposes of partisan political activity.

6. enter into with other corporations merger or consolidation as provided In this Code;

7. of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation;
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8. amend its articles of incorporation in accordance with the provisions of this Code
- appropriate provision is Section 14 as far as the amendments pertaining to the name, place
of principal business, term, and authorized capital stock of the Corporation
9. purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal
with such real and personal property, including securities and bonds of other corporations, as
the transaction of the lawful business of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and the Constitution;
10. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to admit members to the corporation if it be a
non-stock corporation and obtain capital by increasing the number of persons sharing the same
purpose or mission.
11. Exercise such other powers as may be essential or necessary to carry out its purpose or
purposes as stated in its articles of incorporation
C. SPECIFIC POWERS
1. The power to EXTEND OR SHORTEN THE CORPORATE TERM (Sec.36, RCC)
- It is undertaken by a majority vote of the board and vote of 2/3 of the stockholders holding
the corporation's outstanding capital stock or members at the meeting, of which they were
given notice addressed to them at the given address as shown in the books of the
corporation deposited at the post office or delivered personally.
- In case of an extension, a stockholder is allowed to exercise his appraisal right. This is also
allowed when the term is shortened.
- The general rule of assumed approval under section 16 is not applicable as the date of
approval by the SEC maybe before the effectivity date of the extension, the determining
compliance in section 11 or shortening, which may be in the nature of a voluntary
dissolution which requires the consent of the state.
2. Power to INCREASE OR DECREASE CAPITAL STOCK, INCUR CREATE OR INCREASE
CORPORATE BONDED INDEBTEDNESS (Sec.37, RCC)
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- Approved by a majority vote of the board of directors and, at a stockholders' meeting
duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall
favor the increase or diminution of the capital stock, or the incurring, creating or
increasing of any bonded indebtedness.
- Written notice of the proposed increase or diminution of the capital stock or of the
incurring, creating, or increasing of any bonded indebtedness and of the time and
place of the stockholders' meeting at which the proposed increase or diminution of the
capital stock or the incurring or increasing of any bonded indebtedness is to be
considered, must be addressed to each stockholder at his place of residences as shown
on the books of the corporation and deposited to the addressee in the post office with
postage prepaid, or served personally.
- For non-stock corporations, the same requirement is required if it creates or increases
corporate bonded indebtedness
- after the meeting - a certificate in duplicate must be signed by a majority of the
directors, countersigned by the chairman and secretary of the meeting stating that:
a) requirements of this section have been complied with
b) amount of decrease or diminution of capital stock
c) if capital is increased
(1) amount of capital stock or number of shares subscribed
(2) names, nationalities, residences, of persons subscribing and the number or
amount subscribed by each, the amount paid in cash or property
(3) or, amount of capital stock or number of par value stock allotted to each
stockholder if such increase is for the purpose of making effective a stock
dividend therefore authorized
d) any bonded indebtedness to be incurred, created or increased
e) actual indebtedness of the corporation on the date of the meeting
f) vote authorizing the increase or diminution of the capital stock, or the incurring
increasing or creating of corporate bonded indebtedness.
- One copy of the certificate is kept in the corporate office, the other filed with the SEC
and attached its articles.
- Other attachments required are proof of the transfer of cash or property to the
Corporation and a treasurer’s affidavit showing compliance with the 25/25 rule.
 - If corporate bonded indebtedness, the registration of the Bond for the SEC the determinate b) bond holder
sufficiency of terms.
c) trustee or holder of the security.

- From and after SEC approval and compliance of a certificate of filing, the capital stock shall
stand increased or decreased or the bonded indebtedness has been incurred created or 3. POWER TO DENY PRE-EMPTIVE RIGHTS (Sec.38, RCC)
increased.

- referring to the right to subscribe on issues or disposition of shares in proportion by

- Provided, no decrease shall be approved if creditors are prejudiced or terms of bond issue stockholders shareholdings
is not sufficient.

- All stockholders of a stock corporation shall enjoy preemptive right to subscribe to all
- The limitation on when the decrease of capital stock is that it will not be allowed if it issues or disposition of shares of any class, in proportion to their respective
would relieve stockholders of the obligation to pay for their subscription without valuable shareholdings, unless such right is denied by the articles of incorporation or an
consideration. Hence, all subscriptions must be paid. amendment thereto.

- An increase in excess of the amount stated in the articles is ultra vires as there must be an - The reason for its allowance is to preserve a stockholders unaltered and unimpaired
amendment of the articles and a reduction / increase of the capital stock can only decrease influence in the corporation. It does not apply to shares originally unsubscribed or
in the manner provided for by law. undisposed.

THREE WAYS OF INCREASING OR DECREASING CAPITAL STOCK GENERAL RULE: preemptive rights exist

EXCEPTION: maybe restricted when denied by the articles or an amendment thereto

1) Increase / decrease the number of shares without increasing / decreasing par value

2) increase / decrease par value without increasing the number of shares, or - If the preemptive right is offered but not exercised, it does not follow that it will
be offered to other stockholders. If restricted by an amendment, a stockholder may
3) both exercise his appraisal right.

- A reduction creates a surplus if capital is not impaired by losses. The surplus can be PRE-EMPTIVE RIGHTS NOT AVAILABLE:
distributed to stockholders as long as the surplus is over and above the par value of the
outstanding capital stock as reduced and other corporate indebtedness, and the assets so
distributed will not be required to carry out the business.
a. when the shares are issued in compliance with laws requiring stock offerings or
minimum stock ownership

- Bonds are undertakings that are fully secured. It involves 3 parties

a) Borrowing Corporation

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 b. when the shares are issued in good faith with approval of stockholders representing 2/3 GENERAL RULE: Where one corporation sells or otherwise transfers all of its
of the outstanding capital stock in exchange for property needed for corporate assets to another corporation, the latter is not liable for the debts and liabilities of
purposes or the transferor.

c. when the shares are issued in good faith in payment of a previously contracted debt EXCEPTIONS:

1. where the purchaser expressly or impliedly agrees to assume such debts;

4. The power to cause the SALE, LEASE, EXCHANGE, MORTGAGE, PLEDGE OR OTHER 2. where the transaction amounts to a consolidation or merger of the
DISPOSITION OF ALL OR SUBSTANTIALLY ALL OF CORPORATE ASSETS (Sec.39, corporations;
RCC)
3. where the purchasing corporation is merely a continuation of the selling
corporation; and

a) It is undertaken by a majority vote of the board and 2/3 vote of stockholders or members, 4. where the transaction is entered into fraudulently in order to escape liability
written notice having been given. for such debts (Edward J. Nell Company v. Pacific Farms, Inc., 1965)

b) In a non-stock corporation where there are no members with voting rights, the vote of 5. The power to ACQUIRE ITS OWN SHARES (Sec.40, RCC)
majority of the trustees will be considered sufficient authorization.

- It can only be undertaken if it is for a legitimate corporate purpose/s provided that it

c) The disposition should not result in violation of Republic Act No. 10667, otherwise known has unrestricted retained earnings.
as “Philippine Competition Act”, and other related laws or illegal combination and
monopolies. An example would be when the sale violates the Bulk Sales Law.
1) CONDITIONS

d) The contemplated disposition is when the corporation is rendered incapable of continuing

the business or accomplishing its purpose.
(a) Capital is not impaired

(b) There must be unrestricted retained earnings

e) It does not apply to dispositions that are necessary and in the regular course of business or
(c) For a legitimate and proper purpose
the proceeds of which are to be appropriated for the conduct of its remaining business.
Authorization, notwithstanding the disposition, may be abandoned with the board and its (d) Corporation is in good faith and without prejudice to the stockholders’ rights
corporate officers without further approval by stockholders or members.
(e) Condition of corporate affairs where if absent the conditions, there is a violation of
the Trust Fund Doctrine.

f) In case of dissent, the right of appraisal maybe exercised.

2) TRUST FUND DOCTRINE

NELL DOCTRINE

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 - holds that the assets of the corporation as represented by its capital are trust funds that - Can be undertaken by a majority vote of the board and 2/3 vote of stockholders or
are to be maintained unimpaired and to be used by the corporation to pay its creditors members.
and that no distribution of the same can be made without provisions for the payment of
corporate debt.
- The investment contemplated by the provision is an investment in another
corporation or business or for any other purpose other than stated as its primary
- The subscribed capital stock of the corporation is a trust fund for the payment of the purpose.
debts of the corporation which the creditors have the right to look up to satisfy their
credits, and which the corporation may not dissipate.
- If the investment is reasonably necessary to accomplish its purpose as stated in the
articles, stockholder or member’s approval is not necessary.
3) EXCEPTIONS

- In case of dissent, the right of appraisal may be exercised.

(a) Reduction of the authorized capital stock;

(b) Purchase of redeemable shares;

7. A stock corporation has the power to DECLARE DIVIDENDS (Sec.42, RCC)
(c) Dissolution and eventual liquidation.

1) Dividends Defined
4) LEGITIMATE PURPOSES FOR ACQUISITION

- referred to the part or portion of the profits of a corporation, set aside, declared and
a. To pay dissenting or withdrawing stockholders entitled to payment for their shares ordered by the board to be paid ratably to the stockholders
under the provisions of this Code,
b. To eliminate fractional shares arising out of stock dividends;
c. To collect or compromise an indebtedness to the corporation, arising out of unpaid
- As distinguished from profits, profits are the source of dividends but not all profits are
subscription, in a delinquency sale, and to purchase delinquent shares sold during said
dividends until so declared or set aside.
sale.
d. Exercise of the right of appraisal when there is an amendment of the articles, shortening
or extending of the term, investment in other businesses, merger or consolidations, sale
or other disposition of corporate assets, with no one in the close corporation - Dividends are usually declared at the end of a fiscal year as earlier profits may be
e. Redemption of shares offset by losses.
f. Decrease of capital stock
g. Deadlock in a close corporation

- The right of a stockholder to the dividend is immediate if it is a cash dividend. The

corporation becomes a debtor of the stockholder. If it is a stock dividend, it is subject
6. The power to INVEST ITS FUNDS IN ANOTHER CORPORATION OR BUSINESS (Sec.41, to a stockholder vote and an increase of capital stock, if it comes from a new issuance.
RCC)

2) GENERAL RULE: Only stockholders are entitled to a dividend as it is an incident of

stock ownership. EXCEPTION: When it is made to be about the stockholder on record

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 at the specified date. If so, it is the seller who is entitled to the dividend, except when there • No action can be brought against a corporation because it is not a matter of
is a contrary stipulation. The rule also applies to other unrecorded dispositions. right but of consensus.

3) NATURE: 4) KINDS OF DIVIDENDS

DISCRETIONARY when: a) cash dividend - the treatment of property dividend is as if it were a cash
dividend

b) stock dividend
- The board may declare dividends out of unrestricted retained earnings or total assets less
liabilities and total capital, payable in cash, in property or in stock on the basis of
outstanding stock held by them. The basis is the total subscription.
CASH DIVIDEND STOCK DIVIDEND

cash dividend is a disbursement of

- Provided, however, that any cash dividend due on delinquent stock shall first be applied stock dividend is not a disbursement
accumulated earnings
to the unpaid balance, costs, and expenses or if it be a stock dividend, it is withheld until
the unpaid subscription is paid. causes assets to diminish process assets to increase

when declared becomes property of the still part of capital and can still be
stockholder reached by creditors
MANDATORY IF:
does not increase capital increases capital

the declaration of a cash dividend

- When its surplus profits are in excess of 100% of paid in capital stock. does not create the debt
creates a corporate debt

declared by the board declared by the board with

NOT MANDATORY or WITHHELD IF: stockholders concurrence

1. justified by definite corporate expansion projects or programs approved by the

board
- A stock dividend distinguished from stock split is that the former increases capital
while the latter does not increase capital.

2. prohibited by a loan agreement with any financial institution or creditor from

declaring dividends without its consent is not yet obtained
5) CASH DIVIDEND DECLARATION

3. shown that such retention is necessary under special circumstances obtaining in the
- Cash dividends require only approval of the board of directors.
corporation, as there is a need for a special reserve for probable contingencies

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 6) STOCK DIVIDEND DECLARATION 2) or where a majority of the members of the board of directors of the managing
corporation also constitute a majority of the members of the board of directors
of the managed corporation (this situation applies to non-stock corporation)
- Stock dividends are issued by resolution of the board of directors and approval of the
resolution by the stockholders representing 2/3 of the outstanding capital stock at
meeting duly called for the purpose. REQUIRED VOTE IN THESE CASES:

- For the declaration of stock dividends, a corporation must have also a sufficient - Then the management contract must be approved by the stockholders of the
number of authorized unissued shares for distribution to stockholders; otherwise, it managed corporation owning at least two-thirds (2/3) of the total outstanding
must increase its capital stock to the extent of the corporate earnings to be declared and capital stock entitled to vote, or by at least two-thirds (2/3) of the members in the
distributed as stock dividends. case of a non-stock corporation.

8. The power to ENTER INTO A MANAGEMENT CONTRACT (Sec.43, RCC) c) LIMITATIONS ON MANAGEMENT CONTRACTS

a) MANAGEMENT CONTRACT - That such service contracts or operating agreements which relate to the
exploration, development, exploitation or utilization of natural resources may be
entered into for such periods as may be provided by the pertinent laws or
regulations.
any contract whereby a corporation undertakes to manage or operate all or substantially
all of the business of another corporation, whether such contracts are called service
contracts, operating agreements or otherwise. - No management contract shall be entered into for a period longer than 5 years for
any one term. EXCEPT when it relates to exploitation, development or utilization
of natural resources which is to be governed by pertinent rules and regulations.
b) REQUIRED VOTE:

- By way of limitation in a management contract, in interpreting its provisions, it

- Such contract shall have been approved by the board of directors and by the must be read as subjecting its terms to the right of the board of the managed
stockholders representing majority of the outstanding capital stock, or by at least a corporation to give specific duties or recall the delegation, as to hold otherwise will
majority of the members in the case of a non-stock corporation, of both the managing violate section 23 of the Code (the "business judgment" rule which upholds judicial
and managed corporation, at a meeting duly called for the purpose. non-interference in corporate management)

EXCEPTION in two cases: D. ULTRA VIRES ACTS (Sec.44, RCC)

1) where a stockholder or stockholders representing the same interest of both the - Refers to an act outside or beyond express, implied, and incidental corporate powers.
managing and the managed corporations own or control more than one-third (1/3)
of the total outstanding capital stock entitled to vote of the managing corporation;
- are acts that are in violation of the code as it provides that: no corporation shall possess or
exercise corporate powers except those conferred by the code, its articles and except as such are
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 necessary or incidental to the exercise of the powers conferred. Corporate Powers can either be
express or implied (necessary to accomplish what is express).
- If the act is not divisible, the act shall be entirely ultra vires.

- UV Acts can be legal or illegal.

4. APPLICABILITY OF ULTRA VIRES DOCTRINE

- It can be ratified only if it is legal.

BASIS ULTRA VIRES ILLEGAL ACTS

LAWFULNESS Not necessarily unlawful, but Unlawful; against law,

1. TYPES OF UVA outside the powers of the morals, public policy, and
corporation public order
a) Acts done beyond the powers of the corporation (thru BOD)
ENFORCEABILITY Merely voidable and may be Cannot be validated
b) UVA by corporate officers
enforced by performance,
c) Acts or contracts which are per se illegal as being contrary to law ratification, or estoppel

RATIFICATION Can be ratified Cannot be ratified

2. CONSEQUENCES OF ULTRA VIRES ACTS BINDING EFFECT Can bind the parties if wholly Cannot bind the parties
or partly executed

If the contract entered into by the corporation is ULTRA VIRES, the following applies:

5. WHO CAN INVOKE THE DOCTRINE?

(a) if merely executory on both sides, it cannot be enforced by either

(b) If fully performed, neither party can set it aside; can bind the parties if wholly or partly
executed The ultra vires doctrine may be invoked by:

(c) if performed on one side, recovery is allowed as retention of benefits without performance
cannot be allowed
(a) State if a corporation allows its existence to the state, its powers are limited by the
grant of authority by the state

3. RATIFICATION (b) Stockholders as they have a right to expect and insist that the corporation adhere to
the limits of its granted powers

(c) Strangers, if they are party to the contract

- A rectification is possible provided the act is LEGAL.
(d) Competitors only if allowed by the statute; example is the Philippine Competition
Act of 2016

- If ultra vires in part only and if separable, it is valid as to the part not ultra vires and (e) Creditors, if acts are in fraud of creditors.
invalid as to the other part.

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6. EXAMPLES OF ULTRA VIRES ACTS BY-LAWS

- An increase in excess of the amount stated in the articles is ultra vires as there must be - The rules of action adopted by a corporation for its internal government and for the
an amendment of the articles and a reduction / increase of the capital stock can only government of its stockholders or members and those having the direction, management
decrease in the manner provided for by law. and control of its affairs in relation to the corporation and among themselves.

A. 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.

B. ADOPTION OF BY-LAWS (Sec. 45, RCC)

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.

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 - By-laws are adopted by the affirmative vote of stockholders or members representing a
majority of the outstanding capital stock or its members.
- 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 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.
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.

- However, the non-adoption is a ground for a suspension or a revocation of its corporate - A contract signed by the chairman of the board, even if mentioned in the by-laws as an
franchise. 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
C. REQUISITES OF VALID BY-LAWS
vested right if it is contrary to law.)

(a) they must not be contrary to the code, it is void if contrary to the code
E. CONTENTS OF BY-LAWS (Sec. 46, RCC)
(b) not contrary to moral or public policy

(c) must not impair obligations of contract - as a general rule

1) The time, place and manner of calling and conducting regular or special meetings of the
(d) they must be general and uniform in application directors or trustees;

(e) they must be consistent with the Charter / Articles 2) The time and manner of calling and conducting regular or special meetings and mode of
notifying the stockholders or members thereof;
(f) they must be reasonable or capable of compliance.
3) The required quorum in meetings of stockholders or members and the manner of voting
therein;

D. BINDING EFFECT OF BY-LAWS 4) The modes by which a stockholder, member, director, or trustee may attend meetings
and cast their votes;

5) The form for proxies of stockholders and members and the manner of voting them;
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. This is by virtue of the 6) The directors’ or trustees’ qualifications, duties and responsibilities, the guidelines for
PRINCIPLE OF APPARENT AUTHORITY or Ostensible Authority. setting the compensation of directors or trustees and officers, and the maximum number

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 of other board representations that an independent director or trustee may have which shall, 2. A director who is ineligible, if elected, subjects him to removal, if he is also a director
in no case, be more than the number prescribed by the Commission; in a corporation whose business is in competition with or is antagonistic to the
corporation.
7) The time for holding the annual election of directors or trustees and the mode or manner of
giving notice thereof;

8) The manner of election or appointment and the term of office of all officers other than H. DISTINGUISH BY LAWS FROM ARTICLES OF INCORPORATION
directors or trustees;

9) The penalties for violation of the bylaws;

10) In the case of stock corporations, the manner of issuing stock certificates; and
BY-LAWS ARTICLES
11) (k) Such other matters as may be necessary for the proper or convenient transaction of its
corporate affairs for the promotion of good governance and anti-graft and corruption By-laws provide rules or regulations Articles is the fundamental law
measures.
By-laws are usually executed after Articles executed before incorporation
incorporation

An arbitration agreement may be provided in the bylaws pursuant to Section 181 of this Code. The filing of By-laws is a condition The filing of Articles is a condition
precedent to incorporation

In case, of a conflict between the Articles

F. AMENDMENTS TO THE BY-LAWS (Sec. 46, RCC) 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
- It can be undertaken by a majority vote of the Board and majority vote of stockholders or former. Hence, if the articles provide for a
members in a regular or special meeting duly called for that purpose. definite number of directors, a contrary
provision in the By-laws must yield to the
- By vote of the Board, if the power to amend has been delegated by 2/3 vote of the outstanding stated number in the articles
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 place at a meeting duly called
for the purpose.

- 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.

G. 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
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 MEETINGS
- POSTPONEMENT: In case of postponement of stockholders’ or members’ regular
meetings, written notice thereof and the reason therefor shall be sent to all stockholders or
A. KINDS (Sec. 48, RCC) members of record at least two (2) weeks prior to the date of the meeting, unless a different
period is required under the bylaws, law or regulation.

1. Special
- WHO MAY EXERCISE THE RIGHT TO VOTE: The right to vote of stockholders or
2. Regular members may be exercised in person, through a proxy,or when so authorized in the bylaws,
through remote communication or in absentia.

B. REGULAR AND SPECIAL MEETINGS OF STOCKHOLDERS/MEMBERS (Sec. 49, 50 & 51,

RCC)
▪ NOTE THAT WHO CONSIDERED SH/M at the BOOK: Unless the bylaws provide
for a longer period, the stock and transfer book or membership book shall be closed at
least twenty (20) days for regular meetings and seven (7) days for special meetings
- WHEN: Regular meetings of stockholders/members are held annually on the date fixed in the before the scheduled date of the meeting.
By-Laws or any date in April as determined by the Board and special meetings are held at
anytime as deemed necessary or as fixed in the By-Laws.

- REMEDY IF PERSON AUTHORIZED TO CALL MEETING UNJUSTLY REFUSES TO

- NOTICE: That written notice of regular meetings shall be sent to all stockholders or members
of record at least twenty-one (21) days prior to the meeting, and at least one (1) week notice in
case of special meeting, unless a different period is required in the bylaws, law, or regulation.
- MEANS: A written notice of regular meetings may be sent to all stockholders or members of
record through electronic mail or such other manner as the Commission shall allow under its
guidelines.
CALL A MEETING: Whenever for any cause, there is no person authorized or the person
authorized unjustly refuses to call a meeting, the Commission, upon petition of a
stockholder or member on a showing of good cause therefor, may issue an order directing
the petitioning stockholder or member to call a meeting of the corporation by giving proper
notice required by this Code or the bylaws. The petitioning stockholder or member shall
preside thereat until at least a majority of the stockholders or members present have chosen
from among themselves, a presiding officer.

- QOUROM: Unless otherwise provided in this Code or in the bylaws,a quorum shall
consist of the stockholders representing a majority of the outstanding capital stock or a
- WHERE: Stockholders/members are to be held in the city or municipality where the principal majority of the members in the case of nonstock corporations.
office is located or as set forth in the AoI. Any city or municipality in Metro Manila, Metro Cebu,
Metro Davao, and other Metropolitan areas shall, for purposes of this section, be considered a
city or municipality.
- REQUISITES OF A VALID MEETING OF STOCKHOLDERS OR MEMBERS

- WAIVER: Notice of any meeting may be waived, expressly or impliedly, by any stockholder or
member: Provided, That general waivers of notice in the articles of incorporation or the bylaws a) Held at the proper place
shall not be allowed: Provided, further, That attendance at a meeting shall constitute a waiver of
b) Held at the stated date and time or at a reasonable time thereafter
notice of such meeting, except when the person attends a meeting for the express purpose of
objecting to the transaction of any business because the meeting is not lawfully called or c) Called by the proper person
convened.

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 d) Previous notice must be given

e) There must be quorum. EXCEPTION: What is provided in the by-laws but may only provide the increase of a
quorum but not the decrease.

C. REGULAR AND SPECIAL MEETINGS OF THE BOD/BOT (Sec. 52, RCC)

- A quorum once established is not broken by the subsequent withdrawal of one
or a part of a faction of those present, unless the transaction requires the
affirmative vote of a greater proportion.
- WHEN: Regular meetings of directors/trustees are held monthly unless otherwise provided
and their special meetings are held at anytime upon call of the president. Special meetings of
the board of directors or trustees may be held at any time upon the call of the president or as
provided in the bylaws. - WHEN A DIRECTOR CANNOT VOTE: A director or trustee who has a potential interest
in any related party transaction must refuse from voting on the approval of the related
party transaction without prejudice to compliance with the requirements of Section 31 of
this Code.
- NOTICE: Regular and special meetings of directors/trustees require two (2) days notice unless
otherwise provided. A director or trustee may waive this requirement either impliedly or
expressly waived.
- REQUISITES OF A VALID BOARD MEETING

- WHERE: Board meetings can be held anywhere in or outside of the Philippines unless the By-
laws provide otherwise. a) Meeting of the directors/trustees should be assembled as board.
(Directors/trustees cannot attend or vote by proxy as their personal judgment is
required)
- Directors or trustees who cannot physically attend or vote at board meetings can participate and b) Presence of a required quorum
vote through remote communication such as videoconferencing, teleconferencing, or other
alternative modes of communication that allow them reasonable opportunities to participate. c) Decision is reached by a majority vote of the quorum or by an entire board as
Directors or trustees cannot attend or vote by proxy at board meetings. required by law

d) Meet at the time, place and manner provided in the by-laws.

- QUORUM: Unless the articles of incorporation or the bylaws provides for a greater majority, a
majority of the directors or trustees as stated in the articles of incorporation shall constitute a
quorum to transact corporate business, and every decision reached by at least a majority of the - CAN MEETINGS BE POSTPONED? As a rule, meetings may be postponed but annual
directors or trustees constituting a quorum, except for the election of officers which shall require meetings be postponed if the purpose is to extend the term of office of directors or trustees.
the vote of a majority of all the members of the board, shall be valid as a corporate act.

D. WHO PRESIDES (Sec. 53, RCC)

GENERAL RULE: a majority of the directors/trustees as stated in the articles of incorporation
shall constitute a quorum.
- In all instances, the chairman or, in his absence, the president shall preside at all meetings
of the directors or trustees as well as of the stockholders or members, unless the bylaws
- The formula for determining the majority is one half plus one of the entire numbers of provide otherwise.
directors/trustees notwithstanding the existence of vacancies in the board.

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- Where the meeting is called by a stockholder or a member upon showing of good cause to the G. WHY MEETINGS NECESSARY
SEC, the stockholder or member is allowed to preside until a presiding officer is elected.

- Meetings are necessary because corporate powers are vested in the Board or stockholders
E. WHO CALLS or members as a body and not as individuals.

- Person designated in the By-Laws - director/ trustee or officer entrusted with managing - It serves as protection and assurance to stockholders or members as it affords them an
petitioning stockholder or member, in cases of removal, the corporate secretary or a stockholder opportunity to be heard and to discuss, the matter at hand and vote thereon.
or member in proper instances

H. RULE ON ABSTENTION DURING BOARD MEETINGS

F. VALIDITY OF ACTIONS

- An abstention may have the practical effect of a “no” vote since the motion may fail for lack
- In stockholder or member consisting of a majority of the business so transacted shall be of sufficient “yes” votes. Unless a greater number is called for in the articles or by-laws, a
corporation meetings, there being an outstanding capital stock valid within the powers matter is deemed “approved” by the board if at any meeting at which a quorum is present at
least a majority of the required quorum of directors votes in favor of the action.

- Even if meeting is improperly called or held within the powers of the corporation and all stock
holders or members are present or by their representatives I. WHEN ARE MEETINGS NOT NECESSARY

- Note the following instances when only a majority is required of stockholders or members: - The instances when meetings are not necessary are

a) election of the members of the Board a) when a corporation amends its articles and written assets is sufficient

b) removal of directors or trustees b) when there is an agreement to be bound despite the absence of a meeting

c) approval of management contracts c) when the Articles of a close corporation allows directors to take action without a
meeting
d) adopt by laws/amend/or repeal or revoke power delegated to the Board

e) fix issued price of no par value shares

J. COMPENSATION FOR ATTENDING STOCKHOLDER OR MEMBER MEETINGS
f) fixing compensation of directors

- They are not entitled payment for attending meetings as they are exercising a right of
- In directors or trustees meetings, there being a quorum, all acts are valid. But if not undertaken rendering a service. Note that Section 47(5) only allows compensation for directors, trustees
in a duly convened meeting, they are generally invalid but may be ratified. or officers.

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K. HOW ARE MATTERS TAKEN UP IN MEETINGS PUT INTO FORMAL FORM

(a) shares are delinquent

- They are formalized by the exercise of the right to vote (b) shares are non-voting, unless the matter to be voted upon allows them to vote

(c) when the shares are in the treasury shares

L. WHO ARE ENTITLED TO VOTE

N. MANNER OF VOTING (Sec. 57, RCC)

- Stockholder or members are entitled to vote as it is through the exercise of the right to vote that
they are able to participate in management
- The right to vote may be exercised in person or by proxy

- The right to vote is inherent in stock ownership or in membership.

- When so authorized in the bylaws or by a majority of the board of directors, the
stockholders or members of corporations may also vote through remote communication or
in absentia: Provided, That the votes are received before the corporation finishes the tally of
- Provided, they remain as such in the books of the corporation as of the date fixed in the notice. votes.

- If the stock is co-owned, the consent of all is necessary to vote the stock, except where all of - A stockholder or member who participates through remote communication or in absentia,
them have executed a proxy. shall be deemed present for purposes of quorum.

- If owned in an and/or capacity, anyone can vote the stock - The corporation shall establish the appropriate requirements and procedures for voting
through remote communication and in absentia, taking into account the company’s scale,
number of shareholders or members, structure and other factors consistent with the basic
- Although not stockholders, the following may exercise the right to vote right of corporate suffrage.

a) Pledgees or mortgagees when they are given the right and such is recorded in the books of
the corporation
O. PROXY (Sec. 57, RCC)
b) Executors, administrators, receivers and other legal representatives appointed by the Court

c) heirs of the stockholder who have executed a judicial or extra-judicial settlement,

- A proxy is a formal authorization given by the holder of the stock who has the right to vote,
registered with the Registry of Deeds upon presentation of the settlement to the corporate
or by a member, to another person to exercise the voting right of former.
secretary.

- In another sense, it can also refer to the person who was authorized.
M. WHO ARE NOT ENTITLED TO VOTE

- The right to vote by proxy cannot be exercised in board meetings.

The right to vote cannot be exercised if the:
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- The right to appoint a proxy cannot be denied to stockholders in a stock corporation. In a non- - When a proxy is given to two or more persons, they must agree on the vote unless
stock corporation, it can be denied to members. the proxy provides otherwise or discriminates. If there is no agreement, the
majority will prevail.

1. COMMON KINDS
- If only one of them will attend the meeting, he will be deemed authorized to
exercise the powers of a proxy.
(a) General, which confers general discretionary power that is continuing, or

(b) Limited, which limits the power conferred. - As regards several proxies:

(a) last proxy revokes all previous proxies

2. REQUISITES OF A VALID PROXY (b) if undated - date of postmark if mailed, or time of presentation if not mailed

a. it must be in writing and signed by the stockholder or member - When the stockholder intends to designate several proxies, the number of shares of
stock represented by each proxy must be specifically indicated in the proxy form.
b. filed before the scheduled meeting with the corporate secretary

c. it should not be valid and effective for a period of 5 years at any one time
- If some forms do not indicate the number, the shareholdings as indicated shall be
d. it is valid only for the meeting for which it is intended unless otherwise provided.
tallied and compared with that appearing in the books.

- The balance, if any, shall then be allotted to the holder of the proxy without a
- The By-laws may provide for other requisites.
number indicated.
- The board cannot prescribe other formalities besides that provided by the Code if
the By-laws does not so provide. Absent such provisions, compliance with what is
prescribed by the Code is sufficient. - If all the proxies are blank, the shareholdings shall be distributed equally among
all the proxies.
- As when absent a requirement in the By-laws as to notarization, the proxy is valid
as the Code only requires it to be written.

- The writing must show the intention to empower the person to whom it is given to 4. REVOCATION OF PROXY
act as agent in voting the stock, and to enable the corporate officers to know that
such authority is given.

- A revocation of the proxy can be done expressly or impliedly, by writing, orally or

by conduct, with notice or without at anytime EXCEPT if coupled with an interest,
3. PRESENCE OF SEVERAL PROXIES referring to an instance where the proxy giver has incurred liability and is looking
at the grant of the right to vote to another as a means of reimbursement or
indemnity.
- The number of proxies may be limited by the By-laws.
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 - The statute does not apply to agreements whereby stockholders agree to bind themselves to
each other as shall vote their shares. These are called pooling agreements generally a
5. PROXY SOLICITATION stockholder exercises wide liberality in voting and his motives, while for personal profit,
are not objectionable or may be determined by whims or caprices, so long as he does not
violate a duty owed to other stockholders.
- is an action to secure the right to vote of so much a number of shares to ensure the
approval of a proposed corporate action/s.
1. LIMITATIONS APPLYING TO VOTING TRUST AGREEMENTS

- Since a proxy is a corporate control device, solicitation of the same should be

undertaken in accordance with law, which requires among others, the submission to (a) it should not be executed for a period not exceeding 5 years except if executed as a
the SEC of preliminary copies of the Information Statement and Proxy Form at least 10 condition for a loan, in which case it should expire upon payment
business days prior to the date, definitive copies of such materials shall first be sent or
given to security holders.

(b) it should not be executed to circumvent the law against anti-competitive

agreements, abuse of dominant position, anti-competitive mergers and acquisitions,
- The proxy solicitation rules shall apply to: violation of nationality and capital requirements, or for the perpetuation of fraud.

(a) an issuer which has sold a class of its securities pursuant to a registration 2. REQUIREMENTS
(b) an issuer with a class of securities listed for trading on an exchange

(c) an issuer with assets of at least PHP 50,000,000.00 or such amount as the (a) must be in writing and notarized containing and specifying all terms and
Commission may prescribe, and having 200 or more holders each having at least 100 conditions
shares of a class of its equity securities.
(b) it should be filed with the SEC, otherwise it is ineffective or unenforceable

(c) it should be subject to examination

- PURPOSE: to provide shareholders with appropriate information to permit an
intelligent decision on whether to permit their shares to be voted as solicited for a (d) It should automatically expire at the end of the agreed period.
particular matter at a forthcoming stockholders meeting.

P. VOTING TRUST AGREEMENT (Sec. 58, RCC)

- A voting trust agreement is an agreement in writing whereby one or more stockholders of a

stock corporation transfers their share to any person/s or corporation having authority to act as 3. SOME USES OF VOTING TRUST AGREEMENTS
a trustee or the purpose of vesting in such person voting or other rights pertaining to the shares
for a certain period not exceeding that fixed in the Code and upon terms and conditions stated
in the agreement. - concentrate stockholder control in one or few persons, who primarily through the
election of directors can control corporate affairs utilized by founders or incorporators
to retain control.

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 a voting trust

- If a voting trust agreement is validly executed, the shares of the trustor are cancelled and a proxy, as a rule, cannot further delegate
a voting trustee can appoint a proxy
new ones are issued to the trustee and noted in the corporate books that the transfer is his authority
pursuant to a voting trust agreement.
a proxy is an agent of the shareholder a voting trustee votes in his own name

- The trustee then delivers or executes voting trust certificates, which are transferable like
shares, to evidence the trustors' ownership and right to dividends.

6. SOME RULES

- Both the shares and voting trust certificates are then cancelled upon the expiration of the
term and new certificates are issued to the trustor.
- The trustee or trustees shall execute and deliver to the transferors, voting trust
certificates, which shall be transferable in the same manner and with the same
effect as certificates of stock.
4. VOTING TRUSTEE SHALL THEN BE ALLOWED TO:

- The trustee or trustees shall execute and deliver to the transferors, voting trust
a. possess the right to vote certificates, which shall be transferable in the same manner and with the same
effect as certificates of stock.
b. exercise the right to vote in person or by proxy

c. has the right of inspection

- Unless expressly renewed, all rights granted in a voting trust agreement shall
d. since he is the legal bidder, he can be elected as a director
automatically expire at the end of the agreed period. The voting trust certificates as
well as the certificates of stock in the name of the trustee or trustees shall thereby
be deemed cancelled and new certificates of stock shall be reissued in the name of
5. DISTINCTION BETWEEN PROXY AND A VOTING TRUST AGREEMENT the trustors.

PROXY VOTING TRUST AGREEMENT Q. TENDER OFFER

proxy has no legal title a voting trustee has legal title

a voting trust generally is not - A public offer to purchase a specified number of shares from shareholders and usually
the proxy is generally revocable the purchase is at a premium, meaning at a price higher than the par value of the stock.
revocable

proxy can only act at a specified meeting - It is a publicly announced offer by the acquiring person to stockholders of a public
a trustee Is not so limited company for them to tender their shares therein on the terms specified in the offer.
unless it is continuing

proxy can only vote if stockholder or

a trustee votes nevertheless
member is not present
1. PURPOSE

a proxy is usually shorter in duration than

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 - Tender offer is in place to protect the interests of minority stockholders of a target than the time copies of such materials are first published or sent or given to
company against any scheme that dilutes the share value of their investments. security holders.

- It affords such minority shareholders the opportunity to withdraw or exit from the
company under reasonable terms, a chance to sell their shares at the same price as those of
the majority stockholders. Note that in some instances, the premium is payable only if the
offeror is able to obtain the required number of shares.

- It is in an attempt to gain control of the issuing company.

2. TENDER OFFER DISCLOSURE WHEN REQUIRED

Any person or group of persons acting in concert who intends to acquire:

a. at least fifteen percent (15%) of any class of any equity security of a listed corporation or
of any class of any equity security of a corporation with assets of at least Fifty million
pesos (P50,000,000.00) and having two hundred (200) or more stockholders with at least
100 shares each or
b. at least thirty percent (30%) of such equity over a period of twelve (12) months

3. 2 TYPES

a. of any class of any equity security of a listed corporation or

b. of any class of any equity security of a corporation with assets of at least Fifty million
pesos (P50,000,000.00) and having two hundred (200) or more stockholders with at least
100 shares

4. HOW SHALL IT BE MADE

- By filing with the Commission a declaration to that effect; and

- Furnish the issuer, a statement containing such of the information required as the
Commission may prescribe.
- Such person or group of persons shall publish all requests or invitations for tender, or
materials making a tender offer or requesting or inviting letters of such a security.
- Copies of any additional material soliciting or requesting such tender offers subsequent
to the initial solicitation or request shall contain such information as the Commission
may prescribe, and shall be filed with the Commission and sent to the issuer not later
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 STOCKS AND STOCKHOLDERS - or one entered into before incorporation.

- It constitutes a binding contract among the subscribers.

A. ACQUISITION OF STOCKS - It is irrevocable for a period of at least 6 months, counted from the date of subscription
because there is a need to ensure that the corporation shall have capital to undertake
- A person may become a stockholder of a corporation by acquiring a share through a purchase the business for which it was created.
from the corporation or other shareholders.
- The irrevocable nature of the contract shall stand unless:

a) all subscribers consent to the revocation or

- The purchase from the corporation is primarily effected by means of a subscription contract if
the object are unissued shares. b) the corporation fails to materialize within the period for such period fixed
in the contract.

- However, no pre-incorporation subscription/contract can be revoked if the Articles

B. ACQUIRING SHARE FROM THE CORPORATION have already been submitted to the SEC.

- Subscription Contract - is any contract for the acquisition of unissued stock in an existing 2) Post-incorporation subscription
corporation or a corporation still to be formed notwithstanding the fact that the parties refer to
it as a purchase or some other contract. This is so to prevent the avoidance of provisions of the
code insofar as pre-incorporation subscription contracts.
- or one entered into after the incorporation for the acquisition of unissued stock.

- It shall be deemed a subscription notwithstanding the fact that the parties refer to it as
C. THE DOCTRINE OF INDIVIDUALITY OF SUBSCRIPTION
a purchase or some other contract.

- holds that a subscription is one entire and indivisible whole contract. It cannot be divided into - The subscriber becomes a stockholder upon acceptance by the corporation of the
portions. subscriber's offer or by the subscriber of the corporation's offer even though he has not
paid for his shares unless:

D. THE DOCTRINE OF EQUALITY OF SHARES

a) the subscription agreement otherwise provides, or

- holds that where the articles of incorporation do not provide for any distinction of the shares b) when there is a constitutional, statutory, or charter provision to the
of stock, all shares issued by the corporation are presumed to be equal and enjoy the same contrary, or
rights and privileges and are also subject to the same liabilities.
c) except in instances of increase in authorized capital stock.

E. KINDS OF SUBSCRIPTION CONTRACTS:

- Distinguished from a stock option which refers to the privilege granted to a
party to subscribe to a certain portion of unissued stock within a certain period.

1) Pre-incorporation subscription

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 - If the object of the purchase are issued shares, they may be purchased from other
shareholders or from the corporation itself when it disposes of treasury shares.
f. Outstanding shares exchanged for stocks in the event of reclassification or conversion;

F. STOCK OR SHARES OF STOCK

g. Shares of stock in another corporation; and/or

- It is one of the units in which the capital stock is divided. It represents the interest or right
which the owner has in the management of the corporation, in the portion of the corporate h. Other generally accepted form of consideration.
earnings, and in the property and assets of the corporation.

- Where the consideration is other than actual cash, or consists of intangible property such
G. NATURE OF STOCK OR SHARE as patents or copyrights, the valuation must be determined by the incorporators or the
Board subject to approval by the SEC.
- Shares cannot be issued in exchange for promissory notes or future services because they
are supposed to and are intended to represent a value received by the corporation to form
- Shares of stocks are personal property and does not constitute and indebtedness of the part of its capital.
corporation to the stockholder.
- The enumeration of acceptable consideration is also acceptable as consideration for the
issuance of bonds.
H. CONSIDERATION FOR SHARES OF STOCK (Sec. 61,RCC)
- The issued price of no-par value shares may be fixed in the articles of incorporation or by
the board of directors pursuant to authority conferred by the articles of incorporation or
- Stocks shall not be issued for a consideration less than the par or issued price thereof. the bylaws, or if not so fixed, by the stockholders representing at least a majority of the
Consideration for the issuance of stock may be paid for or any combination of: outstanding capital stock at a meeting duly called for the purpose.

a. Actual cash paid to the corporation; I. WHEN PAYMENT FOR SHARES MUST BE MADE (Sec. 66, RCC)

b. Property, tangible or intangible, actually received by the corporation and necessary or (a) Date fixed in the subscription contract
convenient for its use and lawful purposes at a fair valuation equal to the par or issued
value of the stock issued;
(b) Upon call

c. Labor performed for or services actually rendered to the corporation;

- A call is the act of the board in declaring due and payable unpaid subscriptions in full
or such percentage, in either case, with accrued interest, counted from date of
d. Previously incurred indebtedness of the corporation; subscription, if so required by the By-laws and at the rate fixed thereon.

e. Amounts transferred from unrestricted retained earnings to stated capital;

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 - If no interest rate is fixed, the legal rate. Absent such provisions for the collection of
interest and a rate, it cannot be collected.
K. RIGHTS OF UNPAID SHARES, NONDELINQUENT (Sec. 71, RCC)

- The purpose of the call is to fix the period of payment but is not necessary if the
corporation is insolvent or payment is provided for in the contract. - Holders of subscribed shares not fully paid which are not delinquent shall have all the
rights of a stockholder.

- If there is a need for payment, a call is justified by such even before date agreed for
payment. L. REMEDIES TO ENFORCE A DELINQUENCY

1. JUDICIAL ACTION
REQUISITES OF A VALID CALL

- A corporation may collect the unpaid subscription by judicial action.

(a) made in the manner provided by law, it requires a resolution and notice
- However, absent any date for payment in the subscription contract, a call is still
(b) it must be made by the board
necessary.
(c) operate uniformly among all shareholders

2. DELINQUENCY SALE (Sec. 67, RCC)

- If no payment is made 30 days after due date or after the date stated in the call, the shares shall be
considered to be delinquent.
Requirements:

J. EFFECT DELINQUENT SHARES (Sec. 70, RCC)

a. RESOLUTION by the Board ordering the sale of delinquent stocks, specifying the
amount due, interest, and the date, time, place which shall not be less than 30 days
1. they shall not be voted for or be entitled to vote or representation at a shareholders meeting nor more than 60 days from the date stocks become delinquent

2. no rights may be exercised, except the right to receive dividends.

b. NOTICE OF SALE - Notice is sent to the subscriber personally or by registered mail

and published in a newspaper of general circulation in the province or city where the
- This situation will obtain until the amount due, interest and expenses are paid. corporation has its principal office once a week for 2 consecutive weeks.

- Any cash dividend due on delinquent stock shall first be applied to the unpaid balance, costs, c. HIGHEST BIDDER - At the auction sale, the winning bidder shall be the one who
and expenses or if it be a stock dividend, it is withheld until the unpaid subscription is paid. shall pay the full amount of the balance and all expenses for the least number of
shares. Note that there is no deficiency because the winning bid cannot be less than
the amount due. (The law is trying to protect the shareholders to recover his shares.)
- If the subscriber is not anymore delinquent, he is restored to all the rights of a shareholder.
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 ▪ If there is no bidder at the auction sale, the corporation may purchase the shares 1. Stock certificates are in the nature of personal property.
using unrestricted retained earnings.
2. Stock certificate is not essential to the creation of a stockholder relationship as regards
the corporation in the absence of a statute or agreement.

▪ Note that the highest bidder's bid may be rejected by the Board as in a public 3. It is not essential to exercise the rights of a stockholder; it is just a tangible evidence
auction sale, the corporation is not making an offer to sell but rather the that you are a stockholder of a corporation.
purchaser is offering to buy.
4. Stock certificates are transferable. They can be limited but cannot be said to be “non-
transferable”.

d. The stock so purchased shall be transferred to such purchaser in the books of the 5. The nature of a certificate of stock is that it is a prima facie proof that the stock
corporation and a certificate for such stock shall be issued in the purchaser’s favor. The described therein is valid and genuine in the absence of an evidence to the contrary.
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 such shares.

1. UNCERTIFICATED SHARE

M. RECOVERY/ WHEN SALE MAY BE QUESTIONED (Sec. 68, RCC)

- is a subscription duly recorded and paid in the corporate books but has no
corresponding certificate of stock yet issued.
- No action to recover delinquent stock sold can be sustained upon the ground of irregularity
or defect in the notice of sale, or in the sale itself of the delinquent stock, unless the party
seeking to maintain such action first pays or tenders to the party holding the stock the sum for
2. WHEN ISSUED:
which the same was sold, with interest from the date of sale at the legal rate. No such action
shall be maintained unless a complaint is filed within six (6) months from the date of sale.

- It is issued once the consideration, plus interest and expenses due on a

delinquency, if any, have been paid.

N. STOCK CERTIFICATES
- Partial payments are pro-rated among all the shares.

- A stock certificate is the written instrument signed by the proper officer of a corporation
stating or acknowledging that the person named therein is the owner of a designated number - Note that in the case of Baltazar v. Lingayen Gulf, a certificate was issued for less than
of shares of stock. the number subscribed provided the par value of each of the stocks represented by the
certificate has been fully paid. The basis is Section 37 of the old law. Hence, By-laws of
older corporations may carry such a provision.
- It is a paper representation or tangible evidence of the stock itself and of various interests
therein.
3. FORMAL REQUIREMENTS FOR THE ISSUANCE OF A STOCK CERTIFICATE:

O. NATURE OF STOCK CERTIFICATES

(a) signed by the president or vice-president

(b) countersigned by the corporate secretary or assistant secretary

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 (c) sealed with the corporate seal

(d) issued in accordance with the by-laws - Only originally issued stock may be watered, as a subsequent transfer in a sale, the
provision says issuance.

P. WATERED STOCK
- A subsequent increase in value will not eliminate the "water", as the last paragraph of
Section 65 states that the point of reckoning of liability is issuance.
- is stock issued not in exchange for its equivalent in cash, property, shares of stock dividends or
services.
Q. TRANSFER OF STOCK CERTIFICATES (Sec 62, RCC)

- Includes stock that is issued:

Transfers may be effected by delivery and endorsement.
(a) without consideration

(b) as fully paid when the corporation receives a sum less than par or issued value
1. Requirements for Valid Transfer of Stocks
(c) for a consideration other than cash, the fair valuation of which is less than par or issued
value

(d) as stock dividend without sufficient returned earnings or surplus a. If represented by a certificate, the following must be strictly complied with:

- Who is liable for watered stock? 1) Endorsement by the owner and his agent

2) Delivery of the certificate

▪ The shareholder to the corporation for the difference between the fair value received at 3) Must be recorded in the books of the corporation to be valid against 3rd persons and the
the time of issuance and its actual par or issued value. corporation.

- What is to be recorded are the names of the transferor and transferee, date,
number of shares and number of the certificate.
- If the question is who else is liable? (Sec. 64, RCC)

- It must be recorded by the corporate secretary or the designated stock and

▪ The director or officer consenting or having knowledge, and does not express that transfer agent, if one has been appointed. Otherwise, it is invalid.
same in writing and files it with the corporate secretary shall be solidarily liable with
the shareholder to the corporation and its creditors for the difference between the fair
value received at the time of issuance and its actual par or issued value.
b. If not represented by a certificate (such as when the certificate has not been issued or when for
some reason is not in the possession of the stockholder):

- Why? Trust Fund Doctrine - There is liability because a party giving credit to a corporation is
entitled to rely upon its ostensible capitalization as the basis for the credit given. Thus if
watered stock is issued, the ostensible capital is in excess of real assets, thereby he recover less. 1) By means of deed of assignment

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 2) Such is duly recorded in the books of the corporation - Since the law did not prescribe a period within which registration of transfer should be
effected, the action to enforce the right does not accrue until a demand is made and such
is refused. Hence, an action for mandamus can be made even after 24 years.

- No share over which the corporation holds an unpaid claim or a delinquency shall be
transferable.
R. SALE OF SHARES

- If the By-laws do not provide otherwise delivery and sale may also be through another
document but an endorsement is a mandatory requirement. Transferee cannot compel the
corporation to record the transfer of
Partially Sale Valid only between
shares in its books even though he has
paid shares allowed the parties
no knowledge that the shares are not
- If what is transferred is a subscription, the corporation must consent by resolution because the
fully paid.
transfer constitutes a novation requiring the consent of the creditor.
Portion of
Sale not
shares not Not binding SH is still liable for the balance
allowed
2. The registration of transfer is essential to: fully paid

Transferee cannot compel the

corporation to record the transfer of
Shares not Sale Valid only between
a. enable the corporation to know at all times who its shareholders are as mutual rights and shares in its books even though he has
fully paid allowed the parties
obligation exists between them no knowledge that the shares are not
fully paid.
b. afford the corporation a right or opportunity to object or refuse consent to a transfer in case it
has Valid as long as the
Fully paid Sale
requisites of a valid Need to be recorded in the books
c. avoid a fictitious or fraudulent transfer. shares allowed
transfer are present

3. An unregistered transfer is:

1. CONDITIONS FOR THE VALIDITY OF RESTRICTIONS ON THE RIGHT TO

a. valid between transferor and transferee TRANSFER SHARES

b. invalid against the corporation except if notice is given

1) Such restrictions must appear in the articles of incorporation and in the by-laws, as
c. invalid against corporate creditors when the veil of corporation fiction is pierced or there is
well as in the certificate of stock; otherwise, they shall not be binding on any purchaser
liability for watered stocks
thereof in good faith;
d. invalid against creditors of transferors
2) It must be printed at the back of the certificate of stock;
e. transferor has the right to vote and be voted upon until challenged
3) They shall not be more onerous than granting the existing stockholders or the
f. transferor can collect the dividends corporation the option to purchase the shares of the transferring stockholders with
such reasonable terms, conditions or period stated therein.

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 - Thus, a restriction fixing the purchase price very much below the fair market value of the RIGHTS OF STOCKHOLDERS
shares may be invalid. Also invalid is a prohibition against transfer of stock without the prior
consent of the board of directors or of the other stockholders.

- Under the Corporation Code, stockholders exercise and enjoy the following rights

S. LOST OR DESTROYED CERTIFICATES (Sec. 72, RCC)

1. right to attend and vote at meetings

The procedure tor the procurement of lost or replacements certificates are: 2. elect or remove directors

3. approve corporate acts

1. The registered owner or legal representative shall file an affidavit in triplicate setting forth 4. adopt amend by-laws

5. compel the calling of a meeting

(a) circumstances of the loss, theft, or destruction 6. issuance of a stock certificate

(b) number of shares, number of certificate and name of the corporation 7. receive dividends

(c) such other matter or evidence he may deem if necessary 8. receive property upon dissolution

9. transfer stock

2. Upon verification of the affidavit and books, the corporation shall cause notice of loss to be 10. pre-emption
published at shareholder's expense for 3 consecutive weeks, stating the specifics of loss and
that 1 year from date of publication, should no contest be presented, it will cancel and issue 11. inspection of books
new certificates.
12. secure financial statements

13. recover stock at delinquency if unlawfully sold

3. The publication requirement can be dispensed with if the shareholder files a bond or
14. enter into voting trust agreements
surety good for 1 year and satisfactory to the board.
15. exercise the right of appraisal

16. participate in dissolution

4. Provided, in any case, if contest or suit is brought/presented, the issuance of the certificate
shall be suspended until a final decision of the court or determination of ownership is 17. bring derivative suits
made.

- A summary of rights can be had as, follows:

5. Except in case of fraud, bad faith or negligence of the corporation, no action can be brought
against a corporation for issuing a certificate/s pursuant to the procedure laid down by
law.
1. right to dividends

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 2. right to participate in management

3. right to share in corporate property upon dissolution D. DERIVATIVE SUIT

- Is one brought by one or more stockholder/s or member in the name of the corporation and
in its behalf to redress wrongs committed against it or to protect or vindicate corporate
- Note that a subscriber cannot exercise the right to demand the issuance of a stock certificate. rights whenever the officials of the corporation refuse to sue, are the ones to be sued or
hold control of the corporation.

- In a derivative suit, the wrong is inflicted directly on the corporation and indirectly upon
A. MANAGEMENT RIGHTS OF A STOCKHOLDER
the stockholders.
1. To attend and vote in person or by proxy at a stockholder’s meetings;
- It is an available remedy in cases where the officers are over compensated or there is a
2. To elect and remove directors; refusal to take action without sufficient explanation.

3. To approve certain corporate acts;

4. To compel the calling of the meetings; REQUISITES of a DERIVATIVE SUIT:

5. To have the corporation voluntarily dissolved;

6. To enter into a voting trust agreement; and 1. There must be an existing cause of action

7. To adopt/amend/appeal the by-laws or adopt new by-laws. 2. That demand to sue has been made, unless demand is useless

3. That he must have been a stockholder or member at the time the act was committed
unless it be continuing
B. PROPRIETARY RIGHTS OF A STOCKHOLDER
4. action is brought in the corporate name (it is the real party-in-interest)
1. To transfer stock in the corporate book;
5. no appraisal rights are available for activity complained of and that it is not a nuisance
2. To receive dividends when declared; or harassment suit (applies only if the SH/M is allowed to vote)

3. To the issuance of certificate of stock or other evidence of stock ownership; 6. The shareholder is a nominal party; the real party in interest is the corporation. It is an
indispensable party.
4. To participate in the distribution of corporate assets upon dissolution; and
7. The number of shares held is of no consequence. What is required is that the party
5. To pre-emption in the issue of shares. bringing suit is a shareholder without regard to the number of shares held.

8. he has tried to exhaust intra-corporate remedies

C. REMEDIAL RIGHTS OF A STOCKHOLDER

1. To inspect corporate books; E. STOCKHOLDER'S INDIVIDUAL SUIT

2. To recover stock unlawfully sold for delinquency; - Is an action brought by a stockholder against the corporation for direct violation of his
contractual rights as such individual stockholder, such as the right to vote, the right to
3. To demand payment in the exercise of appraisal right;
share in the declared dividends, the right to inspect corporate books and records and
4. To be furnished recent financial statements or reports of the corporation’s operation; and similar other examples.

5. To bring suits (derivative suit, individual suit, and representative suit). - It is an action brought in the name of the shareholder.
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- When a wrong is directly inflicted against a shareholder, the latter can maintain an individual J. MAJORITY VOTE OF STOCKHOLDERS OR MEMBERS
or direct suit in his own name against the corporation. 1. election of members of the Board

2. removal of directors or trustees

F. REPRESENTATIVE SUIT 3. approval of management contracts

- When a wrong is committed against a group of stockholders, a stockholder may bring a suit in 4. adoption of by-laws/ its amendment or repeal and to revoke power of amendment
behalf of himself and all other stockholders who are similarly situated. delegated to the Board
- It is a kind of class action. Which saves the persons involved in the action substantial time and
money. 5. fix issue price of no par value shares
- A representative suit is also the method used by minority stockholders to compel the
declaration of dividends. 6. fixing compensation of directors.

❖ NOTE: To determine the kind of suit, determine first the cause of action or whose right is going to
be asserted, or whose right has been violated?

G. PRIMARY OBLIGATIONS OF A STOCKHOLDER

1. Obligation to pay the corporation the consideration for his subscription, including interest
when required;

2. Obligation to pay the creditors of the corporation to the extent of their subscription, or
beyond, in case the doctrine of piercing the veil of corporate fiction is applicable

H. POWERS EXPRESSLY RESERVED BY LAW TO STOCKHOLDERS OR MEMBERS

1. removal of directors or trustees

2. grant of compensation, other than for per diems, to directors

3. rectification of acts of self-dealing directors or trustees, interlocking directors, disloyal

directors

4. litigation of power to amend by laws

5. calling off a meeting, upon good cause, when no person is authorized to call it

6. management of the close corporation

I. PERCENTAGE VOTING REQUIREMENTS FOR STOCKHOLDERS OR MEMBERS

- The required vote is usually 2/3 of the outstanding capital stock.

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 CORPORATE BOOKS AND RECORDS - As additional requirements for stock corporation - Stock corporations must also keep a
stock and transfer book, which shall containing the following:

A. SEC. 73. Books to be Kept; Stock Transfer Agent. – Every corporation shall keep and carefully
preserve at its principal office all information relating to the corporation including, but not limited to: 1) a record of all stocks in the names of the stockholders alphabetically arranged

2) the installments paid and unpaid on all stocks for which subscription has been
made, and the date of payment of any installment;
(a) The articles of incorporation and bylaws of the corporation and all their amendments;
3) a statement of every alienation, sale or transfer of stock made, the date thereof, by
and to whom made;

(b) The current ownership structure and voting rights of the corporation, including lists of 4) and such other entries as the bylaws may prescribe.
stockholders or members, group structures, intra-group relations, ownership data, and
beneficial ownership;

A. WHO MAY MAKE VALID ENTRIES

(c) The names and addresses of all the members of the board of directors or trustees and the
executive officers;
- The obligation and duty to make proper entries in stock and transfer books fall on the
corporate secretary. If the corporate secretary refuses to comply, the stockholder may
rightfully bring suit to compel performance. The stockholder cannot take the law to his
(d) A record of all business transactions; hands; otherwise such entry shall be void.

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

B. RIGHT TO INSPECT
(f) Copies of the latest reportorial requirements submitted to the Commission; and

- All books are available for inspection at reasonable hours on business days, and in cases
(g) The minutes of all meetings of stockholders or members, or of the board of directors or of records other than the stock and transfer book, a demand in writing for excerpts can be
trustees. Such minutes shall set forth in detail, among others: the time and place of the made.
meeting held, how it was authorized, the notice given, the agenda therefor, whether the
meeting was regular or special, its object if special, those present and absent, and every act
done or ordered done at the meeting. Upon the demand of a director, trustee, stockholder
1. REMEDY IF NOT ALLOWED:
or member, the time when any director, trustee, stockholder or member entered or left the
meeting must be noted in the minutes; and on a similar demand, the yeas and nays must
be taken on any motion or proposition, and a record thereof carefully made. The protest of
a director, trustee, stockholder or member on any action or proposed action must be - Any officer or agent of the corporation who shall refuse to allow the inspection
recorded in full upon their demand. and/or reproduction of records in accordance with the provisions of this Code shall
be liable to such director, trustee, stockholder or member for damages, and in addition,
shall be guilty of an offense which shall be punishable under Section 161 of this Code:

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 - Provided, That if such refusal is made pursuant to a resolution or order of the board of
directors or trustees, the liability under this section for such action shall be imposed upon
the directors or trustees who voted for such refusal: C. RIGHT OF SHAREHOLDER OR MEMBER TO FINANCIAL STATEMENTS (Sec. 74,
RCC)

- Provided, further, That it shall be a defense to any action under this section that the person
demanding to examine and copy excerpts from the corporation’s records and minutes has
improperly used any information secured through any prior examination of the records or
minutes of such corporation or of any other corporation, or was not acting in good faith or
for a legitimate purpose in making the demand to examine or reproduce corporate records,
or is a competitor, director, officer, controlling stockholder or otherwise represents the
interests of a competitor
- If the corporation denies or does not act on a demand for inspection and/or reproduction,
the aggrieved party may report such to the Commission. Within five (5) days from receipt
of such report, the Commission shall conduct a summary investigation and issue an order
directing the inspection or reproduction of the requested records.
- A corporation shall furnish a stockholder or member, within ten (10) days from receipt of
their written request, its most recent financial statement, in the form and substance of the
financial reporting required by the Commission.
- At the regular meeting of stockholders or members, the board of directors or trustees
shall present to such stockholders or members a financial report of the operations of the
corporation for the preceding year, which shall include financial statements, duly signed
and certified in accordance with this Code, and the rules the Commission may prescribe.
- However, if the total assets or total liabilities of the corporation is less than Six hundred
thousand pesos (P600,000.00), or such other amount as may be determined appropriate by
the Department of Finance, the financial statements may be certified under oath by the
treasurer and the president.

2. VALID DEFENSE AGAINST PARTY SEEKING INFORMATION OR INSPECTION

D. A STOCK TRANSFER AGENT OR ONE ENGAGED PRINCIPALLY IN THE BUSINESS
OF REGISTERING TRANSFERS OF STOCKS IN BEHALF OF A STOCK CORPORATION
(SEC. 73, RCC)
1. He has improperly used any information served in a prior examination even of another
corporation.

2. Not acting in good faith/ BAD FAITH and purpose is not legitimate. - It shall be allowed to operate in the Philippines upon securing a license from the
Commission and the payment of a fee to be fixed by the Commission, which shall be
renewable annually:

- requesting party who is not a stockholder or member of record, or is a competitor,

director, officer, controlling stockholder or otherwise represents the interests of a
competitor shall have no right to inspect or demand reproduction of corporate records. - Provided, That a stock corporation is not precluded from performing or making transfers
(Sec. 73, RCC) of its own stocks, in which case all the rules and regulations imposed on stock transfer
agents, except the payment of a license fee herein provided, shall be applicable:

- Any stockholder who shall abuse the rights granted under this section shall be
penalized under Section 158 of this Code, without prejudice to the provisions of - Provided, further, That the Commission may require stock corporations which transfer
Republic Act No. 8293, otherwise known as the “Intellectual Property Code of the and/or trade stocks in secondary markets to have an independent transfer agent.
Philippines”, as amended, and Republic Act No. 10173, otherwise known as the “Data
Privacy Act of 2012”. (Sec. 73, RCC)

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 MERGERS and CONSOLIDATIONS
A. WHAT ARE MERGERS?
- Mergers refer to the absorption of one corporation by another, which is called the
“surviving corporation.
- A+B = A/B (surviving corp)
B. WHAT ARE CONSOLIDATIONS?
- Consolidations refer to the combination of two or more corporations to form a new
corporation called the consolidated corporation.
- A+B = C (consolidated corp)
C. DISTINGUISH MERGER FROM CONSOLIDATION
MERGER
refers to the absorption of one corporation by
another, which is called the “surviving
corporation
All of the constituent corporations involved are
dissolved except one.
No new corporation is created.
The surviving corporation acquires all the
assets, liabilities, and capital stock of all
constituent corporations.
D. PROCEDURE FOR A MERGER OR CONSOLIDATION
JB Pascua
1. PLAN OF MERGER OR CONSOLIDATION - The Board of each corporation shall execute
a plan of merger or consolidation setting forth: (Sec. 75, RCC)
(a) names of the corporations proposing to merge or consolidate hereinafter referred
to as the constituent corporations
(b) terms of the merger or consolidation and the manner of carrying it into effect
(c) statement of changes, if any, in the articles of the surviving corporation, in case of a
merger or with respect to the consolidated corporation, all statements required by
Section 14 to be contained in the Articles of Incorporation
(d) other provisions that may be deemed necessary
2. Upon approval by a majority vote of each of the Boards, the plan of merger/consolidation
shall be submitted to the stockholders of each of the corporations at separate meetings duly
called, notice of which having been given at least 21 days prior to the date of the meeting,
personally or by registered mail. (Sec. 76, RCC)
- The affirmative vote of stockholders representing at least two-thirds (2/3) of the
outstanding capital stock of each corporation in the case of stock corporations or at
least two-thirds (2/3) of the members in the case of nonstock corporations shall be
necessary for the approval of such plan.
CONSOLIDATION
- Any dissenting stockholder may exercise the right of appraisal in accordance with
refers to the combination of two or more this Code: Provided, That if after the approval by the stockholders of such plan, the
corporations to form a new corporation called board of directors decides to abandon the plan, the right of appraisal shall be
the consolidated corporation extinguished.
All consolidated corporations are dissolved
without exception.
3. Any amendment of the plan shall be subject to the same procedure.
A new corporation emerges.
All assets, liabilities, and capital stock of all
consolidated corporations are transferred to 4. ARTICLES OF MERGER OR CONSOLIDATION - After approval, the Articles of
the new corporation. Merger/Consolidation will be executed by each of the constituent corporations signed by
the President or Vice President, certified by the Corporate Secretary or Assistant Corporate
Secretary stating: (Sec. 77, RCC)
(a) The plan of the merger or the plan of consolidation;
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 (b) As to stock corporations, the number of shares outstanding, or in the case of nonstock - No need for liquidation because there is transfer of assets and liabilities.
corporations, the number of members;

(c) As to each corporation, the number of shares or members voting for or against such
plan, respectively;
(d) The carrying amounts and fair values of the assets and liabilities of the respective
companies as of the agreed cut-off date;
3. The surviving or consolidated corporation shall possess all the rights, privileges,
immunities and powers and shall be subject to all duties and liabilities of a corporation
organized under the corporation code.

(e) The method to be used in the merger or consolidation of accounts of the companies;
4. The surviving or consolidated corporation shall thereupon and thereafter possess:
(f) The provisional or pro forma values, as merged or consolidated, using the accounting
method; and

(g) Such other information as may be prescribed by the Commission. a) all the rights, privileges franchises of each of the constituent corporations and

b) all property, real or personal, and all receivables due on whatever account
including subscriptions of shares and other choses in action and all and every
5. EFFECTIVITY - Articles of Merger/Consolidation signed and certified shall be submitted to the interest of or belonging or due to each constituent corporation.
SEC for approval together with a favorable recommendation in cases of banks, building and
loan associations, trust companies, insurance companies, public utilities and educational
institutions. (Sec. 78, RCC)
- These shall be deemed automatically transferred and vested, in the surviving /
consolidated corporation without further act or deed.

- The effectivity of the merger/consolidation is upon the issuance by the SEC of a certificate of
merger/consolidation. 5. The surviving or consolidated corporation shall:

- If, upon investigation, the Commission has reason to believe that the proposed merger or a)
consolidation is contrary to or inconsistent with the provisions of this Code or existing
laws, it shall set a hearing to give the corporations concerned the opportunity to be heard.
Written notice of the date, time, and place of hearing shall be given to each constituent
b)
corporation at least two (2) weeks before said hearing. The Commission shall thereafter
proceed as provided in this Code.
Be responsible and liable for all liabilities and obligations of each of the constituent
corporations in the same manner as the surviving or consolidated corporation had
itself incurred the liability or obligation.
Any pending claim, action or proceeding brought by or against the constituent
corporations may be prosecuted by or against the consolidated or surviving
corporation as the case may be.

c) The rights of creditors or liens upon property of any of the constituent corporations
E. EFFECTS OF A MERGER OR CONSOLIDATION (Sec. 79, RCC) shall not be impaired by the merger or consolidation.

1. The constituent corporations shall become a single corporation which becomes the surviving F. TRANSFER OF EMPLOYEES
corporation in case of a merger, and the consolidated corporation in case of a consolidation.
▪ The employees of the dissolved corporation shall be assumed by the surviving
corporation. Their tenure should be treated as having started when they started with
the dissolved corporation.
2. The separate existence of the constituent corporations shall cease, except that of the surviving
or consolidated corporation.
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G. DISTINGUISH MERGER OR CONSOLIDATION FROM SALE OF ASSETS
MERGER OR CONSOLIDATION
− If it merges or consolidates with another corporation in the country or state of
incorporation, it shall file a duly certified copy of the Articles of Merger or
Consolidation with the SEC and appropriate regulating agency within 60 days from its
date of effectivity.
SALE OF ASSETS

In a merger or consolidation, there is no In a sale of assets, a sale is always

contract of sale. involved. − Provided, that if the absorbed corporation is the foreign corporation, the corporation
must file a petition to withdraw its license because it is in effect dissolved. Not a
There is automatic assumption of Generally the buyer is not liable except
change of name as its identity ceases.
liabilities. when

(f) he expressly/impliedly assumes

liability

(g) in a de facto merger or

consolidation

(h) where the purchasing corporation

is merely a continuation of the
selling corporation that eventually
dissolves itself

(i) where the transaction is

fraudulently entered into to avoid
liability for debts.

there is continuance of the enterprise a liquidation is usually contemplated

title to assets is transferred by virtue of title is transferred by virtue of contract

law

one or all the constituent corporation/s there is no dissolution by the selling

are dissolved corporation

H. MERGERS/CONSOLIDATIONS OF FOREIGN CORPORATIONS

− If the foreign corporation merges or consolidates with a domestic corporation, it will be

allowed if such is permitted by Philippines laws and laws of the state of incorporation,
provided it complies with the laws of the Philippines on merger or consolidation.

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 RIGHT OF APPRAISAL - If the certificate is not submitted for notation within 10 days, the corporation may
consider the exercise of the right terminated at its option.

− It is the right of stockholder to demand payment of the fair value of its shares after dissenting
from a proposed corporate action involving a fundamental change in the corporation in the
cases provided for by law.
A. AVAILABLE WHEN? (Sec. 80, RCC)
- Failure to do so shall, at the option of the corporation, terminate the rights under this
Title. If shares represented by the certificates bearing such notation are transferred,
and the certificates consequently cancelled, the rights of the transferor as a dissenting
stockholder under this Title shall cease and the transferee shall have all the rights of a
regular stockholder; and all dividend distributions which would have accrued on such
shares shall be paid to the transferee.

1. Sale, lease, exchange, transfer, mortgage, pledge or disposition of all or substantially all of 3. SEC. 82. Effect of Demand and Termination of Right. - Upon a demand, all rights accruing to
corporate assets or property the share are suspended including voting rights including voting and dividend rights, except the
right of such stockholder to receive payment of the fair value thereof.
2. Articles are amended and such has the effect of changing or restricting the rights of a
shareholder or a class of shares or authorizing preferences in any respect superior to those
outstanding shares of any class
- Only the right to receive the fair value is not suspended.
3. Mergers/consolidations

4. Extending or shortening the corporate term

- If there is no payment within 30 days after the award, he is restored to all his rights.
5. A stockholder in a close corporation for any reason may compel the said corporation to allow
the exercise of his appraisal rights.

6. Investment by the corporation in another corporation or business other than its primary - However, the exercise of the right after demand is made, shall cease if: (Sec. 83,
purpose RCC)

B. HOW IS IT EXERCISED ( Sec. 81, RCC) (a) stockholder withdraws his demand and the corporation consents

(b) proposed action is abandoned or rescinded

1. The dissenting stockholder who votes against a proposed corporate action may exercise the right (c) SEC disapproves the action, if its approval is necessary
of appraisal by making a written demand on the corporation for the payment of the fair value of
shares held within thirty (30) days from the date on which the vote was taken (d) SEC determines that the stockholder is not entitled to the exercise of the right, in
the effect is that he is restored to all rights and accrued dividends are paid to him.

- If no demand is made within 30 days, he is deemed to have waived the exercise of the right.
4. The corporation then pays the stockholder the fair value upon surrender of the certificate.

2. The stockholder must submit his certificate of stock within 10 days for notation that such shares
are dissenting shares (all the shares on record, hindi patingitingi). - The value paid is the value as of the day prior to the date on which the vote is taken,
excluding any depreciation or appreciation in anticipation of the corporate action.

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 - If, within sixty (60) days from the approval of the corporate action by the stockholders, the
withdrawing stockholder and the corporation cannot agree on the fair value of the shares,
it shall be determined and appraised by three (3) disinterested persons, one of whom shall
be named by the stockholder, another by the corporation, and the third by the two (2) thus
chosen.
b. In the case of an action to recover such fair value, all costs and expenses shall be
assessed against the corporation, unless the refusal of the stockholder to receive
payment was unjustified.

- The findings of the majority of the appraisers shall be final, and their award shall be paid
by the corporation within thirty (30) days after such award is made:

- A transfer pending exercise of the right of appraisal shall cause the rights of the transferor
as a dissenting stockholder to cease and the transferee shall have all the rights of
stockholder including the dividends which would have accrued to the shares as by so
buying, it indicates his desire to be a stockholder.

- If the right of appraisal is denied, the remedy is to sell your shares to someone who will
not dissent to such corporate action.

- If there is no payment within 30 days after the award, he is restored to all his rights.

- Provided, in all cases: (Sec. 81, RCC)

(a) no payment can be made if the corporation has no unrestricted retained earnings, and

(b) that the shareholder shall forthwith transfer his shares to the corporation

C. WHO BEARS COSTS OF APPRAISAL. – The costs and expenses of appraisal shall be: (SEC. 84,
RCC)

a. borne by the corporation, unless the fair value ascertained by the appraisers is
approximately the same as the price which the corporation may have offered to pay the
stockholder, in which case they shall be borne by the latter.
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 CLOSE CORPORATION
A. CHARACTERISTICS OF A CLOSE CORPORATION

A close corporation is a corporation whose articles provide that:

1. Stockholders may act as directors without need of election, however, they shall
assume all obligations and liabilities of directors.
1. All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of
record by not more than a specified of persons not to exceed 20. 2. It may have a greater quorum requirement.

3. Pre-emptive rights extend to all stock issues, even treasury shares.

- The number of shareholders is mandatory. 4. A stockholder may withdraw and avail of his right of appraisal

- In case of the death of a stockholder, if his heirs will cause the number to exceed 20,
their remedy is to put only in the name of one of them or they can create a corporation
to hold the shares.
B. CAN A CORPORATION BE STOCKHOLDER OF A CLOSE CORPORATION?

2. All issued stock of all classes shall be subject to one or more specified restrictions on transfer
permitted in this title. - YES as long as it does not own 2/3 of the voting stock or voting rights of the close
corporation.

- Except if 2/3 of its voting stock or voting rights is owned or controlled by another
ANY RESTRICTION CAN BE PUT PROVIDED:
corporation which is not a close corporation within the meaning of the Code, the
corporation shall not be deemed a close corporation.

a. the restriction must appear in the articles of incorporation/by-laws as well as the

certificate of stock, otherwise it is not binding on a purchaser in good faith
- Other provisions of the Code shall have supplemental effect in the absence of express
provisions found in the title on close corporations.

b. it or they should not be more onerous than that granting the existing stockholders
or the corporation the option to purchase the shares with such reasonable terms,
C. NO CLOSE CORPORATION
conditions or periods stated therein.
1. Mining

2. stock exchange
- If at the end/expiration of the period, a stockholder/s or the corporation falls to exercise
the option to purchase, the transferring stockholder may sell his shares to any third person. 3. banks
Example: fixing a price below actual/market value, prescribing a longer holding period or
a transfer without consent of the board. 4. insurance

5. public utility

3. The corporation must not list in any stock exchange or make any public offering of any of its 6. educational corporations
stock of any class.
7. are otherwise vested with public interest
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 c) stockholders and the corporation shall be subject to all liabilities of
director
D. DISTINGUISH CLOSE CORPORATION FROM ORDINARY STOCK CORPORATION
5. May provide that all officers or employees or that specified officers shall be elected or
appointed by stockholders instead of the Board.
CLOSE CORPORATION ORDINARY STOCK CORPORATION

there is a limitation on shareholders none exists - Note that the term of directors for a close corporation is 1 year as it is a stock
corporation, while those in non-stock corporations will have a term of 3 years and in
there are restrictions of transfer No restrictions
an educational corporation the term is for 5 years.
there are qualifications that may be qualifications are not normally
imposed for shareholders imposed
F. RULES TO APPLY TO TRANSFERS OF STOCK IN BREACH OF QUALIFYING
a public offering of shares is there can be a public offering of shares CONDITIONS
prohibited

may be managed by shareholders always managed by a board

- A person holding stocks in a close corporation is conclusively presumed to have
notice of the fact of his ineligibility to be a stockholder if he is not entitled under any of
its provisions in the Articles of Incorporation to be a holder of record of stock and the
➢ Distinguished from a "closely held corporation" referring to the number of shareholders at
certificate for such stock conspicuously shows the qualifications of the persons entitled
a particular time, indicating that they are few in number or a corporation whose shares are
to be holders.
owned by a relatively small number of shareholders.

- If the Articles of Incorporation states the number of persons not exceeding 20 entitled
E. ARTICLES OF INCORPORATION OF A CLOSE CORPORATION
to be holders of stock and the certificate for such stock states such fact, the person to
whom stock is issued or transferred that will exceed the number is conclusively
presumed to have knowledge or notice of such fact.
In addition to what is required by Section 14 of the Code, the Articles of Incorporation of a close
corporation may provide for: - If stock certificate conspicuously shows a restriction on transfer, the transferee is
conclusively presumed to have notice of the fact that he has acquired stock in
1. Classification of shares or rights and the qualifications for owning or holding them and violation of the restriction, if such acquisition violates the restriction.
restrictions on their transfer

2. Classification of directors into one or more classes, each of which may be voted for or
elected solely by a particular class of stock - The effects of such is that the corporation may at its option refuse to register the
transfer of stock in the name of the transferee have; the corporation may record if it is
3. Greater quorum or voting requirements for stockholder or board meeting consented to by all the stockholders or if the close corporation had amended its
Articles and effect of such amendment is to terminate the status of the corporation as a
4. Provide that the corporation's business shall be managed by the stockholder rather than close corporation as long as the purpose of the amendment is either:
the board as long as:
(a) delete/remove provision required under the title to be contained in the Articles of
a) no meetings of stockholders are necessary to be called to elect directors Incorporation. Example: restrictions

b) unless the context clearly requires otherwise, stockholders shall be deemed (b) reduce quorum or voting requirement.
directors for the purpose of applying the provisions of the code

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 - It will require a 2/3 vote of the outstanding capital stock or such higher proportion as fixed
In the Articles, whether with or without voting rights. No written assent is allowed.
- Agreements signed by and among all the stockholders executed before the formation
or organization of the corporation shall survive incorporation and shall continue to be
valid and binding if such be their intent as long as they are not inconsistent with the
- Other related matters: Articles, irrespective of whether or not they are embodied in the Articles or not, but
aspects requiring it to be embodied must be so embodied.
(a) the manner of transfer is the same as stock corporations
Examples:
(b) transfers are not limited to transfers for value
(a) agreement between stockholders to sell their shares to each other must be embodied
(c) it does not impair/prejudice the right of the transferee to rescind or recover on the
warranty express or implied. (b) agreement to stay in the corporation for a definite period

G. PRE-EMPTIVE RIGHTS in a close corporation - Agreement between 2 or more stockholders in writing and signed by them may
provide that in exercising any voting rights, the shares held by them shall be voted as
provided, as they may agree or as determined by the procedure agreed between them.
- In a close corporation, pre-emptive rights extend to all stock issued, including a re-issuance
Example: voting trust agreements
of treasury shares, whether for money, property, personal services or in payment of
corporate debts unless the Articles otherwise provide.

- No provision in any written agreement signed by a stockholder relating to any phase

of corporate affairs shall be invalidated as between the parties on the ground that its
H. RIGHT OF FIRST REFUSAL in a close corporation
effect is to make them partners among themselves.

Example: contracts as to the use of dividends

- In close corporations, restrictions reasonably protecting existing stockholders in their
interests by giving them or the corporation the option to purchase stock offered for sale, or
the right of first refusal in case of sale of stock at a given reasonable date before disposing - Neither will an agreement among some or all of the stockholders in a close
of them to third persons are lawful as promotive of good management and sound business corporation be invalidated on the ground that it relates to conduct of business of the
enterprise. corporation as to restrict or interfere in the discretion of the board. Provided that such
shall impose on stockholders who are partners thereto liabilities for a managerial act
reposed on directors.
- The present policy of the Securities and Exchange Commission is to limit the period to one
Example: consultation agreements not to deal with particular entities or deal with
(1) month which is deemed "sufficient for the stockholders or for the corporation (not
particular entities only
necessarily a closely-held one) to signify their desire to buy the shares of stock being
offered for sale by any stockholder." (SEC Opinion, Oct. 13, 1964.)

- To the extent that a stockholder is actively engaged in the management or operation of

the business affairs of a close corporation stockholder shall be held to strict fiduciary
- Under Section 98, an absolute restraint on transfer of stock unlimited in time is invalid.
duties to each other and among themselves, said stockholder shall be personally liable
for corporate torts unless the corporation has obtained reasonably adequate insurance.

I. VALIDITY OF STOCKHOLDER AGREEMENTS

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J. EFFECTS OF ACTIONS TAKEN WITHOUT BOARD MEETINGS OR TAKEN DURING
IMPROPERLY HELD ONES
GENERAL RULE: The general rule is that all actions are valid If:
(a) signed and written consent of all directors is obtained before or after the action
(b) all stockholders have actual or implied knowledge and no prompt objections in writing
is made
(c) directors are accustomed to take informal action with express or implied acquiescence
of all stockholders
(d) all directors have express or implied knowledge of the action in question and no one
makes a prompt objection in writing and the by-laws do not provide otherwise
➢ If a directors meeting is held without call or notice, an action taken within corporate
powers is deemed ratified by the director who fails to attend unless he promptly files a
written objection with the secretary after having knowledge therefore.
L. PROVISIONAL DIRECTOR
K. DEADLOCKS
WHEN DOES IT OCCUR?
- Deadlocks occur if directors or stockholders are so divided regarding the management of the
corporation's business and affairs that the necessary vote cannot be obtained, the consequence
of which is that the business and affairs of the corporation can no longer be conducted to the
advantage of stockholders.
WHO RESOLVE DEADLOCKS?
- Deadlocks are resolved by the SEC.
- The petition to resolve a deadlock is initiated by written petition by any stockholder M. WITHDRAWAL OR DISSOLUTION
notwithstanding any contrary provision in the article or by-laws or agreements.
- The SEC may arbitrate and in the exercise of its powers may order the following:
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1. cancel or alter any provision contained in the articles of incorporation, by-laws, or any
stockholders' agreement;
2. cancel, alter or enjoin any resolution or other act of the corporation or its board of
directors, stockholders, or officers;
3. direct or prohibit any act of the corporation or its board of directors, stockholders,
officers, or other persons party to the action;
4. require the purchase at their fair value of shares of any stockholder, either by the
corporation regardless of the availability of unrestricted retained earnings in its books
or by the other stockholders;
5. appoint a provisional director;
6. dissolve the corporation; or
7. grant such other relief as the circumstances may warrant
- an impartial person who is neither a stockholder nor a creditor of the corporation or of
any subsidiary or affiliate of the corporation
- whose further qualifications, if any, may be determined by the Commission
- not a receiver of the corporation and does not have the title and powers of a custodian
or receiver
- shall have all the rights and powers of a duly elected director of the corporation,
including the right to notice of and to vote at meetings of directors, until such time as
he shall be removed by order of the Commission or by all the stockholders
- His compensation shall be determined by agreement between him and the corporation
subject to approval of the Commission, which may fix his compensation in the absence
of agreement or in the event of disagreement between the provisional director and the
corporation
- Without prejudice to other remedies, a stockholder may for any reason compel the
corporation to purchase his shares at their fair market value, which shall not be less
 than the par or issued value when the corporation has sufficient assets to cover debts and
liabilities, elusive of capital stock.
ONE PERSON CORPORATION
- Provided also, that a stockholder may, by written petition to the SEC, compel dissolution
when the acts of director, officers or persons in control are:

(1) Illegal; − A One Person Corporation is a corporation with a single stockholder

(2) Fraudulent;

(3) Dishonest; − SEC. 120. Display of Corporate Name. – A One Person Corporation shall indicate the letters
“OPC” either below or at the end of its corporate name.
(4) Oppressive or unfairly prejudicial to the corporation;

(5) Corporate assets are being misapplied or wasted.

A. WHO MAY FORM ONE PERSON CORPORATION (OPC? (Sec. 116, RCC)

- only a natural person, trust, or an estate may form a OPC.

- A natural person who is licensed to exercise a profession may not organize as a OPC
for the purpose of exercising such profession except as otherwise provided under
special laws.

- Banks and quasi-banks, pre-need, trust, insurance, public and publicly-listed

companies, and non-chartered government-owned and -controlled corporations may
not incorporate as OPC

B. CAPITALIZATION (Sec. 117, RCC)

- OPC shall not be required to have a minimum authorized capital stock except as
otherwise provided by special law.

C. ARTICLES OF INCORPORATION AND BY-LAWS (Secs. 118-119, RCC)

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 - OPC shall file articles of incorporation in accordance with the requirements under Section
14 of this Code. It shall likewise substantially contain the following:
- SEC. 123. Special Functions of the Corporate Secretary. – In addition to the functions
designated by the One Person Corporation, the corporate secretary shall:

(a) If the single stockholder is a trust or an estate, the name, nationality, and residence of
the trustee, administrator, executor, guardian, conservator, custodian, or other person
exercising fiduciary duties together with the proof of such authority to act on behalf of (a) Be responsible for maintaining the minutes book and/or records of the
the trust or estate; and corporation;

(b) Name, nationality, residence of the nominee and alternate nominee, and the extent, (b) Notify the nominee or alternate nominee of the death or incapacity of the single
coverage and limitation of the authority. stockholder, which notice shall be given no later than five (5) days from such
occurrence;

- The OPC is not required to submit and file corporate bylaws.

(b) Notify the Commission of the death of the single stockholder within five (5) days
from such occurrence and stating in such notice the names, residence addresses,
and contact details of all known legal heirs; and
D. OFFICERS (Secs. 121 and 123)

(d) Call the nominee or alternate nominee and the known legal heirs to a meeting and
1. Director and President - The single stockholder shall be the sole director and president of the advise the legal heirs with regard to, among others, the election of a new director,
OPC (Sec. 121). amendment of the articles of incorporation, and other ancillary and/or
consequential matters.

2. Treasurer - within fifteen (15) days from the issuance of its certificate of incorporation, the One
Person Corporation shall appoint a treasurer, corporate secretary, and other officers as it may E. NOMINEE AND ALTERNATE NOMINEE
deem necessary, and notify the Commission thereof within five (5) days from appointment.

1. SEC. 124. Nominee and Alternate Nominee. – The single stockholder shall designate a
- A single stockholder who is likewise the self-appointed treasurer of the corporation shall nominee and an alternate nominee who shall, in the event of the single stockholder’s
give a bond to the Commission in such a sum as may be required: Provided, That the death or incapacity, take the place of the single stockholder as director and shall manage
saidstockholder/treasurer shall undertake in writing to faithfully administer the One the corporation’s affairs.
Person Corporation’s funds to be received as treasurer, and to disburse and invest the
same according to the articles of incorporation as approved by the Commission. The bond
shall be renewed every two (2) years or as often as may be required.
The articles of incorporation shall state the names, residence addresses and contact
details of the nominee and alternate nominee, as well as the extent and limitations of their
authority in managing the affairs of the One Person Corporation.
3. Corporate Secretary - The single stockholder may not be appointed as the corporate secretary.

- The single stockholder may not be appointed as the corporate secretary.

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 The written consent of the nominee and alternate nominee shall be attached to the 3. SEC. 129. Reportorial Requirements. – The One Person Corporation shall submit the
application for incorporation. Such consent may be withdrawn in writing any time before the following within such period as the Commission may prescribe:
death or incapacity of the single stockholder.

(a) Annual financial statements audited by an independent certified public accountant:

2. SEC. 125. Term of Nominee and Alternate Nominee. – When the incapacity of the single Provided, That if the total assets or total liabilities of the corporation are less than Six
stockholder is temporary, the nominee shall sit as director and manage the affairs of the One Hundred Thousand Pesos (P600,000.00), the financial statements shall be certified
Person Corporation until the stockholder, by self determination, regains the capacity to under oath by the corporation’s treasurer and president.
assume such duties.

(b) A report containing explanations or comments by the president on every qualification,

In case of death or permanent incapacity of the single stockholder, the nominee shall sit reservation, or adverse remark or disclaimer made by the auditor in the latter’s report;
as director and manage the affairs of the One Person Corporation until the legal heirs of the
single stockholder have been lawfully determined, and the heirs have designated one of them
or have agreed that the estate shall be the single stockholder of the One Person Corporation.
(c) A disclosure of all self-dealings and related party transactions entered into between
the One Person Corporation and the single stockholder; and

The alternate nominee shall sit as director and manage the One Person Corporation in
case of the nominee’s inability, incapacity, death, or refusal to discharge the functions as
(d) Other reports as the Commission may require.
director and manager of the corporation, and only for the same term and under the same
conditions applicable to the nominee.

For purposes of this provision, the fiscal year of a One Person Corporation shall be
that set forth in its articles of incorporation or, in the absence thereof, the calendar year.
3. SEC. 126. Change of Nominee or Alternate Nominee. – The single stockholder may, at any time,
change its nominee and alternate nominee by submitting to the Commission the names of the
new nominees and their corresponding written consent. For this purpose, the articles of
incorporation need not be amended. The Commission may place the corporation under delinquent status should the
corporation fail to submit the reportorial requirements three (3) times, consecutively or
intermittently, within a period of five (5) years.
F. RECORDS AND REPORTORIAL REQUIREMENTS (Secs. 127-129, RCC)

G. LIABILITY OF SINGLE SHAREHOLDER (Sec. 130, RCC)

1. SEC. 127. Minutes Book. – A One Person Corporation shall maintain a minutes book which
shall contain all actions, decisions, and resolutions taken by the One Person Corporation.
- A sole shareholder claiming limited liability has the burden of affirmatively showing
that the corporation was adequately financed. Where the single stockholder cannot
prove that the property of the One Person Corporation is independent of the
2. SEC. 128. Records in Lieu of Meetings. – When action is needed on any matter, it shall be
stockholder’s personal property, the stockholder shall be jointly and severally liable
sufficient to prepare a written resolution, signed and dated by the single stockholder, and
for the debts and other liabilities of the One Person Corporation.
recorded in the minutes book of the One Person Corporation. The date of recording in the
minutes book shall be deemed to be the date of the meeting for all purposes under this Code.

- Limited liability is applicable in OPC.. If the creditor/obligee ask for the solidary
liablility of the single stock holder (SSH), SSH must discharge his burdent that the
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 OPC is adequately financed. Only then If SSH cannot discharged, he will be solidarily Commission of the transfer. Within sixty (60) days from the transfer of the shares, the
liable with the OPC. legal heirs shall notify the Commission of their decision to either wind up and dissolve
the One Person Corporation or convert it into an ordinary stock corporation.

- The principles of piercing the corporate veil applies with equal force to One Person
Corporations as with other corporations. The ordinary stock corporation converted from a One Person Corporation shall
succeed the latter and be legally responsible for all the latter’s outstanding liabilities as of
the date of conversion.
- Limited liability is not the same as piercing the veil. Limited liability presupposes of the
burden of showing that the OPC is adequately financed while piercing the veil poses the
grounds of perpetuate fraud, justify wrong and defeat… and burden is no longer
applicable. But these principles have the same effect.

H. CONVERSION (Secs. 127-129, RCC)

1. SEC. 131. Conversion from an Ordinary Corporation to a One Person Corporation. – When a
single stockholder acquires all the stocks of an ordinary stock corporation, the latter may
apply for conversion into a One Person Corporation, subject to the submission of such
documents as the Commission may require. If the application for conversion is approved, the
Commission shall issue a certificate of filing of amended articles of incorporation reflecting the
conversion. The One Person Corporation converted from an ordinary stock corporation shall
succeed the latter and be legally responsible for all the latter’s outstanding liabilities as of the
date of conversion.

2. SEC. 132. Conversion from a One Person Corporation to an Ordinary Stock Corporation. – A
One Person Corporation may be converted into an ordinary stock corporation after due notice
to the Commission of such fact and of the circumstances leading to the conversion, and after
compliance with all other requirements for stock corporations under this Code and applicable
rules. Such notice shall be filed with the Commission within sixty (60) days from the
occurrence of the circumstances leading to the conversion into an ordinary stock corporation.
If all requirements have been complied with, the Commission shall issue a certificate of filing
of amended articles of incorporation reflecting the conversion.

In case of death of the single stockholder, the nominee or alternate nominee shall
transfer the shares to the duly designated legal heir or estate within seven (7) days from
receipt of either an affidavit of heirship or self-adjudication executed by a sole heir, or any
other legal document declaring the legal heirs of the single stockholder and notify the

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 D. RELIGIOUS CORPORATIONS

SPECIAL CORPORATIONS
- Are corporations incorporated by one or more persons and are classified as either a
corporation sole or religious society and is to be governed by this chapter and generally by
A. KINDS: other provisions governing non stock corporations.

- They are corporations composed of entirely spiritual persons and which is organized for
the furtherance of a religion or for perpetrating the rights of the church or for the
1. EDUCATIONAL CORPORATIONS (stock or non-stock)
administration of church or religious work or property.
2. RELIGIOUS CORPORATIONS\

a. Corporation Sole
E. A CORPORATION SOLE - is one formed by the archbishop, bishop, priest, minister, rabbi,
b. Religious Society or other presiding elder of a religious denomination, sector, or church for the purpose of
administering and managing as trustee the affairs, property, and temporalities or money
revenues of such religious denomination, sect, or church.

B. EDUCATIONAL CORPORATIONS

- The Articles of Incorporation must provide:

- Are stock or non-stock corporations organized to provide facilities for teaching or instruction a. that he is the archbishop bishop, priest, minister, rabbi or presiding elder
and are governed by special laws and by general provisions of the code.
b. rules are not inconsistent with his becoming a corporation sole nor is it prohibited
- Prior to its incorporation, a favorable recommendation must be obtained from the Department
of Education. c. that he is charged with the administration of its temporalities and the management of
its affairs within its territorial jurisdiction
- A non-stock corporation is a corporation whose capital stock is not divided into shares. No part
of its income is distributable as dividends to its members, trustees or officers. Any income d. the manner vacancies are filled
obtained as an incident of its operations shall be used for the furtherance of the purpose to which it
e. place where the principal office is located.
has been organized.

WHEN DEEMED INCORPORATED

C. MANAGEMENT OF A NON-STOCK EDUCATIONAL CORPORATION

- The Board of Trustees shall not be less than 5 nor more than 15 members but always in
multiples of 5, so classified so that 1/5 of its members shall have terms that expire every year
and those subsequently elected shall serve for a term of five years.
- Any vacancies are only filled up for the unexpired portion but if organized as a stock
corporation, the provisions applicable to stock corporations shall govern
- For the conduct of its business, a majority of the board shall constitute a quorum.
- Once the Articles are submitted to the SEC together with an affidavit of affirmation.
- Henceforth he becomes a corporation sole.
- Property may be bought or encumbered by a corporation sole. Authority may also be
obtained from the RTC if no internal rules govern the same.
- Vacancies can be filled by the filing with the SEC of his commission or certificate of election
or proof of assumption.

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DISSOLUTION OF A CORPORATION SOLE - It takes place by the filing with the SEC of a - The rules or the law on non-stock corporations will govern them if applicable or in the
verified declaration of dissolution setting forth: absence of an express provision of law.

a. name

b. reason for dissolution

c. authorization for dissolution

d. name and address of the persons who will supervise dissolution or winding up of its
affairs.

- Upon SEC approval, it ceases to carry on its operations.

F. A RELIGIOUS SOCIETY - is the same as a corporation sole as far as purposes are concerned but
incorporation is brought about by 2/3 vote 5 or written consent of its members, who then file its
articles with the SEC, verified by affidavit of the presiding elder, secretary, clerk or member stating
that:

a. that the society is a religious organization of some religious denomination, sect or church

b. that 2/3 of its members have given their written consent or vote to incorporate at a duly
convened meeting of the body

c. , that its incorporation is not forbidden by competent authority or by constitution, rules,

regulations or discipline of the religious denomination, sect or church to which it belongs

d. that its purpose is to manage or administer its affairs, properties or estate

e. location of its principal office which must be in the Philippines

f. names, nationalities and residences of the trustees elected to serve the first year or such other
period as prescribed, which board must not be less than 5 nor more than 15

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 FOREIGN CORPORATIONS (b) The address, including the street number, of the principal office of the corporation in
the country or State of incorporation;

- A foreign corporation is one formed or organized or existing under any laws other than the
Philippines whose laws allow Filipino citizens and corporations to do business in its own (c) The name and address of its resident agent authorized to accept summons and process
country or state. in all legal proceedings and all notices affecting the corporation, pending the
establishment of a local office;

- These corporations can transact business after it has obtained a license and a certificate of
authority from the appropriate government agency. (d) The place in the Philippines where the corporation intends to operate;

- Every foreign corporation which, on the date of the effectivity of this Code, is authorized to do (e) The specific purpose or purposes which the corporation intends to pursue in the
business in the Philippines under a license issued to it shall continue to have such authority transaction of its business in the Philippines: Provided, That said purpose or purposes
under the terms and conditions of its license, subject to the provisions of this Code and other are those specifically stated in the certificate of authority issued by the appropriate
special laws. (Sec. 141, RCC) government agency;

A. THE BASES OF AUTHORITY (f) The names and addresses of the present directors and officers of the corporation;

(a) consent and

(b) doing business in the Philippines (g) A statement of its authorized capital stock and the aggregate number of shares which
the corporation has authority to issue, itemized by class, par value of shares, shares
without par value, and series, if any;

B. REQUISITES FOR APPLICATION FOR LICENSE (Sec. 142, RCC)

(h) A statement of its outstanding capital stock and the aggregate number of shares which
the corporation has issued, itemized by class, par value of shares, shares without par
Foreign Corporation applying for a license to transact business in the Philippines shall submit to the
value, and series, if any;
Securities and Exchange Commission:

(i) A statement of the amount actually paid in; and

1. Copy of its articles of incorporation, by-laws certified in accordance with law, and their
translation to an official language of the Philippines, if necessary

2. Application which shall be under oath and shall specifically set forth the following, unless (j) Such additional information as may be necessary or appropriate in order to enable the
already stated in its articles of incorporation: Commission to determine whether such corporation is entitled to a license to transact
business in the Philippines, and to determine and assess the fees payable.

(a) The date and term of incorporation;

3. Attached to the application for license shall be a duly executed certificate under oath by the
authorized official of the jurisdiction of its incorporation, attesting that its laws allow

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 Filipino citizens and corporations to do business thereon and that the applicant is an existing
corporation in good standing.
4. Statement under oath by the president or authorized officer showing to the satisfaction of the
SEC that it is solvent and in sound financial condition: setting forth its assets and liabilities as of
its date not exceeding 1 year prior to the filing of its application.
5. Foreign banking, financial, and insurance corporations shall, in addition to the above
requirements, comply with the provisions of existing laws applicable to them. In the case of all
other foreign corporations, no application for license to transact business in the Philippines shall
be accepted by the Commission without previous authority from the appropriate government
agency, whenever required by law.
6. As a condition to the issuance of the license for a foreign corporation to transact business in the
Philippines, such corporation shall file with the Commission a written power of attorney
designating a person who must be a resident of the Philippines, on whom summons and other
legal processes may be served in all actions or other legal proceedings against such corporation,
and consenting that service upon such resident agent shall be admitted and held as valid as if
served upon the duly authorized officers of the foreign corporation at its home office. (Sec. 145,
RCC)
C. REQUISITES FOR ISSUANCE OF LICENSE (Sec. 143, RCC)
1. WHEN LICENSED ISSUED:
- If the Commission is satisfied that the applicant has complied with all the requirements of this
Code and other special laws, rules and regulations, the Commission shall issue a license to
transact business in the Philippines to the applicant for the purpose or purposes specified in
such license.
2. AFTER LICENSED HAS BEEN ISSUED:
- Upon issuance of the license, such foreign corporation may commence to transact business in
the Philippines and continue to do so for as long as it retains its authority to act as a
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corporation under the laws of the country or State of its incorporation, unless such license
is sooner surrendered, revoked, suspended, or annulled in accordance with this Code or
other special laws.
- Within sixty (60) days after the issuance of the license to transact business in the
Philippines, the licensee, except foreign banking or insurance corporations, shall deposit
with the Commission for the benefit of present and future creditors of the licensee in
the Philippines, securities satisfactory to the Commission, consisting of bonds or other
evidence of indebtedness of the Government of the Philippines, its political subdivisions
and instrumentalities, or of government-owned or -controlled corporations and entities,
shares of stock or debt securities that are registered under Republic Act No. 8799,
otherwise known as “The Securities Regulation Code”, shares of stock in domestic
corporations listed in the stock exchange, shares of stock in domestic insurance
companies and banks, any financial instrument determined suitable by the Commission,
or any combination thereof with an actual market value of at least Five hundred
thousand pesos (P500,000.00) or such other amount that may be set by the Commission:
- Provided, however, That within six (6) months after each fiscal year of the licensee, the
Commission shall require the licensee to deposit additional securities or financial
instruments equivalent in actual market value to two percent (2%) of the amount by
which the licensee’s gross income for that fiscal year exceeds Ten million pesos
(P10,000,000.00). The Commission shall also require the deposit of additional securities or
financial instruments if the actual market value of the deposited securities or financial
instruments has decreased by at least ten percent (10%) of their actual market value at the
time they were deposited.
- The Commission may, at its discretion, release part of the additional deposit if the gross
income of the licensee has decreased, or if the actual market value of the total deposit has
increased, by more than ten percent (10%) of their actual market value at the time they
were deposited. The Commission may, from time to time, allow the licensee to make
substitute deposits for those already on deposit as long as the licensee is solvent. Such
licensee shall be entitled to collect the interest or dividends on such deposits.
- In the event the licensee ceases to do business in the Philippines, its deposits shall be
returned, upon the licensee’s application and upon proof to the satisfaction of the
Commission that the licensee has no liability to Philippine residents, including the
Government of the Republic of the Philippines. For purposes of computing the securities
deposit, the composition of gross income and allowable deductions therefrom shall be in
accordance with the rules of the Commission.
3. NECESSITY OF A LICENSE (a) transacting business with a license, it has access

(b) not transacting business and has no license, it has access

- The purpose of the law in requiring that a foreign corporation doing business in the Philippines (c) transacting business without a license, it has no access
to be licensed is to subject it to the jurisdiction of the courts.
(d) transacting business without license but subject qualifications/exceptions, it has access.

- The object is not to prevent foreign corporation from performing single acts but to prevent it
from acquiring a domicile for the purpose of business without taking steps necessary to render 2. WHAT CONSTITUTES DOING BUSINESS
it amenable to suits in local courts.

a. GENERAL RULE - There is no general rule as each case must be determined in the light
- OBJECTIVES: of the obtaining circumstances or the below guidelines:

1. To place the foreign corporations under the jurisdiction of the court a) Is the foreign corporation continuing the business or enterprise for which it was
organized or whether it has retired from it and turned it over to another?
2. To place them in the same footing as domestic corporation

3. To protect the public in dealing with the said corporation

b) Are the acts of the foreign corporation indicative of a purpose on its part to engage in
some part of its regular business?

D. TRANSACTION OF BUSINESS AND DOING BUSINESS OF FOREIGN CORPORATION

THREE TESTS TO DETERMINE

1. TRANSACTION OF BUSINESS only for the purpose for which the corporation was issued
a license.
i. Continuity test – doing business implies a continuity of commercial dealings and
arrangements, and contemplates to some extent the performance of acts or works or
the exercise of some functions normally incident to and in progressive prosecution of,
- Upon the grant of a license, foreign corporations can now transact business. A license is no the purpose and object of its organization;
longer absolutely necessary. It matters only when access to the court is the issue.

ii. Subsequent test – a foreign corporation is doing business in the country if it is

- If it is without a license, it can still transact business but the difference is that if it is transacting continuing the body or substance of the enterprise of business for which it was
business with a license it is permitted to maintain or intervene in any action suit or proceeding organized; and
in any court or administrative agency with the Philippines, otherwise it cannot maintain suit but
may be proceeded against before Philippine courts on any valid cause of action.

iii. Contract test – whether the contracts entered into by the foreign corporation, or by an
agent acting under the control and direction of the foreign corporation, are
- Therefore if the foreign corporations is: consummated in the Philippines

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 - Transacting business is not determined by number of transactions or volume. A single act REQUISITES FOR ITS APPLICATION ARE:
is not merely incidental or casual but is of such a character as to distinctly indicate a
purpose to do other business in the state or the performance of act/s for which it was
created.
(a) It must disclose that it is not doing business in the Philippines and is suing
under the Isolated Business Transaction Rule

- The volume or amount of business is not entirely determinative of whether it is transacting (b) It must prove its juridical personality as a foreign corporation
business or not.
(c) It must name its duly authorized representatives or resident agent.

DOING BUSINESS CAN THUS BE INFERRED FROM:

2) A cause of action to protect its name, reputation or goodwill subject to the rule on
reciprocity under the IPR.

i. continuous business acts or transactions

ii. isolated transaction or business act if an inference can be drawn or of such a character as - The foreign corporation is suing to protect its name, reputation and goodwill. If the
distinctly to indicate a purpose or the part of the foreign corporations to do business and to foreign corporations are well known through products bearing its corporate and
make the state the base of its operations for the conduct of its ordinary business. trade names, it has a legal right to maintain an action and it is also allowed by
treaties to which the Philippines is a party to.

BETTER DETERMINATION – an intent to make the Philippines as base of the corporation.

3) A cause of action that is independent of any business transaction

4) A cause of action that arises out of a business transaction that is not entered into in
b. EXCEPTIONS - UNLICENSED FOREIGN CORPORATION HAS THE CAPACITY TO SUE the Philippines
If it is not transacting or doing business in the Philippines, it can sue under:

- The foreign corporation is suing to enforce a right not arising out of business
1) The isolated business transaction rule transaction with a party in the Philippines. Example: failure of a shipping
corporation to deliver goods shipped by the foreign corporation or an insurer-
subrogee sues to recover from a Philippine carrier for the amounts paid to an
insured
- When the foreign corporation is suing to seek redress for an isolated business
transaction, which is a transaction or a series of transactions set apart from the
common business of a foreign enterprise in the sense that there is no intention to
engage in the progressive pursuit of the object/purpose of the business
organization.
3. TO HOLD IT LIABLE FOR ACTS AND OMISSIONS
- This is an exception as it is not the intention of the law to favor a domestic
corporation who later on repudiate obligations on account of the foreign
corporation's lack of a license. - Determine first whether it arises from transacting business or not

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- Conversely, if a foreign corporation is allowed to sue without a license, it may also be sued in - in case of a domestic corporation who will act as a resident agent, it must likewise be of
the Philippines for acts done to persons in the Philippines. It means that it cannot avoid suit due sound financial standing and must show proof that it is in good standing as certified by the
to the lack of a license. Commission.

- A foreign corporation shall not be allowed to impugn jurisdiction due to the lack of a license.

- That notwithstanding the above-situations, the Supreme Court has ruled: 2. Service of Process on Foreign Corporation through its Resident Agent? (Sec. 145, RCC)

▪ “That the contract that is entered into is not void ab initio. Thus, when a foreign corporation
which is doing business without a license contracts with a third party, any defect will
subsequently be cured if it obtains a license to transact business.”
- The power of attorney must contain a provision that the foreign corporation consents to
service of summons and legal notice and that service on the resident agent is admitted and
held as valid as if served on the duly authorized officer at its given address.

- If a foreign corporation is doing business In the Philippines without a license, the move of the
defendant to dismiss the complaint that said foreign corporation filed might still be neutralized
by invoking the doctrine of estoppel. - It should also be accompanied by an agreement executed by the proper authority of the
corporation that if there be cessation of business or if they shall be without a resident agent,
service may be made on the SEC as if service has been made upon it, the SEC in turn must
transmit the same by mail to the head office within 10 days, service is then complete.
- The Supreme Court adopted the in pari delicto rule holding that no remedy could be afforded
to the parties because of their presumptive knowledge that the transaction was tainted with
illegality. The Court said that equity couldn't lend its aid to the enforcement of an alleged right
claimed by virtue of an agreement entered into in contravention of law. F. SERVICE OF SUMMONS ON A FOREIGN CORPORATION

- The prohibition against doing business without a license is subject to penal sanctions under The rules on service of summons on a foreign corporation are:
Section 144 of the Code.

1. On the resident agent - Note if made on another while it has a resident agent, the
summon is inefficacious. It is also exclusive.

E. RESIDENT AGENT

- It shall be the duty of the resident agent to immediately notify the Commission in
writing of any change in the resident agent’s address.
1. Who may be a Resident Agent? (Sec. 144, RCC)

2. On the SEC - if the corporation ceases to do business or there is no resident agent

- Can be an individual or a corporation who is a resident of and is transacting business in the
Philippines.

- Whenever such service of summons or other process is made upon the

Commission, the Commission shall, within ten (10) days thereafter, transmit by
- If it be an individual, he must be of good moral character and of sound financial standing. mail a copy of such summons or other legal process to the corporation at its home
or principal office. The sending of such copy by the Commission shall be a
necessary part of and shall complete such service. All expenses incurred by the

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 Commission for such service shall be paid in advance by the party at whose instance GENERAL RULE: Only foreign corporations that have been issued a license to operate a
the service is made. business in the Philippines have the personality to sue.

- The burden of proof to show that it is a foreign corporation transacting business or suing
3. Any of its officers or agents in the Philippines - if the foreign corporation has neglected or under any of the exceptions is: on the foreign corporations by affirmatively pleading such
refused to appoint a resident agent. fact.

- The defendant must specifically deny the allegation of a foreign corporation's capacity to
sue.
4. If the foreign corporation is not doing business, service may be made upon any agent, as
provided for by the 1997 Rules on Civil Procedure. - Proof of doing business is not necessary before jurisdiction is acquired.

- For purposes of suit, a foreign corporation is a resident of the Philippines on account of

their being found and operating in the Philippines.
G. AMENDMENTS OF THE ARTICLES OR BY-LAWS (Sec. 147, RCC)

EXCEPTION: A party is estopped to challenge the personality of a foreign corporation to sue,

even if it has no license, after having acknowledged the same by entering to a contract with it.
- Amendments are to be governed by the laws of the country of incorporation but it must within
60 days after the effectivity of the amendment filed with the SEC and appropriate government
agency, a duly authenticated copy of the Articles or By-Laws indicating clearly in capital letters
- An unlicensed foreign corporation doing business in the country cannot maintain any
or underscoring the change or changes made, duly certified by the authorized official or officials
action but it can be sued.
of the country or State of incorporation., the filing thereof shall not of itself enlarge or alter the
purpose for which foreign corporation was granted a license.

J. PRINCIPLES GOVERNING A FOREIGN CORPORATION’S RIGHT TO SUE

- Such filing shall not in itself enlarge or alter the purpose or purposes for which such corporation
is authorized to transact business in the Philippines. If so enlarged or amended it must obtain an
amended licensed or if it changes its corporate name by submitting an application with the SEC
favorably enclosed by the appropriate regulating agency.
H. AMENDED LICENSE (Sec. 148, RCC)
1. if it does business without a license, it cannot sue before Philippine courts
2. if it is not doing business, it needs no license to sue before Philippine courts on an isolated
business transaction or on a cause of action entirely independent of any business
transaction or to protect its name, reputation or goodwill
3. if it does business with the required license, it can sue before Philippine courts on any
transaction

- A foreign corporation authorized to transact business in the Philippines shall obtain an

amended license in the event it changes its corporate name, or desires to pursue other or
TOP-WELD MANUFACTURING, INC. VS. ECED, S.A., 138 SCRA 118 [1985]
additional purposes in the Philippines, by submitting an application with the Commission,
favorably endorsed by the appropriate government agency in the proper cases.

- A party to a contract in pari delicto with a foreign corporation doing business in the
Philippines without a license is not entitled to relief from the latter. Thus, where a
I. RULES TO OBSERVE WHEN SUING A FOREIGN CORPORATION OR VICE VERSA contract entered into by a Philippine corporation with a foreign corporation for the
manufacture and marketing of the latter's products is illegal for failure to secure a
prior license from the Board of Investments (under R.A. No. 5455.), the former cannot

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 ask the court to prohibit the foreign corporation from terminating the contract and giving
the production and distributorship rights to another. The parties are charged with
knowledge of existing law at the time they enter into a contract and at the time it is to - Effect on contracts entered into:
become operative. Moreover, a person is presumed to be knowledgeable about his own
State law than his alien or foreign contemporary.
(a) If prior to revocation, they are valid

K. REVOCATION OF LICENSE (Sec. 151, RCC)

(b) If after revocation, they are invalid and unenforceable as far as the foreign
corporations are concerned.
- Without prejudice to the other grounds, a suspension or revocation of the license may arise
when the foreign corporation:
L. WITHDRAWAL OF FOREIGN CORPORATIONS (Sec. 153, RCC)

1. Fails to pay fees or file annual reports

2. Fails to appoint and maintain a resident agent - Subject to existing laws and regulations, a foreign corporation licensed to transact business
in the Philippines may be allowed to withdraw from the Philippines by filing a petition for
3. Fails, after change of a resident agent or his address, to submit to the SEC a statement of withdrawal of license. No certificate of withdrawal shall be issued by the Commission
such change unless all the following requirements are met:

4. Fails to submit an authenticated copy of any amendment of its Articles/By- Laws or any
articles of merger or consolidation within the time prescribed
(a) All claims which have accrued in the Philippines have been paid, compromised or
5. Misrepresentation of any material matter in the application, report, affidavit or other settled;
document submitted pursuant to the required documents

6. Failure to pay any and all taxes, imposts, assessments, penalties

(b) All taxes, imposts, assessments, and penalties, if any, lawfully due to the Philippine
7. Transacting business outside the purpose/s for which it was issued a license Government or any of its agencies or political subdivisions, have been paid; and

8. Transacting business in the Philippines as an agent of or acting in behalf of a foreign

corporation or entity not duly licensed In the Philippines
(c) The petition for withdrawal of license has been published once a week for three (3)
9. Any other ground that would render it unfit to transact business. consecutive weeks in a newspaper of general circulation in the Philippines.

- Issuance of Certificate of Revocation (Sec. 152, RCC) - Upon a revocation, the SEC shall issue a
certificate of revocation furnishing the appropriate government agency and it shall also mail to
the corporation at its registered office in the Philippines a notice of revocation with a
corresponding certificate of revocation.

▪ The Commission shall also mail the notice and copy of the certificate of revocation to
the corporation, at its registered office in the Philippines.

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 DISSOLUTION circulation and notice to a shareholder or member given by registered mail or
delivered personally 30 days prior to the meeting.

A. DEFINITION
- A copy of the Resolution is then certified by a majority of the Board, countersigned
by the secretary submitted to the SEC.

- Dissolution is the extinguishment of its franchise to be a corporation at the termination of its

corporate existence.
- TAKE EFFECT: upon issuance by the SEC of a Certificate of Dissolution

B. STEPS IN DISSOLUTION
b) With creditors prejudiced

1. termination of corporate existence as far as the right to go on doing ordinary business

- INITIATED: by the filing of a petition with the SEC, signed by a majority of the
2. winding up of corporate affairs, payment of debt, distribution of assets no creditors prejudiced Board or other officers having management, verified by President, Secretary or one
of its directors or trustees.
3. Liquidation - A corporation is really dissolved after liquidation. A corporation can still
exercise corporate powers while the liquidation phase is not yet terminated.

- The petition will set forth:

C. MODES OF DISSOLUTION (a) all claims and demands against it

(b) that dissolution was resolved upon the affirmative vote of 2/3 of outstanding
capital stock or members at a duly called meeting.
1. GROUNDS FOR VOLUNTARY DISSOLUTION

a) where no creditors are affected;

- If the SEC finds the petition to be in proper form, an order will be issued fixing
b) where creditors are affected; and date on or before which objections may be made, which date shall not be less than
30 days nor more than 60 days after the entry of the order.
c) by shortening of the corporate term.

- Publication will also be required once a week for 3 weeks and posted in 3 public
VOLUNTARY DISSOLUTION
places.

a) With no creditors prejudiced

- 5 days after the date fixed, the SEC will try all issues, objections and if all material
allegations are true.

- INITIATED: by majority of the Board and a resolution adopted by the outstanding

capital stock or members at a meeting to be held upon call of the Board after publishing
- TAKE EFFECT: upon judgment directing disposition of assets and payment of
notice of the time, place and object for 3 consecutive weeks in a newspaper of general
debts, and if required, appoint a receiver

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 c) Amendment to shorten the term
- INITIATED: by a majority vote of the Board and subject to the affirmative vote of 2/3
of the outstanding capital stock or members, followed by the submission to the SEC of
the amended articles duly certified by the secretary and a majority of the Board
together with an affidavit of publication.
- TAKE EFFECT: upon expiration of the shortened term without further proceedings
2. GROUNDS FOR INVOLUNTARY DISSOLUTION (Sec. 138, RCC)
- A corporation may be dissolved by the Commission motu proprio or upon filing of a verified
complaint by any interested party. The following may be grounds for dissolution of the
corporation:
a) Non-use of corporate charter as provided under Section 21 of this Code;
b) Continuous inoperation of a corporation as provided under Section 21 of this Code;
c) Upon receipt of a lawful court order dissolving the corporation;
d) Upon finding by final judgment that the corporation procured its incorporation through
fraud;
e) Upon finding by final judgment that the corporation:
1) Was created for the purpose of committing, concealing or aiding the commission of
securities violations, smuggling, tax evasion, money laundering, or graft and corrupt
practices;
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2) Committed or aided in the commission of securities violations, smuggling, tax
evasion, money laundering, or graft and corrupt practices, and its stockholders
knew; and
3) Repeatedly and knowingly tolerated the commission of graft and corrupt practices
or other fraudulent or illegal acts by its directors, trustees, officers, or employees.
- If the corporation is ordered dissolved by final judgment pursuant to the grounds set forth
in subparagraph (e) hereof, its assets, after payment of its liabilities, shall, upon petition of
the Commission with the appropriate court, be forfeited in favor of the national
government. Such forfeiture shall be without prejudice to the rights of innocent
stockholders and employees for services rendered, and to the application of other penalty
or sanction under this Code or other laws.
- The Commission shall give reasonable notice to, and coordinate with, the appropriate
regulatory agency prior to the involuntary dissolution of companies under their special
regulatory jurisdiction.
D. WITHDRAWAL OF REQUEST AND PETITION FOR DISSOLUTION (Sec. 137, RCC)
- A withdrawal of the request for dissolution shall be made in writing, duly verified by any
incorporator, director, trustee, shareholder, or member and signed by the same number of
incorporators, directors, trustees, shareholders, or members necessary to request for
dissolution as set forth in the foregoing sections.
- The withdrawal shall be submitted no later than fifteen (15) days from receipt by the
Commission of the request for dissolution. Upon receipt of a withdrawal of request for
dissolution, the Commission shall withhold action on the request for dissolution and shall,
after investigation:
(a) make a pronouncement that the request for dissolution is deemed withdrawn;
 (b) direct a joint meeting of the board of directors or trustees and the stockholders or members d. when it has misused a right, privilege or franchise or used it in violation of the law by
for the purpose of ascertaining whether to proceed with dissolution; or order of the SEC in cases of a violation of the code, deadlocks and mismanagement in a
close corporation, suspension, or revocation of the Certificate of
(c) issue such other orders as it may deem appropriate. Registration/Incorporation when:

- A withdrawal of the petition for dissolution shall be in the form of a motion and similar in i. Fraud in procuring its certificate of incorporation (such as making it appear that it has cash
substance to a withdrawal of request for dissolution but shall be verified and filed prior to paid-up capital when actually it has none, the money being in fact merely borrowed and
publication of the order setting the deadline for filing objections to the petition. returned to the lender after the incorporation);
ii. Serious misrepresentation as to what the corporation can do or is doing to the great
prejudice of, or damage to, the general public;
iii. Refusal to comply with or defiance of a lawful order f the Commission restraining the
- Withdrawal of Petition requires the same voting requirement as in dissolution.
commission of acts which would amount to a grave violation of its franchise;
iv. Continuous inoperation for a period of at least five (5) years
v. Failure to file by-laws within the required period; and
vi. Failure to file required reports in appropriate forms as determined by the Commission
within the prescribed period.
E. DE JURE DISSOLUTION VS FACT DISSOLUTION

G. POWER OF A SHAREHOLDER TO BRING ABOUT DISSOLUTION

- What is covered by de jure dissolution, or one that is adjudged and determined by judicial
sentence, or brought about by an act of or with the consent of the state, or which results from GENERAL RULE - a shareholder cannot, sue to demand dissolution unless they are unable to
the expiration of the period of corporate life, as opposed to a fact dissolution that is brought obtain redress and protection for their rights or violations warrant quo warranto proceedings.
about by cessation of business insolvency.

H. EFFECTS OF DISSOLUTION

F. GROUND FOR DISSOLUTION BY JUDICIAL DECREE

1. legal title to corporate property is vested in shareholders

2. corporation ceases as a body politic to continue the business for which it was organized
a. the corporation has offended against a provision of an act for its creation or renewal. Note: de
facto corporations 3. it cannot be revived

4. dissolution does not, by itself imply the diminution or extinguishment of rights

b. when it has forfeited its privileges and franchises by non-user 5. upon expiration of the winding up period of 3 years, the corporation ceases, it can no
longer sue or be sued

c. when it has committed an act or omitted an act which amounts to a surrender of corporate
rights, privileges or franchise I. LIQUIDATION (Sec. 139, RCC)

- This is the 2nd phase of dissolution.

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 appoint a trustee or reciever. If failed to do so, the last known or appointed
director/trustee shall be considered and one responsible at the end of the 3-year
- It pertains to the winding up of the affairs of the corporation by reducing its assets in money, period.
settling with creditors, and apportioning the amount of profit and loss.

- Pending suits upon expiration of the 3 year period may still be prosecuted by the
- Except for banks, which shall be covered by the applicable provisions of Republic Act No. 7653, handling lawyer who will then be constituted as a trustee for such purpose.
otherwise known as the “New Central Bank Act”, as amended, and Republic Act No. 3591,
otherwise known as the Philippine Deposit Insurance Corporation Charter, as amended, every
corporation whose charter expires pursuant to its articles of incorporation, is annulled by
forfeiture, or whose corporate existence is terminated in any other manner, shall nevertheless
remain as a body corporate for three (3) years after the effective date of dissolution, for the
J. DISTRIBUTION OF ASSETS IN A STOCK CORPORATION
purpose of prosecuting and defending suits by or against it and enabling it to settle and close its
affairs, dispose of and convey its property, and distribute its assets, but not for the purpose of
continuing the business for which it was established.
The preference will apply only if assets are insufficient to pay the claims. It is as follows:

- During liquidation, a corporation continues to exist as a body corporate for the purpose of
prosecuting and defending suits by or against it, enable it to settle and close its affairs, enable it (a) creditors
to dispose of and convey property and distribute assets but it should not be for the purpose of
continuing the business. (b) shareholders, members, directors, officers who are also creditors

(c) shareholders in proportion to shareholdings in the absence of a contrary provision.

- A corporation is allowed a 3 year period to enable it to close its business, collect from debtors
and settle with creditors.
- If the shares are divided into classes, preferred shareholders before common
shareholders.

METHODS OF LIQUIDATION - Shareholders may get more than the fair market value. If assets are just enough, they
get the par value or issued value, or less if the assets are insufficient.

- If creditors or shareholders cannot be found, the assets will be escheated in favor of

1. By the corporation itself the municipality or city where the assets are found.

2. By a management committee or a rehabilitation receiver

3. By a trustee within a 3-year period, where the property is conveyed to the trustee GENERAL RULE:
holding the same in trust for the benefit of shareholders, members, creditors and other
interested parties The assets can only be distributed upon lawful dissolution and payments of
debts/liabilities.
4. By liquidation after three years

EXCEPTIONS
- Note that receivers or trustees can act as such beyond the statutory 3 year period of
liquidation. If the corporation cannot complete the 3-year liquidation period, it shall (a) Decrease of capital stock under Section 18

(b) Redeemable shares under Section 8

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 (c) Treasury shares under section 9
(d) Acquisition by the corporation of its own shares under section 41
(e) Dividends under Section 43
(f) Deadlocks under Section 104
(g) Withdrawal under Section 105
K. DISTRIBUTION OF ASSETS IN A NON-STOCK CORPORATION:
1. Liabilities and obligations of the corporation shall be paid, satisfied or discharged, or adequate
provisions made, therefore assets held under a condition requiring return, transfer,
conveyance and which condition occurs by reason of dissolution shall be returned, transferred
and conveyed.
2. Assets received and held by the corporation subject to limitations permitting use only for
charitable, religious, benevolent, educational or similar purposes, but not subject to return,
transfer or reconveyance by reason of dissolution shall be transferred to corporations
undertaking similar activities pursuant to the plan of dissolution.
3. Other assets shall be distributed in accordance with the Articles of Incorporation or By-Laws
determining the distributive rights of its members or as provided.
4. In any other case, assets shall be distributed to such persons, societies or organizations
whether organized for profit or not as provided in the plan of distribution.
- The Plan of Distribution as outlined above must be consistent with Section 94.
- This is adopted pursuant to a majority vote of the Board of Trustees, then is submitted for the
affirmative vote of 2/3 of the members having voting rights at a regular or special meeting,
prior notice having been given.
L. KINDS OF CORPORATE INSOLVENCY
1. actual insolvency, i.e., the corporation’s assets are not enough to cover its liabilities; and
2. technical insolvency defined under Sec. 3-12, i.e., the corporation has enough assets but it
foresees its inability to pay its obligation for more than one year.
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- SEC supervision over corporations
- In the case of United Church of Christ in the Philippines, Inc. v. Bradford United
Church of Christ, Inc., 674 SCRA 92, it was held that the SEC shall have absolute
jurisdiction, supervision and control over all corporations. Even with their religious
nature, the SEC may exercise jurisdiction over them in matters that are legal and
corporate.
M. REHABILITATION
In the case of San Jose Timber Corporation v. SEC, 667 SCRA 13, rehabilitation was defined as
“restoration of the debtor to a position of successful operation and solvency.”
A successful rehabilitation depends on 2 factors:
1. positive change in the business fortunes of the debtor, and
2. the willingness of the creditors and shareholders to arrive at a compromise
agreement on repayment and the extent of dilution.
N. INTRACORPRATE DISPUTES
- controversies arising out of intra-corporate or partnership relations, between and among
stockholders, members, or associations between any or all of them and the corporation,
partnership or association of which they are stockholders, members, or association
respectively between such corporation, connected with the regulation of the internal affairs
of the corporation.
REQUIREMENTS:
1. the plaintiff must be a stockholder or member at the time the acts or transactions
subject of the action occurred;
2. he exerted all reasonable efforts, and alleges the same with particularity in the
complaint, to exhaust all remedies available under the articles of incorporation, by-
laws, laws or rules governing the corporation or partnership to obtain the relief he
desires;
3. No appraisal rights are available for the act or acts complained of; and
4. The suit is not a nuisance or harassment suit.
 1. the creation of the position is under the corporation’s charter or by-laws; and

JURISDICTION 2. the election of the officer is by the directors or the stockholders.

Jurisdiction to hear an intra-corporate dispute is determined by:

(a) the status of the relationship between the parties, and

(b) nature of the question that is the subject of the controversy.

- If the controversy involves the contractual rights and obligations of the parties/stockholders
and not the enforcement of rights and obligations under the Corporation Code, jurisdiction
belongs to the regular courts.

SPECIAL COMMERCIAL COURT

1. Devices and schemes employed by or any acts of the board of directors and/or the
stockholder, partners, members of association and organization, business associates, its
officers or partners amounting to fraud, and misrepresentation which may be detrimental
to the interest of the public

2. Controversies in the election or appointment of directors, trustees, officers, or managers of

such corporation, partnership or association

3. Petitions for suspension of payments or corporate rehabilitation.

4. Civil suits falling under the SRC (like liability for selling unregistered securities)

O. DISPUTE WITH AN INTRA-CORPORATE RELATIONSHIP WITHIN THE JURISDICTION

OF THE NLRC

- In the case of Cosare v. Broadcom Asia, Inc, G.R. No. 201298, February 5, 2014, the NLRC was
held to have jurisdiction over the dismissal of an AVP for Sales, who was also a stockholder, as
he is not a corporate officer whose dismissal is cognizable by the RTC.

- A corporate officer was defined as one who meets the following:

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 CORPORATE ACTS WHICH REQUIRE THE VOTES OF BOD/BOT AND 2. Dissolution of corporation - Voluntary
STOCKHOLDERS OR MEMBERS 3. Adoption of plan or distribution of assets of non-stock corporation

4. Merger or consolidation
A. MAJORITY VOTE OF THE BOD 5. Lease, sale, exchange, mortgage, pledge, or dispose of all or substantially all of the
corporate assets

1. Vacancies in BOD if not due to removal, expiration of the term or increase of the number of 6. Increase or decrease of capital stock
directors
7. Incur, create, or increase bonded indebtedness
2. Power to acquire own shares
8. Investment of corporate funds in another corporation or for any business or for any
3. Power to declare dividends other purpose other than primary purpose

4. Election of officers 9. Extension or shortening of corporate term

5. Fixing the issued price of no-par value shares 10. Stock dividends’ Issuance

B. MAJORITY VOTE OF THE SH E. SH REPRESENTING 2/3 OF OCS

1. Fixing of compensation of directors 1. Denial of pre-emptive right

2. Adoption of by-laws 2. Delegation of the power to amend, repeal, or adopt new by-laws to BOD

3. Fixing the issued price of no-par value shares 3. Incorporation of religious societies

4. Election of directors or trustees 4. Removal of directors or trustees

5. Ratification of act of disloyal director

C. MAJORITY VOTE OF THE BOD AND MAJORITY OF SH 6. Ratification of contract of self-dealing directors

1. Amendment or repeal of by-laws or adoption of new by-laws

2. Management contract

D. MAJORITY VOTE OF THE BOD AND 2/3 OF SH

1. Amendment of AOI

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