Philippine Corporation Code and Business Laws Overview

Republic of the Philippines
CAMARINES NORTE STATE COLLEGE

F. Pimentel Avenue, Brgy. 2, Daet, Camarines Norte – 4600, Philippines
COLLEGE OF BUSINESS AND PUBLIC

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Name of faculty: Ryan Daves F. Quiñones, CPA
Subject: Business laws and Regulations
Schedule for Instruction: BSA 2A TTH 9:30 – 11:00 – BSA 2B MW 2:00 – 3:30
Lesson/Topic:
 Corporation Code as Revised under Republic Act 11232

 Securities and Regulation Code under Republic Act 8799a
 Cooperative Code Under Republic Act 9520
Objectives
 Define Private Corporation and distinguish the same from public corporation.
 Discuss Batas Pambansa 68 and Republic Act 11232, and distinguish the two
mentioned laws.
 Identify different classes of corporation.
 Enumerate powers of private corporations.
 Recognized term of corporate existence, capital stock requirement and minimum
subscription and paid-up capital as per amended of Ra 11232
 Enumerate the requirements in election of board of directors/trustees / Corporate
officers.
 Identify different classes of stocks including the needed subscriptions.
 Recognized the important of Articles of Incorporation and by-laws.
 Distinguish Articles of incorporation from by laws.
 Distinguish Mergers and Consolidations.
 Apply the appropriate remedies from Supreme Court decisions in case of
dissolution and retirement.
 Discuss the requirements for establishing foreign corporations.
 Distinguish foreign corporation from domestic corporations.
 Define foreign corporation
 Distinguish suspension from revocations.
 Explain the for suspension and revocations.
 Make a flowchart of the rules and procedures for withdrawal from business.
 Define cooperative under RA 8799.
 Identify requirements for filing of General information sheet and annual Audited
Financial statements.
 Identify the different kinds of securities.
 Define Cooperative under R.A 9520
 Identify relevant documents in registering cooperative
 Describe the reportorial requirements for cooperative

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 Identify the requirements for the of cooperative and its dissolution.
 Comprehend the merger and consolidation of cooperatives
Revised Corporation Code
The law took effect on February 23, 2019 upon completion of its publication in Manila
Bulletin and Business Mirror, two newspapers of general circulation.
The law promotes ease of doing business, hence, the provisions, among others, on
one-person corporation, the option of the corporation to have perpetual existence and
the elimination of the minimum subscription requirement upon incorporation.
Definition of corporation
Corporation is an artificial being created by operation of law, having the right of

succession and the powers, attributes, and properties expressly authorized by law or
incidental to its existence.
Congress cannot, except by general law, provide for the formation, organization or
regulation of private corporations. It is only government owned and controlled
corporation that may be created or established through special charters.
Consequently, it has been held that a private corporation created pursuant to special
law is a nullity, and such special law is void for being in violation of the Constitution.
Attributes of a corporation
1. It is an artificial being
2. It is created by operation of law
3. It enjoys the right of succession
4. It has the powers, attributes and properties expressly authorized by law or
incidental to its existence.
As a juridical person, it is entitled to the rights of a person under the Bill of Rights of the
Philippine Constitution.
A corporation may invoke the right against unreasonable search and seizure. However,
it cannot invoke the right against self-incrimination.

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A corporation may also be criminally prosecuted if the imposable penalty is not
imprisonment such as fine, forfeiture of license and revocation of franchise.
The Congress shall not, except by general law, provide for the formation, organization,
or regulation of private corporations.
Concept of Cuentas en participacion (Joint accounts)
A joint account is a transaction of merchants where other merchants agree to contribute

the amount of capital agreed upon and the participating in the favorable or unfavorable
results thereof in the proportion they may determine.
An arrangement whereby merchants may interest themselves in the transaction of other

merchants, contributing thereto the amount of capital that may be agreed upon, and
participating in the favorable and unfavorable results thereof in the proportion they may
determine. There is commonly called accidental partnership and there is no indication to
the public that there is an existing arrangement because only the ostensible partner is
conducting the business.
Joint Account vs. Partnership
Joint account Partnership

Has no firm name and is conducted in the Has a firm name
name of an ostensible partner
Has no juridical personality; can sue or be Has a juridical personality; may sue or be
sued only in the name of the ostensible sued under its firm name
partner
Has no common fund Has a common fund
The ostensible partner manages the All general partners have the right of
business operations management
Liquidation can only be done by the Liquidation may, by agreement, be
ostensible partner entrusted to a partner/s.
Corporation as a creation of law or by operation of law
GR: A legislative grant or authority is required for the creation of a corporation, either by
a special incorporation law or charter or by means of general corporation law.
XPN: for corporations by prescription, such authority is not necessary.


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A corporation by prescription is one which has exercised powers for an indefinite period
without interference on the part of the sovereign power and which by fiction of law, is
given the status of a corporation.
Concession or fiat theory or government paternity theory or franchise theory.
It is a principle in the creation of corporations, under which a corporation is an artificial

creature without any existence until it has received the imprimatur of the State acting
according to law, through the SEC. The life of the corporation is a concession made by
the State.
Under the Concession theory, a corporation is a creature without any existence until it
has received the imprimatur of the State acting according to law.
A corporation is an artificial being created by operation of law. It owes its life to the
state, its birth being purely dependent on its will. A corporation will have no rights and
privileges of a higher priority than that of its creator and cannot legitimately refuse to
yield obedience to acts of its state organs.
It states that a corporation is conceived as an artificial person owing existence through

creation by a foreign law. Further, a corporation has without any existence until it has
received the imprimatur of the State acting according to law, through the SEC.
A private corporation may be created only under the corporation code. Only
public corporations may be created under a special law. Where a private corporation is
created under a special law, there is no attempt at a valid incorporation and it cannot
claim a de facto status.
Congress cannot enact a law creating a private corporation with a special
charter. Such legislation would be unconstitutional. Private corporations may exist only
under a general law.
What is a GOCC?
GOCC’s are stock or non-stock corporations vested with functions relating to public
needs that are owned and controlled by the Government directly or through its
instrumentalities.
GOCC refers to any agency organized as a stock or non-stock corporation vested with
functions relating to public needs whether governmental or proprietary in nature and
owned by the government through its instrumentalities either wholly or where

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applicable, as in the case of stock corporation, to the extent of at least 51% of its capital
stock.
There are two types of GOCC, chartered and non-chartered.
A chartered GOCC is created by special law. It is governed primarily by the special law
creating it while the RCC has suppletory application.
A non-chartered GOCC is governed by the RCC.
The CSC has jurisdiction over employees of chartered GOCCs while the LA has
jurisdiction over the employees of non-chartered GOCCs.
Acquired asset corporation is a corporation under private ownership, the voting or

outstanding shares of which were conveyed to the government in the satisfaction of
debts.
Attributes of a GOCC
1. Its organization as stock or non-stock corporation

2. The public character of its function
3. Government ownership over the same.
Government owns a stock or non-stock corporation if it has controlling interest in the

corporation.
Stock corporation – the controlling interest of the government is assured by its

ownership of at least 51% of the corporate capital stock
Non-stock corporation – Controlling interest of the government is affirmed when “at

least majority of the members are government officials holding such membership
by appointment or designation” or “there is otherwise substantial participation of
the government in the selection” of the corporations governing board.
The capital stock of the corporation may be decrease only if it will not result in prejudice
to the corporate creditors.
Franchise

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A franchise includes any special privilege or right affected with public interest, conferred
by the State on corporations or persons and which does not belong to the citizens of the
country, generally as a matter of common right.
Primary vs. Secondary Franchise
Primary Franchise Secondary Franchise

The franchise or authority to exist as a Special authority given to a corporation to
corporation. engage in specialized business (banks,
insurance companies, right to use the streets
of municipality to lay pipes or tracks, erect
poles or string wires)
The franchise to exercise powers and

privileges granted to such corporation to the
business for which it was created, including
those conferred for purposes of public benefit
such as the power of eminent domain and
other powers and privileges enjoyed by public
utilities.
GR; granted by the Corporation Code Granted by a Government agency or a
municipal corporation
XPN: In GOCC’s with a special charter, a
special law grants the franchise.
Cannot be transferred without the It may ordinarily be conveyed or mortgaged
approval of the Congress under a general power granted to a
corporation to dispose of its property.
It can be subject to levy and sale on

execution together with corporate power.
kinds of corporation
1. Stock corporation – which has capital stock divided into shares and is
authorized to distribute dividends, or allotments of the surplus profits on the basis
of the shares.
2. Nonstock corporation – no part of its income is distributable as dividends to its
members, trustees, or officers
3. Public Corporation – corporation created for public purpose and organized by
the State to assist it in the administration and governance of political subdivision
or unit.

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4. Private corporation – corporation created for profit-making activities or some
benevolent purpose
5. Domestic Corporation – formed, organized or existing under the Philippine laws
6. Foreign corporation – formed, organized or existing under any laws other than
those of the Philippines and whose laws allow Filipino Citizens and corporations
to do business in its own country or state
7. De jure corporation – a corporation created in strict compliance with the
mandatory requirements for incorporation, and the right of which exists as a
corporation cannot be successfully attacked or questioned by any party even in a
direct proceeding for that purpose by the state
8. De facto corporation – a corporation which is formed where there exists a flaw
in its incorporation but there is colorable compliance with the requirements of the
law.
Engagement into a contract of partnership or joint venture.
GR: corporations have no power to enter into partnership
XPN: the SEC allowed corporations to enter into partnerships with other corporations
and individuals provided that:
1. The authority to enter into partnership relation is expressly conferred by the

charter or the Articles of incorporation (AOI).
2. The nature of the business venture to be undertaken by the partnership is
in line with the business authorized by the charter or the AOI.
3. The partnership must be a limited partnership
4. If it is a foreign corporation, it must obtain a license to transact business in the
country.
Requisites for the formation of a stock corporation
1. A capital stock divided into shares; and

2. An authority to distribute to the holders of such shares, dividends or allotments of
the surplus profits on the basis of the shares held.
De facto corporation
A de facto corporation is one which actually exists for all practical purposes as a
corporation but which has no legal right to corporate existence as against the State.

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It is a corporation organized with a colorable compliance with the requirements of a

valid law and its existence cannot be inquired into except by the Solicitor General in quo
warranto proceedings.
Existing in fact but not in law.
For a corporation to be considered a de facto corporation, it is necessary that the

corporation should be defectively formed from a bona fide attempt to incorporate under
existing laws, and which body exercises corporate powers.
If after the incorporation, the incorporators discovered that they have not complied
substantially with the law and still continued transacting business as a corporation,
without doing anything to correct the defect, the privilege of de facto existence can no
longer be invoked.
The filing of AOI and the issuance of certificate of incorporation is essential for the
existence of a de facto corporation.
Requisites of a de facto corporation
1. Existence of a valid law under which it may be incorporated

2. Attempt in GF to incorporate or comply with the formalities of the law. (Colorable
compliance)
3. Actual use or exercise in GF of corporate powers;
The corporation must have performed the facts which are peculiar to a corporation like
entering into a subscription agreement, adopting by-laws and electing directors.
If there is substantial compliance, de jure corporation results; only colorable compliance

results in de facto corporation.
The due incorporation and right to exercise corporate powers of a de facto corporation
cannot be inquired into collaterally in a private suit to which the corporation is a party.
Inquiry shall be only through quo warranto proceedings filed by the Solicitor General.
The filing of articles of incorporation and the issuance of the certificate of incorporation
are essential for the existence of a de facto corporation.
Defects resulting in the creation of de facto corporation


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1. Articles of incorporation fails to state all the matters required by the Code to be
stated, or state some of them incorrectly;
2. Minimum paid-up capital stock has not been paid to and received by the
corporate treasurer contrary to his affidavit;
3. Name of the corporation closely resembles that of a pre-existing corporation that
will tend to deceive the public
4. Incorporators or a certain number of them are not residents of the Philippines;
5. Acknowledgement of the articles of incorporation is insufficient or defective in
form, or it was acknowledged before the wrong officer
6. Percentage of Filipino ownership of the capital stock required for the business is
less than that prescribed by law; or
7. Failure to submit by-laws on time.
Defects precluding creation of corporation
1. Absence of articles of incorporation

2. Failure to file articles of incorporation with SEC
3. Lack of certificate of incorporation from SEC
In this case, neither de jure or de facto corporation is created.
The existence of a de facto corporation cannot be collaterally attacked.
GR: The existence of a de facto corporation shall not be inquired into collaterally in any
private suit to which such corporation may be a party. Such inquiry may be made by the
Solicitor general in a quo warranto proceeding.
XPN: Collateral attack can be permitted when the lack of right or the wrong doing of the
corporation is in issue because it is in violation of public policy or of express or implied
statutory requirement, such as denial of its right to enforce contracts entered into
without compliance with prohibitions of express or implied statutory or public policy.
De Facto Corporation vs. De jure Corporation
De facto corporation De jure corporation

One which actually exists for all practical One created in strict or substantial
purposes as a corporation but which has conformity with the mandatory statutory
no legal right to corporate existence as requirements for incorporation
against the State

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There is a colorable compliance with There is substantial compliance with
the requirements of the law creating the the requirements of the law creating the
corporation corporation
Can be attacked directly but not Its right to exist as a corporation cannot
collaterally. be successfully attacked or questioned by
any party even in direct proceeding for
that purpose by the State
Corporation by estoppel
A corporation by estoppel has no real existence in law. It is neither a de jure nor de

facto corporation, but is a “mere fiction existing for the particular case, and
vanishing where the element of estoppels is absent”
A corporation by estoppel is neither a de jure or de facto corporation but is considered

as a corporation in relation only to those, who cannot deny its corporate existence due
to its agreement, admission or conduct.
The doctrine of corporation by estoppel applies for as long as there is no fraud and
when the existence of the association is attacked for causes attendant at the time the
contract or dealing sought to be enforced was entered into and not thereafter.
Rules governing a corporation by estoppel
1. All person who assume to act as a corporation knowing it to be without authority

to do so shall be liable as general partners for all debts, liabilities and damages
incurred or arising as a result
2. When any such ostensible corporation is sued on any transaction entered by it as
a corporation or on any tort committed by it as such, it shall not be allowed to use
as a defense its lack of corporate personality.
3. One who assumes an obligation to an ostensible corporation as such, cannot
resist performance thereof on the ground that there was in fact no corporation.
When there is no third person involved and the conflict arises only among those
assuming the form of a corporation who know that the corporation has not been
registered, there is no corporation by estoppel.
De facto corporation vs. corporation by estoppel
De facto corporation Corporation by estoppel

There is existence in law There is no existence in law

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The dealings among the parties on The dealings among the parties on a
corporate basis is not required corporate basis is required
The State reserves the right to question Quo warranto proceeding is not
its existence through a quo warranto applicable
proceeding
Stockholders in a de facto corporation are Stockholders are liable as general
liable as de jure corporation partners for all debts, liabilities and
damages incurred.
There is a corporation. There is a bona There is NO corporation. A group of
fide attempt to incorporate under existing persons misrepresent themselves as a
laws in GF, although defectively formed. corporation knowing it is without authority
It may sue and be sued, as well as validly to do so. These persons will be
exercise corporate powers until it is personally liable as general partners for
dissolved through quo warranto all debts, liabilities and damages incurred
proceedings. or arising from their acts. The ostensible
corporation can be sued on any
transaction entered into by it or on any
tort committed by and cannot use as a
defense its lack of corporate personality.
Stock corporation vs. nonstock corporation
Basis Stock Corporation Nonstock corporation

Nature It has capital stock divided No part of its income is
into shares and is distributable as dividends
authorized to distribute to its members during its
dividends to its term of existence
stockholders
Manner of Voting Cumulative voting is Cumulative voting is not
available in the election of available unless allowed in
directors the AOI/BL
Proxy Stockholders may vote by Members may be deprived
proxy of the right to vote by proxy
in the AOI or BL
Non-transferability of Stockholders may freely Membership is personal
membership transfer their shares and non-transferrable
unless allowed in the AOI
and BL
Directors/Trustees Directors cannot exceed Trustees may exceed 15 in
15 in number number
Term of office Term of a director is 1 year Trustees can hold office for
not more than 3 years
Election of officers Officers are elected by the Officers may be directly

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BOD elected by the members
unless otherwise provided
in the AOI or BL
Place of meeting Stockholders meeting shall The bylaws may provide
be held in the principal of that members of a
the corporation, if nonstock corporation may
practicable, or anywhere hold their meetings at any
within the city or place within the
municipality where Philippines.
principal office of
corporation is located
Nonstock corporation
Unless so limited, broadened or denied, each member, regardless of class shall be

entitled to one vote.
While for stock corporations, the quorum is based on the number of outstanding voting
stocks, for nonstock corporations, only those who are actual, living members with voting
rights shall be counted in determining the existence of a quorum.
Homeowners cannot be compelled to become members of a homeowner’s association

by the simple expedient of including them in its AOI and BL without their express or
implied consent.
Nationality of Corporations
Test in determining the nationality of corporations
1. Place of incorporation test

2. Control test
3. Grandfather rule
4. Domiciliary test
Place of incorporation test (entity test)
A corporation is a national of the country under whose law the corporation was
organized and registered.
Place of incorporation test which looks to the nation where the corporation was
incorporated.

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The nationality of a corporation is determined by the state of incorporation, regardless of

the nationality of the stockholders.
This means that the nationality of the corporation is determined by the state of
incorporation. Under this test, a corporation is a Philippine national if it is organized and
existing under Philippine Laws, regardless of the nationality of the shareholders. It is
applied if the corporation is not engaged in areas of activities reserved, in whole or in
part for Filipinos.
Control Test (aggregate test)
The nationality of a corporation is determined by the nationality of the controlling

stockholders.
The control test requires looking into the nationality, domicile, or residence of the
individuals who control the corporation.
In determining the nationality of a corporation, the control test uses the nationality of
the controlling stockholders or members of the corporation.
Control test is applied for corporations organize for the purpose of exploiting natural
resources, owning and operating public utilities, mass media, advertising and other
corporations subject to foreign equity restrictions under the Constitution.
A corporation organized/incorporated abroad and registered as doing business in the

Philippines under the Corp. Code of which 100% of the capital stock outstanding and
entitled to vote is wholly owned by Filipinos, may be considered a Philippine National
under the Foreign Investments Act of 1991. This is the only exception to the place of
incorporation test. The test was adopted by the said law as a general guideline in
determining the nationality of corporations engaged in nationalized activity.
If a corporation, engaged in a partially nationalized industry, issues a mixture of

common and preferred non-voting shares, at least 60 percent of the common shares
and at least 60 percent of the preferred non-voting shares must be owned by
Filipinos.
Under the control test, a corporation organized under Philippine law shall be regarded
as a Philippine national if at least 60% of its voting shares is owned and held by Filipino
citizens. Otherwise it is still foreign.

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Are the place of incorporation test and control test used interchangeably?
No. The place of incorporation test is the primary and general test to be used in
determining the nationality of a corporation. The control test is an exceptional test used
only in times of war or in determining the compliance with the constitutional and
statutory foreign equity restrictions.
The control test cannot override the place of incorporation test. If a corporation is
organized and incorporated abroad, it is considered a foreign corporation regardless of
proportionate equity ownership between Filipinos and foreigners except when it is
wholly owned by Filipinos.
Double 60% Rule
Where a corporation and its non-Filipino stockholders owns stocks in a SEC registered
enterprise, at least 60% of the capital stocks outstanding and entitled to vote of both
corporations must be owned and held by citizens of the Philippines and at least 60% of
the members of the BOD of both corporations must be citizens of the Philippines, in
order that the corporation shall be considered a Philippine National.
Control test and Grandfather rule
Control Test Grandfather Rule

Also known as the “liberal test”; This The method by which the percentage of
provides that shares belonging to Filipino equity in a corporation is
corporations or partnerships at least 60% computed, in cases where corporate
of the capital of which is owned by shareholders are present, by attributing
Filipino citizens shall be considered of the nationality of the second or even
Philippine nationality. subsequent tier of ownership to
determine the nationality of the corporate
This does not scrutinize further the shareholder. Thus, to arrive at the actual
ownership of the Filipino shareholdings. Filipino ownership and control in a
corporation, both the direct and indirect
shareholdings in the corporation are
determined.
Primary test (but it may be combined with Applies only when the 60-40 Filipino
the Grandfather Rule) foreign ownership is in doubt or where
there is reason to believe that there is
noncompliance with the provisions of the
Constitution on the nationality restriction.

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Who are considered Philippine Nationals (under the Foreign Investment Act of
1991)
1. Corporations organized under Philippine laws of which 60% of the capital stock
outstanding and entitled to vote is owned and held by Filipino citizens.
2. Corporations organized abroad and registered as doing business in the
Philippines under the Corp. Code of which 100% of the capital stock entitled to
vote belong to Filipinos.
Domiciliary Test or place of principal business test
The corporation is a national of the place where its principal office or center of
management is located.
It is determined by the principal place of business of the corporation.
Grandfather Rule
The method by which the percentage of Filipino equity in a corporation engaged in

nationalized and/or partly nationalized areas of activities, provided for under the
Constitution and other nationalization laws, is computed, in cases where corporate
shareholders are present, by attributing the nationality of the second or even
subsequent tier of ownership to determine the nationality of the corporate shareholder.
It is a method of determining the nationality of a corporation which in turn is owned by

another corporation by breaking down the equity structure of the shareholders of the
corporation. The percentage of shares held by the second corporation in the first is
multiplied by the latter’s own Filipino Equity, and the product of these percentages is
determined, to be the ultimate Filipino ownership of a subsidiary corporation. This
applies only if the Filipino equity is less than 60% of the outstanding capital of a
corporation that own shares in partly nationalized enterprise – at least 60% must be
owned by Filipino nationals.
Nationality is attributed to the percentage of equity in the corporation used in

nationalized or partly nationalized area. This test is an exception to the Control test and
was applied by SEC in several cases
The Grandfather rule, standing alone, should not be used to determine the Filipino
ownership and control in a corporation, as it could result in an otherwise foreign

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corporation rendered qualified to perform nationalized or partly nationalized activities. It
is only when the control test is first complied with that the Grandfather rule may be
applied.
One must not stop until the citizenships of the individual or natural stockholders of layer
after layer of investing corporations have been established, for his is the very essence
of the grandfather rule.
The grandfather rule applies only when the 60-40 Filipino-foreign equity
ownership is in doubt.
The doubt that demands the application of the grandfather rule in addition to or in
tandem with the control test does not refer to the fact that the apparent Filipino
ownership of the corporation’s equity falls below the 60% threshold. Rather, doubt
refers to various indicia that the beneficial ownership and control of the corporation do
not in fact reside in Filipino shareholders but in foreign stakeholders.
To arrive at the actual Filipino ownership and control in a corporation, both direct and
indirect shareholdings in the corporation are determined.
Under the grandfather rule, it is not enough that the corporation does have the required
60% Filipino stockholdings at face value. To determine the percentage of the ultimate
Filipino ownership, it must first be traced to the level of the investing corporation and
added to the shares, directly owned in the investee corporation.
The grandfather rule and control test may be applied cumulatively.
Grandfather rule is the method of attributing the shareholdings of a given corporate

shareholdings of a given corporate shareholder to the second or even the subsequent
tier of ownership to determine the ultimate ownership in a corporation. This is consistent
with the rule that the beneficial ownership of corporations engaged in nationalized
activities must reside in the hands of Filipino citizens. In the case of multi-tiered
corporation, the stock attribution rule must be allowed to run continuously along the
chain of ownership until it finally reaches the individual stockholder. The grandfather
rule is a method of determining the nationality of a corporation that owns shares in
another corporation by breaking down the equity structure of the shareholders of the
corporation.
Rules governing the application of the Grandfather Rule


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1. The grandfather rule should be used in determining the nationality of a
corporation engaged in a partly nationalized activity. This applies in cases where
the stocks of a corporation are owned by another corporation with foreign
stockholders exceeding 40% of the capital stock of the corporation
2. The Grandfather rule will not apply in cases where the 60-40 Filipino-alien equity
in ownership in a particular natural resource corporation is 60% or more owned
by Filipinos, all the stock held by the stockholder corporation is deemed to be
held by Filipinos
3. When there is doubt as to the actual extent of Filipino Equity in the investee
corporation, the SEC is not precluded from using the Grandfather Rule.
When should the grandfather rule be applied?
It applies only when the 60-40 Filipino-foreign equity ownership is in doubt as a result of
various indicia that beneficial ownership and voting control of a subject corporation does
not in fact reside in Filipino shareholders but in foreign stakeholders through the
medium or practice of corporate layering.
What is corporate layering?
Corporate layering is a means of structuring companies whereby a parent corporation

holds shares in other corporations. Unless used to circumvent the law, corporate
layering is a valid and legal practice in the business community. It is the use of
corporations as stockholders of other corporations in different stages of organization.
Corporate layering is admittedly allowed by the Foreign Investment Act (FIA); but if it is
used to circumvent the Constitution and pertinent laws, then it becomes illegal.
Corporate layering is not prohibited provided that it is not used to circumvent the rules
on foreign ownership restriction.
Corporate layering is valid insofar as it does not intend to circumvent the Filipino
ownership requirement of the Constitution.
Common conditions for the application of control test and grandfather rule

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1. The corporation is engaged in economic activities that are reserved, in whole or
in part, for Filipinos, otherwise known as nationalized activities.
2. Stockholders include corporations. If stockholders are all-natural persons, the
nationality of the corporation, under this test is ascertained by simply computing
the percentage of stock ownership by Filipino and foreigners.
3. Foreign stockholders are present either by owning shares directly in the
corporation or owning shares in a corporation that invested in the equity of the
corporation whose nationality is in issue.
The control test is the prevailing mode of determining the nationality of

corporations engaged in nationalized activities. However, when in the mind of the court
there is doubt as to where beneficial ownership and control reside, based on the
attendant facts and circumstances of the case, then it may apply the grandfather rule.
The SC held that the required percentage of Filipino ownership shall be applied to
BOTH:
1. The total number of outstanding shares of stock entitled to vote in the election
of directors; and
2. The total number of outstanding shares of stock, whether or not entitled to
vote in the elections of directors.
Nationalized activities reserved for Filipinos under the constitution and special
laws.
100% Filipino Owned (Zero percent foreign equity)
1. Cockpits
2. Cooperatives
3. Small-scale mining
4. Private security agencies
5. Mass media except recording
6. Utilization of marine resources
7. Manufacture of firecrackers and other pyrotechnic devices
8. Retail trade enterprises with paid-up capital of less than US$2.5M
9. Manufacture, repair, stockpiling and/or distributions of nuclear weapons
10. Manufacture, repair, stockpiling and/or distribution of biological, chemical and
radiological weapons and Anti-personal mines.
80% Filipino owned (up to 20% foreign equity)


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1. Private, radio communications network
75% Filipino Owned (up to 25% foreign equity)
1. Contracts for construction and repair of Locally-funded public works, except

a. Infrastructure/development projects covered in RA 7718
b. Projects which are foreign funded or assisted and required to undergo
international competitive bidding
2. Private Recruitment, whether for local or overseas employment
3. Contracts for the construction of defense related structures
4. Under the Flag Law, in the purchase of articles for the Government, preference
shall be given to materials and supplies produced, made, or manufactured in the
Philippines and to domestic entities. Domestic entities mean any citizen of the
Philippines or commercial company at least 75% of the capital of which is owned
by citizens of the Philippines.
70% Filipino owned
1. Advertising
2. Corporations engaged in pawnshop business.
40% Filipino Owned (up to 60% foreign equity)
1. Financing companies regulated by the SEC

2. Investment houses regulated by the SEC
All other corporations must be 60% owned by Filipinos.
Corporate juridical personality
Doctrine of separate juridical personality
The doctrine of corporate juridical personality states that the 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.
Mere ownership by a single stockholder, or by another corporation, of all or nearly all of

the capital stock of a corporation is not itself a sufficient ground for disregarding the
separate corporate personality. (e.g., 90% ownership)

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Corporate officers cannot be personally liable for the consequences of their acts, for as
long as these are for and behalf of the corporation, within the scope of their authority
and in good faith.
PNRC has a sui generis status. The PNRC enjoys a special status as an important ally
and auxiliary of the government in the humanitarian field in accordance with its
commitments under international law.
Significance of the doctrine of separate personality
1. Liability for contracts – as a GR, the obligation of the corporation is not the
liability of the stockholders, officers or directors.
2. Right to bring actions – may bring civil and criminal actions in its own name in
the same manner as natural persons.
3. Right to acquire and possess property – property conveyed to or acquired by
the corporation is in law the property of the corporation itself as a distinct legal
entity and not that of the stockholders or members*
4. Acquisition of jurisdiction – service of summons may be made only on the
president, general manager, corporate secretary, treasurer or in-house counsel
5. Changes in individual membership – corporation remains unchanged and
unaffected in its identity by the changes in its individual membership or
ownership.
* The interest of the stockholders over the properties are merely inchoate.
Entitlement of corporations to constitutional rights.
Entitled to the following rights.
1. Right to due process and equal protection of the laws

2. Right against unreasonable searches and seizures
- not entitled to the right against self-incrimination, being a mere creature of law.
Liability for torts
The corporation is liable for every tort which it expressly directs or authorizes.

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A corporation is civilly liable in the same manner as natural persons for torts, because
generally speaking, the rule governing liability of the 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, and whether the servant or agent be a natural or
artificial person. All of the authorities agree that a principal or master is liable for every
tort which he expressly directs or authorizes and is just as true of a corporation as of
natural person.
Liability of corporation in cases of crimes
GR: Since corporation is a mere creation of legal fiction, it cannot be held liable for
crimes committed by its officers; in such case the responsible officers would be
criminally liable
XPN: If the penalty of the crime is only fine or forfeiture of license or franchise.
A corporation cannot be arrested and imprisoned; hence, it cannot be penalized for a

crime punishable by imprisonment. However, a corporation may be charged and
prosecuted for a crime if the imposable penalty is monetary fine or forfeiture or
revocation of the corporate franchise.
Since a corporation is a mere legal fiction, no criminal action can lie against a
corporation whether such corporation be a resident or non-resident
The rule is only natural persons are criminally liable. Juridical persons like corporations
are not criminally liable.
A corporation is a mere legal fiction, it does not have the essential element of malice.
Corporations are incapable of intent; hence they cannot commit felonies that are
punishable under the RPC and those that are punishable under special laws because
crimes are personal in nature.
The law specifically makes the director, officer, employee or any person responsible
criminally liable precisely for the reason that a corporation being a juridical entity, cannot
be the subject of the penalty of imprisonment.
Recovery of moral damages


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GR: a corporation is not entitled to moral damages because it has no feelings, no
emotions, no senses.
XPNs:
1. The corporation may recover moral damages under Article 2219 (7) of NCC
because said provision expressly authorizes the recovery of moral damages in
cases of libel, slander, or any other form of defamation
2. When the corporation has a reputation that is debased, resulting in its humiliation
in the business ream. (Besmirched reputation)
As a rule, a corporation is not entitled to moral damages because, not being a natural
person, it cannot experience physical suffering or sentiments like wounded feelings,
serious anxiety, mental anguish and moral shock.
When a juridical person has a good reputation that is debased, resulting in social
humiliation, moral damages may be awarded. Moreover, goodwill can be considered an
asset of the corporation.
Generally, the award of moral damages cannot be granted in favor of a corporation

because being an artificial person and having existence only in legal contemplation, it
cannot experience physical suffering or such sentiments as wounded feelings, serious
anxiety, mental anguish or moral shock which the causes of moral damages under the
Civil Code are. However, it may acquire goodwill or reputation of its own and if the
same is besmirched, the corporation may recover moral damages.
What is the limited liability rule?
Under the LLR, a stockholder is personally liable for the financial obligations of the
corporation only to the extent of his subscription, paid or unpaid. While stockholders are
generally not liable to satisfy corporate debts with their own property, the stockholders
may be held liable if they have not fully paid the subscription price to the extent of the
amount paid.
Doctrine of piercing the corporate veil
The doctrine of piercing the corporate veil is the doctrine that allows the State to
disregard, for certain justifiable reasons, the notion that a corporation has a personality
separate and distinct from persons composing it.

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This is an exception to the Doctrine of Separate Corporate Entity.
The corporation will be looked upon as a legal entity as a general rule, and until
sufficient reason to the contrary appears; but when the notion of legal entity is used to
defeat public convenience, justify wrong, protect fraud, or defend a crime, the law will
regard the corporation as an association of persons, or in case of two corporations
merge them into one.
When does the doctrine of piercing the corporate veil apply?
Corporate veil of the corporate fiction may be pierced if it is used:
1. As a shield to confuse the legitimate issues.

2. To justify a wrong, protect fraud or defend a crime;
3. To defeat public convenience or evade an existing obligation;
4. In alter ego cases, where a corporation is merely a farce since it is a mere alter
ego or business conduit of a person or where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation.
The veil of corporate fiction may be pierced by proving in court that the notion of legal
entity is being used to defeat public convenience, justify wrong, protect fraud, or defend
crime or the entity is just an instrument or alter ego or adjunct of another entity or
person.
To summarize, piercing the corporate veil based on alter ego theory requires the
concurrence of 3 elements:
1. Control of the corporation by the stockholder or parent corporation,

2. Fraud or fundamental unfairness imposed on the plaintiff, and
3. Harm or damage caused to the plaintiff by the fraudulent or unfair act of the
corporation.
The absence of any of these elements prevents piercing the corporate veil.
Piercing the corporate veil based on the alter ego theory requires the concurrence of
3 elements, namely:
1. Control, not mere majority or complete stock control, but complete domination,
not only of finances but of policy and business practice in respect to the

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transaction attacked so that the corporate entity as to this transaction had at the
time no separate mind, will or existence of its own.
2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest
and unjust act in contravention of plaintiff’s legal right; and
3. The aforesaid control and reach of duty must have proximately caused the injury
or unjust loss complained of.
How does one pierce the veil of corporate fiction?
1. By disregarding the separate personality of the corporation;

2. By holding the corporate officer liable for corporate obligation
3. By regarding the corporation as an association of persons or in case of two
corporations, treat them as one and hold them liable as such.
Effect of piercing the corporate veil
1. The corporation will be treated merely as an association of persons –

undertaking a business and the liability will attach directly to the officers and
stockholders
2. Where there are 2 corporations, they will be merged into one, the one being
merely regarded as the instrumentality, agency, conduit or adjunct of the other.
Grounds for application of doctrine (FACO)
1. Fraud Test – if the fiction is used to perpetrate fraud

2. Alter ego or Instrumentality test – if a certain corporation is only an adjunct or
an extension of the personality of the corporation
3. Control test – if complete control of one corporate entity to another which
perpetuated the wrong is the proximate cause of the injury
4. Objective test – if the fiction is pierced to make the stockholders liable for the
obligation of the corporation.
Test in determining applicability of the doctrine (ECAO)
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
2. Control test – in fraud cases when the corporate entity is used to justify a wrong,
protect fraud or defend crime

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3. In alter ego cases, where a corporation is merely a farce since it is a mere alter
ego or business conduit of a person, or where the corporation is so organized
and controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation
4. The objective test where the end result in piercing the veil of corporate fiction is
to make the stockholders liable for debts and obligations of the corporation not to
make the Corporation liable for the debts and obligations of the stockholders.
Where the stock of a corporation is owned by one person whereby the corporation
functions only for the benefit of such individual owner, the corporation and the individual
should be deemed the same.
Piercing the veil of corporate entity applies to determination of liability not of jurisdiction
because the doctrine of piercing the veil of corporate fiction comes to play only during
the trial of the case after the court has already acquired jurisdiction over the corporation.
Piercing the corporate veil based on the alter ego theory requires the concurrence of the
3 elements – control, fraud or fundamental unfairness and harm or damage. The
absence of any of these elements prevents piercing of the corporate veil.
The corporate mask may be lifted and the corporate veil may be pierced when a
corporation is just but the alter ego of a person or of another corporation.
Piercing may be done even at execution stage.
Circumstances which do not warrant the piercing of the corporate veil
The mere fact that:
1. A corporation owns fifty (50%) of the capital stock of another corporation, or the
majority ownership of the stocks of a corporation is not per se a cause for
piercing the veil.
2. Two corporations have Common directors or same or single stockholder who has
all or nearly all of the capital stock of both corporations is not in itself sufficient
ground to disregard separate corporate entities.
3. There is a Substantial identity of the incorporators of the 2 corporations does not
necessarily imply fraud and does not warrant piercing the corporate veil.
Piercing the veil: when not applicable


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1. It does not apply to service of summons
2. This cannot be availed by one who is not a victim of fraud or wrong
3. It applies to determination of liability, not of jurisdiction
Reverse piercing of the corporate veil
The plaintiff seeks to reach the assets of a corporation to satisfy claims against a
corporate insider. Reverse piercing flows in the opposite direction (of traditional
corporate veil-piercing) and makes the corporation liable for the debt of the
shareholders.
Two types of reverse piercing of corporate veil
1. Outside reverse piercing – occurs when a party with a claim against an

individual or corporation attempts to be repaid with assets of a corporation owned
or substantially controlled by the defendant
2. Insider reverse piercing – the controlling members will attempt to ignore the
corporate fiction in order to take advantage of a benefit available to the
corporation, such as an interest in a lawsuit or protection of personal assets.
Indications that a subsidiary corporation is a mere instrumentality of its parent

corporation
A combination of two or more of the following circumstances taken together may be

indicia that a subsidiary corporation is but a mere instrumentality or alter-ego of its
parent corporation.
1. The parent corporation owns all or most of the capital stock of the subsidiary
2. The parent and subsidiary corporations have common directors or officers
3. The parent corporation finances the subsidiary
4. The parent corporation subscribes to all the capital stock of the subsidiary or
otherwise causes its incorporation
5. The subsidiary has grossly inadequate capital
6. The parent corporation pays the salaries and other expenses or losses of the
subsidiary
7. The subsidiary has substantially no business except with the parent corporation
or no assets except those conveyed to or by the parent corporation
8. In the papers of the parent corporation or in the statement of its officers, the
subsidiary is described as a department or division of the parent corporation, or

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its business or financial responsibility is referred to as the parent corporation’s
own
9. The parent corporation uses the property of the subsidiary as its own
10. The directors or executives of the subsidiary do not act independently in the
interest of the subsidiary but take their orders from the parent corporation
11. The formal legal requirements of the subsidiary are not observed.
What factors or circumstances, per se, are insufficient to disregard the doctrine
of separate legal entity?
1. Mere ownership by a single stockholder or by another corporation of all or nearly

all of the capital stock of a corporation.
2. The existence of interlocking directors, corporate officers and shareholders.
3. The fact that the businesses are related.
To warrant piercing the veil of corporate fiction, there must be total and absolute control
not only in shares but also in business polices and practices such that the corporation
does not have a mind of its own with respect to the transaction attacked; the control
must also be used to commit fraud or wrong or perpetuate the violation of a legal duty or
dishonest or unjust act in contravention of the plaintiff’s legal rights and the aforesaid
control and breach of duty must have been the proximate cause of the injury or unjust
loss complained of.
Incorporation and organization
Incorporation
It is the performance of conditions, acts, deeds, and writings by incorporators, and the
official acts, certification or records, which give the corporation its existence.
Steps in the creation of a corporation
1. Promotion
2. Incorporation
3. Formal organization and commencement of business operations

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Incorporators
Incorporators are those stockholders or members mentioned in the articles of

incorporation as originally forming and composing the corporation and who are
signatories thereof.
Any person, partnership, association or corporation, singly or jointly with others but not
more than 15 in number may organize a corporation for lawful purpose/s provided that
natural persons who are license to practice a profession, and partnerships or
associations organized for the purpose of practicing a profession, shall not be allowed
to organize corporation unless otherwise provided under special laws.
Corporations and other juridical persons can now be incorporators because of the
express provision of the RCC.
The number of directors, which shall not be more than 15 or the number of trustees
which may be more than 15.
Under the RCC, an ordinary stock corporation may now have only two BOD.
Corporators vs. incorporators
Corporators Incorporators
Those who compose the corporation Are those stockholders or members
whether as stockholders or shareholders mentioned in the Articles of Incorporation
in a stock corporation or members in a as originally forming and composing the
nonstock corporation corporation and who are signatories
thereof.
May or may not be signatory of the AOI A signatory of the AOI
Ceases to be a corporator by sale of his Does not cease to be an incorporator
share in case of stock corporation upon sale of his shares
In case of non-stock corporation, the

corporator ceases to be a member
Kinds of underwriting agreement
1. English – the underwriter sells what the corporation cannot sell

2. Firm commitment – the underwriter purchases outright the securities and then
resells the same
3. Best efforts – the underwriter merely sells for commission

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Acts needing Stockholders’ vote or intervention (Vote of stockholders holding

majority of the Outstanding Capital Stock
1. Fixing of issue value of no-par value stocks

2. Adoption, amendment or repeal of bylaws
3. Compensation, other than per diems, for directors.
Number and qualification of incorporators in a stock corporation
1. Incorporators could be natural or juridical persons – any person, partnership,

association or corporation, singly or jointly with others may form a corporation
2. No minimum number fixed for incorporators but not more than 15 in numbers
3. Incorporators who are natural person must be of legal age
4. Each incorporator of stock corporation must own or be a subscriber of at least
1 share of capital stock
5. A corporation with a single stockholder is considered a One-Person
Corporation (OPC)
6. Incorporators for OPC must be a Natural person, Estate or Trust (NET)
7. 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.
Principle of priority of adoption in corporate names
A corporation which acquired a prior right over the use and adoption of a corporate
name shall have exclusive use thereof, with freedom from infringement.
The first to adopt the name has a better right.
Corporate names that are not allowed: Distinguishability Test
No corporate name shall be allowed by the SEC if:
1. It is not DISTINGUISHABLE from that already reserved or registered from the

use of another corporation;
2. It is already protected by law
3. It is use in contrary to existing law, rules and regulations

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The name is not distinguishable even if it contains one or more of the following:
1. Word corporation, company, incorporated, limited, limited liability, or any

abbreviation of such words; and
2. Punctuations, articles, conjunctions, prepositions, abbreviations, different tenses,
spacing, or number of the same word or phrase.
Under the RCC, the SEC has the power to summarily order a corporation to cease and
desist from using a name it finds to be in violation of the requirements of the law. SEC
may now cause the removal of all visible signs, marks, ads, labels, prints and other
effects bearing such disapproved corporate name.
A corporation’s right to use its corporate name and trade name is a property right.
A right in rem, which it may assert and protect against the whole world in the same
manner as it may protect its tangible property, real or personal, against trespass or
conversion.
Rule on use of corporate name.
No corporate name shall be allowed by the SEC
1. If such name is already protected by law

2. When its use is contrary to existing rules and regulations
3. If is not distinguishable from that already reserved or registered for the use of
another corporation;
Explain the principle of priority of adoption in corporate names
A corporation which acquired a prior right over use and adoption of a corporate name
shall have exclusive use thereof with freedom from infringement.
Registration and issuance of Certificate of Incorporation
1. The incorporators shall submit their intended corporate name to the SEC for
verification
2. Once approved, they shall then submit the AOI and bylaws to the SEC
3. If the SEC determines that the documentary requirements have been complied
with, it shall issue the Certificate of Incorporation.

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Accomplished fact rule
There are entries in the articles of incorporation that cannot be amended because they
are accomplished facts.
Example: The names of the incorporates and the original directors cannot be amended
because the same are accomplished facts. The incorporators and original directs are
always the same even if there are a change in the stockholders or directors.
Features of OPC
1. A one-person corporation (OPC) is a corporation with a single stockholder, who

can only be a natural person, trust or estate. The incorporator of an OPC
being a natural person must be of legal age.
A foreign natural person may organize an OPC.
An OPC aims to encourage the formation of businesses in the country by making

it easier for entrepreneurs to start a limited liability company.
2. The “trust” as incorporator in OPC.
As an incorporator, the “trust” as used by the law does not refer to a trust entity,
but as subject being managed by a trustee.
If the single stockholder is a trustee, administrator, executor, guardian,

conservator, custodian, or other person exercising fiduciary duties, proof of
authority to act on behalf of the trust or estate must be submitted at the time of
incorporation.
3. Entities NOT allowed to form a OPC:
a. Banks
b. Non-bank financial institutions
c. Quasi-banks
d. Pre-need, trust and insurance companies
e. Public and publicly listed companies
f. Non-chartered (GOCCS)

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g. A natural person who is licensed to exercise a profession may not
organize as an OPC for the purpose of exercising such profession except
as otherwise provided under special laws.
5. The corporate name of OPC.
The suffix “OPC” should be indicated by the one-person corporation either below
or at the end of its corporate name.
6. Unique features:
a. Not be required to have a minimum authorized capital stock except as

otherwise provided by special law.
b. NOT required to submit and file BLs.
c. The single stockholder shall be the sole director and president.
d. The single stockholder may not be appointed as the corporate secretary.
e. A single stockholder can be a treasurer; shall post a surety bond.
f. The principles of piercing the corporate veil applies with equal force to
OPC as with other corporations.
g. The single stockholder is required to designate a nominee and an
alternate nominee who shall, in the event of the single stockholder’s
death or incapacity, take the place of the single stockholder as director
and shall manage the corporation’s affairs.
h. The liability of a single stockholder shall be limited to his subscription to
the corporation unless there is a ground to pierce to the veil of corporate
fiction.
The written consent of the nominee and alternate nominee shall be attached to the
application for incorporation, such consent may be withdrawn in writing any time before
the death or incapacity of the single stockholder.
The single stockholder shall be the OPC’s sole director, president and self-appointed
treasurer. He may not however be appointed as a corporate secretary.
What are the requires for the limited liability of the single stockholder of OPC?
1. The sole shareholder must show that the corporation was adequately financed;
2. He must prove that the property of the OPC is independent of the stockholder’s
personal property; and
3. There is no ground to pierce the veil of corporate fiction.

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Otherwise, the sole stockholder shall be jointly and severally liable for the debts and
other liabilities of the OPC.
Delinquent status
The SEC may place the corporation under the delinquent status should the corporation
fail to submit the reportorial requirements 3 times, consecutively or intermittently within
a period of 5 years.
7. Within 15-days from the issuance of its certificate of incorporation, the OPC shall
appoint a:
a. treasurer,
b. corporate secretary, and
c. other officers as it may deem necessary, and
d. notify the SEC thereof within five (5) days from appointment.
8. A nominee and alternate nominee, whose written consent must be obtained,

shall be designated.
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. The Articles of Incorporation need not be
amended.
In case the single stockholder becomes incapacitated, the nominee can take
over the management of the OPC as director and president. At the end of the
incapacity, the single stockholder can resume the management of the OPC.
In case of death or permanent incapacity of the single stockholder, the nominee

will take over the management of the OPC until the legal heirs of the single
stockholder have been lawfully determined and the heirs have agreed among
themselves who will take the place of the deceased.
9. Conversion to OPC.
Only a Domestic Corporation organized as a Stock Corporation may be

converted into a One-Person Corporation. The Ordinary Stock Corporation
(OSC) may only apply for its conversion to OPC after a natural person of legal

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age, a trust, or an estate (“single stockholder”) acquired all outstanding capital
stocks of an OSC.
Conversion is processed in the same manner as amendment of an Articles of

Incorporations/By-laws.
Conversion shall take effect upon approval of the Amended Articles of

Incorporation through the issuance of a Certificate of Filing of Conversion to One
Person Corporation.
10. Conversion from OPC to ordinary corporation
An OPC may be converted into an ordinary stock corporation by filing an

amended AOI with the SEC and comply with all the requirements.
If all requirements have been complied with, the SEC shall issue a certificate of
filing of amended articles of incorporation reflecting the conversion.
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.
The limited liability rule applies to an OPC. However, the 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 OPC is independent of the stockholder’s personal property, the stockholder shall
be jointly and severally liable for the debts and other liabilities of the OPC.
Corporate Term
A corporation shall have perpetual existence UNLESS its Articles of Incorporation

provides otherwise or UNLESS sooner dissolved
Corporations with certificates of incorporation issued prior to the effectivity of the RCC
and which constitute to exist, shall have perpetual existence unless the corporation,
upon a vote of its stockholders representing a majority of its OCS, notifies the SEC that
it elects to retain its specific corporate term pursuant to its articles.

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Also, the Code mandates that corporations with certificates of incorporation issued prior
to this code and which continue to exist shall likewise have perpetual existence
UNLESS the corporation elects to retain its specific corporate term.
A corporation shall have perpetual existence unless its articles of incorporation provides
otherwise or unless the corporation, upon a vote of its stockholders representing a
majority of its outstanding capital stock, notifies the Commission that it elects to retain
its specific corporate term pursuant to its articles of incorporation (Sec. 10 of R.A.
11232) or unless its registration is revoked upon any of the grounds provided by law.
Under the RCC, if a corporation wishes to change its corporate term, it may amend its
AOI at least 3 years prior to the expiration of its term. Previously, such change
should be made at least 5 years prior to the expiration.
If the term has already expired, the corporation may now ask the SEC to revive their
corporate existence, which option was not present in the old code. Upon approval by
the SEC, it will then issue a certificate of revival giving it perpetual existence, unless it
requests for a limited term.
XPN: No revival is allowed for companies under the supervision of other government
agencies, such as banks, insurance and trust companies.
XPN to XPN: Unless, Revival is first approved by the appropriate government agency.
Extension must also comply with procedural requirements for amendment of AOI.
Doctrine of Relation or the Relating Back Doctrine
Under the doctrine of relations or relating back doctrine, when the delay in
effecting or filing the amended articles of incorporation for the extension of corporate
term is due to an insuperable interference occurring without the corporation’s
intervention which could not have been prevented by prudence, diligence and care, the
same will be treated as having been affected before the expiration of the original term of
the corporation.
GR: The filing and recording of a certificate of extension after the term cannot relate
back to the date of the passage of the resolution of the stockholders to extend the life of
the corporation.

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XPNs: The doctrine of relation applies if the failure to file the application for extension
within the term of the corporation is due to:
1. The neglect of the SEC officer with whom the certificate is required to be filed; or
2. A wrongful refusal on his part to receive it.
Revival of corporations
A corporation whose term has expired may apply for a revival of its corporate existence,
together with all the rights and privileges under its certificate of incorporation and
subject to all of its duties, debts and liabilities existing prior to its revival. Upon approval
by the Commission, the corporation shall be deemed revived and a certificate of revival
of corporate existence shall be issued, giving it perpetual existence, unless its
application for revival provides otherwise.
The revival shall take effect upon the SEC’s issuance of a certificate of revival of
corporate existence, giving it perpetual existence, unless its application for revival
provides otherwise.
Winding-up of affairs
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 3 years after the effective date of
dissolution, for the 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.
If a corporation entered into the real estate mortgage agreement after its dissolution,
then resultantly, such REM would be void ab initio because of the former’s nonexistence
of juridical personality.
Minimum Capital stock and subscription requirements
NO MINIMUM STOCK REQUIRED: One can start a business with as little capital or
funding possible.
The provision:

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SEC. 12. Minimum Capital Stock Not Required of Stock Corporations. -- Stock
corporations shall not be required to have a minimum capital stock, except as otherwise
specifically provided by special law.
The RCC deleted the provision requiring subscription, of, and paid-up capital
NO MORE RESIDENCY REQUIREMENT FOR INCORPORATORS AND DIRECTORS.
The RCC states that each incorporator of a stock corporation must own or be a
subscriber to at least one (1) share of the capital stock. (Secs. 10) A director who
ceases to own at least one (1) share of stock or a trustee who ceases to be a member
of the corporation shall cease to be such. (Sec. 22)
When can an emergency board be constituted?
An emergency board can be constituted 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 or the corporation by unanimous vote of the
remaining directors or trustees.
Period of filling up vacancies by election and emergency board
If vacancy is by term expiration, the election shall be held no later than the day of such
expiration at a meeting called for that purpose. If by removal, the election may be held
on the same day of the meeting authorizing the removal. In all other cases, the
election must be held no later than 45- days from vacancy.
An emergency board may be created from among the officers in the event of urgency to
prevent grave, substantial, and irreparable loss or damage to the corporation.
The emergency board:
a) The corporation can be more decisive in times of emergency.
The RCC allows the creation of an emergency board from among the officers when a
vacancy in a corporation’s board of directors prevents the remaining directors from
constituting a quorum and consequently from making emergency action required to
prevent grave, substantial and irreparable loss or damage.

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b) Creation, election and duration of the emergency board.
1. The vacancy may be temporarily filled from among the officers of the corporation
by unanimous vote of the remaining directors or trustees.
2. The action by the designated director or trustee shall be limited to the
emergency action necessary.
3. The term shall cease within a reasonable time from the termination of the
emergency or upon election of the replacement director or trustee, whichever
comes earlier.
4. Notify SEC within 3-days from creation stating reasons for creation.
Requisites to create emergency board
1. The vacancy prevents the remaining directors from constituting a quorum

2. Emergency action is required to prevent grave, substantial, and irreparable loss
or damage to the corporation.
3. The vacancy may be temporarily filled from among the officers of the corporation
4. The appointment must be made by the unanimous vote of the remaining
directors or trustees; and
5. The action by the designated director or trustee shall be limited to the emergency
action necessary, and the term shall cease within a reasonable time from the
termination of the emergency or upon the election of the replacement director or
trustee, whichever comes earlier.
Classes of shares
1. Preferred shares – shares which enjoy preference as to dividends or asset

distribution upon dissolution as stated in the AOI.
a. Participating preferred shares – holders are still given the right to
participate with the common stockholders in dividends beyond their stated
preference
b. Non-participating preferred shares – where there is no such
participation
c. Cumulative preferred shares – the shareholder is entitled to recover
dividends in arrears. While dividend declaration may not be compelled
once it is declared, the shareholder is entitled to the said arrears.
d. Non-cumulative preferred shares – not entitled to arrears but only to
present dividends.
2. Redeemable shares -are those which permit the issuing corporation to redeem
or purchase its own shares.

ADMINISTRATION
Articles of incorporation
Articles of incorporation (AOI)
The Articles of Incorporation (AOI) 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 its stockholders
Its contents are binding not only on the corporation but also on its shareholders.
Under the RCC, the AOI may now include an arbitration agreement to govern intra-
corporate disputes and relations.
The AOI and applications for amendments thereto may be filed with the SEC in the form
of electronic document, in accordance with the SEC rules on electronic filing.
When a corporation has more than one stated purpose, the AOI, shall state which the
primary purpose is and which is/are the secondary purposes.
A non-stock corporation may not include a purpose which would change or contradict its
nature as such.
Under the RCC, treasurer’s affidavit is no longer expressly required for the acceptance
of the AOI.
Three-fold Nature of AOI
An AOI, which stands as the corporate charter, is a contract of three-fold nature

because it is a contract between:
1. The State and the corporation;

2. The corporation and the stockholders; and
3. The stockholders inter se.
INTEGRATION OF ARBITRATION AGREEMENT IN THE ARTICLES OF

INCORPORATION OR BYLAWS.
The RCC allows for an arbitration agreement to be provided in the articles of

incorporation (AOI) or bylaws (BLs) of a corporation.

ADMINISTRATION
With such an agreement in place, disputes between the corporation, its stockholders or
members that arise from the implementation of AOI or BLs or from intra-corporate
relations shall now be referred to arbitration.
Disputes involving criminal offenses or the interests of third parties remain non-
arbitrable.
The provision:
SEC. 181. Arbitration for Corporations. – An arbitration agreement may be provided in

the articles of incorporation or bylaws of an unlisted corporation. When such an
agreement is in place, disputes between the corporation, its stockholders or members,
which arise from the implementation of the articles of incorporation or bylaws, or from
intra-corporate relations, shall be referred to arbitration. A dispute shall be non-
arbitrable when it involves criminal offenses and interests of third parties. x x x
Conversion of a stock corporation into a nonstock corporation (2001 Bar)
A stock corporation may be converted into a nonstock corporation by mere

amendment, provided all the requirements are complied with. Its rights and liabilities
will remain
A stock corporation can always be converted to a non-stock corporation. The

conversion can be done simply by amending of the AOI. The effect is that, after
conversion the stockholders who became the members of the non-stock corporation will
no longer have pecuniary interest in the corporate assets. Neither are they entitled to
any share in the profit that may be obtained out of the operations or activities of the non-
stock corporation.
NOTE: A non-stock corporation cannot be converted into a stock corporation through

mere amendment of its Articles of Incorporation. This would violate Section 87 CC,
which prohibits distribution of income as dividends to members. Giving the members
shares, is tantamount to distribution of its assets or income.
Under Section 122 of the Corporation Code, the nonstock corporation must be
dissolved first.

ADMINISTRATION
May a non-stock corporation be converted into a stock corporation by mere
amendment of the articles of incorporation? Conversely, may a stock corporation
be converted into a non-stock corporation?
No. A non-stock corporation may not be converted into a stock corporation by mere
expedient of amending the articles of incorporation. This detracts from the very essence
of a non-stock corporation which prohibits the distribution of income as dividends. A
non-stock corporation may only be converted into a stock corporation if its
members would dissolve it first and form a new corporation.
On the other hand, a stock corporation may be converted into a non-stock

corporation by a mere amendment of the articles of incorporation provided all the
requirements for a non-stock corporation are complied with.
Doctrine of corporate entity
GR: A corporation comes into existence upon the issuance of the certificate of
incorporation by the SEC under its official seal. Then and only then will it acquire a
juridical personality.
XPN: In case of a corporation sole, the corporation sole commences existence upon the
filing of the articles of incorporation.
A corporation sole is one formed for the purpose of administering and managing as
trustee, the affairs, property and temporalities of any religious denomination, sect or
church. It is formed by the chief archbishop, bishop, priest, minister, rabbi or other
presiding elder of such religious denomination, sect or church.
The right of the members of any class or classes to vote may be limited, broadened,
or denied to the extent specified in the articles of incorporation or the bylaws.
Unless so limited, broadened, or denied, each member, regardless of class, shall be
entitled on 1 vote.
Adoption of bylaws
Bylaws are set of rules and regulations adopted by the corporation for its internal
government, and to regulate the conduct and prescribe the rights and duties of its
members towards itself and among themselves in reference to the management of its
affairs. The corporation has the inherent and, at the same time, express power to adopt
bylaws.

ADMINISTRATION
By-laws are rules and regulations or private laws enacted by the corporation to
regulate, govern and control its own actions, affairs and concerns and of its
stockholders or members and directors and officers in relation thereto and among
themselves in their relation to it. These are rules of action pertaining to the direction,
management and control of its affairs and activities.
By-laws are relatively permanent and continuing rules of action adopted by the
corporation for its for its own government and that of individuals composing of it and
those having the direction, management, and control of its affairs, in whole or in part, in
the management and control of its affairs and activities.
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.
Under the RCC, the corporation has now more time to adopt its bylaws since the one-
month period to adopt the bylaws after incorporation has been deleted.
Requisites of a valid bylaws
The following are the requisites for the validity of by-laws:
1. Must be consistent with the Revised Corporation Code, other pertinent laws and
regulations and with the AOI;
2. Must not be contrary to morals and public policy;
3. Must not disturb vested rights or must not impair Obligations and contracts or
property rights of stockholders or members;
4. Must be Reasonable and not arbitrary or oppressive;
5. Must be of General application and not directed against a particular individual.
6. It must be duly approved by the SEC
NOTE: In case of conflict between the by-laws and the AOI, the AOI prevails because
the bylaws are intended merely to supplement the former.
Corporations have the power to make bylaws declaring a person employed in the
service of a rival company to be ineligible for the corporation’s Board of Directors. An
amendment which renders ineligible, or if elected, subjects to removal, a director if he

ADMINISTRATION
be also a director in a corporation whose business is in competition with or is
antagonistic to the other corporation is valid.
A stockholder has no vested right to be elected as director.
Characteristics of a valid bylaws
1. They must not be contrary to the RCC and existing laws

2. They must not impair obligations of contracts
3. They must be general and uniform in their operation and not directed against
particular individuals.
Can the bylaws require that the director own more than one share of stock?
Yes, the bylaws may enlarge the share ownership requirement provided that it is not
intended to deprived minority representation.
It is possible that a majority or even all directors or trustees may be non-residents.
RCC does not require Filipino citizenship for the directors or trustees of a corporation.
However, if the corporation is engaged in nationalized activities, citizenship becomes a
qualification.
Are the bylaws of the corporation binding on third parties?
No, bylaws are only binding among the stockholders and members of the corporation.
To be bound, a third party must have acquired knowledge of the pertinent bylaws at the
time the transaction or agreement was entered into.
Bylaws become effective only upon the issuance of the SEC of a certification that the
bylaws are in accordance with the RCC
Amended or new bylaws become effective upon the issuance by the SEC of a
certification that the same is in accordance with the RCC and other relevant laws.
Binding Effects of by-laws
The following are the binding effects of by-laws:


ADMINISTRATION
1. As to members/ stockholders, officers, trustees/ directors and corporation -
They are bound by and must comply with it. They are presumed to know the
provisions of the by-laws.
2. As to third persons
GR: They are not bound.
XPN: They have knowledge or notice of the bylaws at the time the contract was
executed.
The bylaws do not bind third persons since they are not privy thereto unless third
persons have actual or constructive knowledge of the same.
Limitations on adopting bylaws
1. they must be reasonable and calculated to carry into effect the objects of the
corporation and are not contradictory to the general policy of the laws of the land
2. they must always be strictly subordinate to the Constitution and the general laws
of the land.
3. They must not disturb vested rights or impair the obligation of a contract, take
away or abridge the substantial rights of stockholder or a member, affect the
rights of property or create obligations unknown to the law
4. They must be within the charter limits
5. They must not be in conflict with the provisions of the Corporation Law
Bylaws are subordinate to the AOI as well as the Corporation Code and related
statutes.
Articles of Incorporation vs. By-laws
Basis AOI By-laws

Requirement for Condition precedent in the Condition subsequent; its
corporate acquisition of corporate absence merely furnishes a ground
existence existence for the revocation of the franchise
Essence Essentially a contract between For the internal government of

the: the corporation but has the
1. corporation and SH/M; force of a contract between the:
2. SH/M inter se; and 1. corporation and the SH/M and
3. corporation and the State; 2. between the SH/M inter se;

ADMINISTRATION
Time of execution Executed before incorporation May be executed after

incorporation. Sec. 46 allows the
filing of the by-laws simultaneously
with the Articles of Incorporation
Manner of Amended by a majority of the May be amended by a majority
Amendment directors/ trustees and vote of the BOD and majority vote
stockholders representing 2/3 of outstanding capital stock or a
of the outstanding capital majority of the member in non-
stock, or 2/3 of the members in stock corporation
case of non-stock corporations
Effect of non-use of corporate charter
UNDER THE REVISED CORPO If a corporation does not formally organize and
commence its business within five (5) years from the date of its incorporation, its
certificate of incorporation shall be deemed revoked as of the day following the
end of the five (5)-year period.
However, if a corporation has commenced its business but subsequently becomes

inoperative for a period of at least 5 consecutive years, the SEC may after due notice
and hearing, place the corporation under delinquent status.
A delinquent corporation shall have a period 2 year to resume operations and comply
with all requirements that the SEC shall prescribe.
Corporate Powers
Corporations are now expressly allowed to enter into a partnership, joint venture or any
other commercial agreement with natural and juridical persons.
Corporate Powers
1. Express powers – granted by law, the RCC, and its Articles of Incorporation or
Charter, and administrative regulations;
2. Inherent/incidental powers – not expressly stated but are deemed to be within
the capacity of corporate entities;
3. Implied/necessary powers – exists as a necessary consequence of the
exercise of the express powers of the corporation or the pursuit of its purposes
as provided in the charter.

ADMINISTRATION
Three levels of control in the corporate hierarchy
1. The board of directors - responsible for corporate policies and the general
management of the business affairs of the corporation;
2. The officers of the corporation - execution of the policies laid down by the
board, but in practice often have a wide latitude in determining the course of
business operations.
3. The stockholders - have the residual power over fundamental corporate
changes, like amendments of the articles of incorporation.
Theory of General Capacity
Under the theory of General capacity, a corporation holds such powers which are not
prohibited or withheld from it by general laws.
The general powers of a corporation also called Theory of General Capacity are the
following:
1. To Sue and be sued;

2. Of Succession (To have perpetual existence unless the certificate of
incorporation provides otherwise;);
3. To adopt and use of Corporate seal;
4. To amend its Articles of Incorporation;
5. To adopt its By-laws;
6. For Stock corporations: issue and sell stocks to subscribers and treasury stocks;
for non-stock corporations: admit members;
7. To Purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage
and deal with real and personal property, securities and bonds subject to the
Constitution and existing laws;
8. To Enter into merger or consolidation, (To enter into a partnership, joint venture,
merger, consolidation, or any other commercial agreement with natural and
juridical persons);
9. To make reasonable Donations for public welfare, hospital, charitable, cultural,
scientific, civic or similar purposes,
10. To establish pension, Retirement, and other plans for the benefit of its directors,
trustees, officers and employees – basis of which is the Labor code; and
11. To exercise Other powers essential or necessary to carry out its purposes
Requisites for valid donation


ADMINISTRATION
1. Donation must be Reasonable.
2. Must be for valid Purposes including public welfare, hospital, charitable, cultural,
scientific, civic or similar purposes.
3. Donation must bear a reasonable relation to the corporation’s Interest and not be
so remote and fanciful.
For foreign corporations, there is an additional requirement in making donations. The

donation must not be in aid of any political party, candidate or partisan political activity.
THE BAN ON CORPORATE DONATIONS FOR POLITICAL PARTIES OR

CANDIDATES LIFTED.
The RCC amended Section 36(9) of the Old Code, which stated that no corporation,
domestic or foreign, shall give donations in aid of any political party or candidate or for
purposes of partisan political activity.
The RCC now expressly bans only foreign corporations from giving such
donations.
The provision:
SEC. 35. Corporate Powers and Capacity. – Every corporation incorporated under this
Code has the power and capacity: x x x
(i) To make reasonable donations, including those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar purposes: Provided, that no foreign
corporation shall give donations in aid of any political party or candidate or for
purposes of partisan political activity;
Corporation as surety or guarantor
GR: A corporation cannot act as a surety or guarantor because it will be contrary to the
primary purpose for which the corporation was created.
XPN: Such guaranty may be given in the accomplishment of any object for which the
corporation was created, or when the particular transaction is reasonably necessary or
proper in the conduct of its business.
Theory of Specific Capacity


ADMINISTRATION
Under the theory of specific capacity, a corporation cannot exercise powers except
those expressly or impliedly given to it.
The specific powers of a corporation, also called Theory of Specific Capacity, are the
following: (ESB-PA-SIDE-A)
1. Power to Extend or shorten corporate term

2. Increase or decrease corporate Stock
Note: Now, Section 36 RCC, in addition to the provision, ALLOWANCE OF

SENDING OF NOTICE OF MEETING REGARDING PROPOSED ACTION
THRU ELECTRONIC MEANS SUCH AS ELECTRONIC DATA MESSAGES IF
ALLOWED BY THE BY-LAWS IN ACCORDANCE WITH ECOMMERCE ACT)
3. Incur, create, or increase Bonded indebtedness

4. Deny Pre-emptive right
5. Sell, dispose, lease, encumber all or substantially all of corporate Assets
6. Purchase or acquire Shares
7. Invest corporate funds in another corporation or business for other purpose other
than primary purpose
8. Declare Dividends out of unrestricted retained earnings
9. Enter into management contract with another corporation (not with an individual
or a partnership – within general powers) whereby one corporation undertakes to
manage all or substantially all of the business of the other corporation for a
period not longer than five (5) years for any one term
10. Amend Articles of Incorporation
The funds of the corporation may be invested in the primary purpose or in the
secondary purpose/s of the corporation as specified in the articles of incorporation or in
any other corporation or business other than the corporation’s primary and secondary
purposes.
What are the matters on which non-voting shares are allowed to vote?
1. Dissolution of corporation
2. Increase, decrease capital stock
3. Adoption/amendment of by-laws
4. Amendment of articles of incorporation.
5. Investment of funds in another corporation
6. Incur, create, increase bonded indebtedness

ADMINISTRATION
7. Merger/consolidation with another corporation
8. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of corporate property
This list is exclusive.
Authority to enter into contract
The Board of Directors or Trustees must act together as a body in order to bind the
corporation by their acts.
Requirements of a Proxy
1. Proxies shall be in writing

2. The proxy shall be signed by the stockholder or member
3. The proxy shall be filed before the scheduled meeting with the corporate
secretary
4. Unless otherwise provided in the proxy, it shall be valid only for a meeting for
which it is intended and
5. No proxy shall be valid and effective for a period longer than 5 years at any one
time.
Corporate powers which are exercised by the BOD and stockholders jointly
1. Amendments to by-laws
2. Issuance of stock dividends
3. Entering into management contract
Increase or decrease of capital stock
4. Extending or Shortening the corporate term
5. Sale or other disposition of All or substantially all of the corporate assets
6. Investment of corporate funds in another corporation or business or for any other
purpose;
Summary of corporate acts that require concurrence of the stockholders and the
required vote
By the stockholders representing at least 2/3 of the outstanding capital stock or

2/3 of the members if applicable.
1. Power to deny pre-emptive right


ADMINISTRATION
2. Power to declare stock dividends
3. Power to increase or decrease capital stock
4. Power to amend the articles of incorporation
5. Power to extend or shorten the corporate term
6. Power to incur, create or increase bonded indebtedness
7. Power to delegate to the board the power to amend the bylaws.
8. Power to sell, dispose, lease or encumber all or substantially all of the corporate
assets
9. Power to invest corporate funds in another corporation or business or for any
other purpose
By stockholders representing majority of the outstanding capital or members
1. Power to enter into management contract

2. Power to adopt, amend or repeal the by-laws
3. Power to fix the issued value of price of shares.
4. Power to revoke the power of the board to amend the bylaws which was
previously delegated by the stockholders
Over-issue of shares is not allowed
An issue of stock by a corporation in excess of the amount prescribed or limited by its

AOI is ultra vires and the stock so issued is void even in the hands of a bona fide
purchaser for value.
An over-issued stock is a spurious stock
NOTE: Over-issue of stock does not avoid the original issue
There is no over-issue in the case of shares, which were surrendered and new shares
issued in their stead. The new issue in such case merely takes the place of the shares
surrendered.
Power to deny pre-emptive right
Pre-emptive right
It is the preferential right of shareholders to subscribe to all issues or disposition of

shares of any class in proportion to their present shareholdings.

ADMINISTRATION
It is the right of a stockholder to subscribe to all issues or disposition of shares of any
class, in proportion to their respective shareholdings so as to enable the stockholder to
retain his proportionate control in the corporation or to retain his equity in the
surplus.
Pre-emptive right must be exercised in accordance with the AOI or the By-Laws. When
the AOI and the By-Laws are silent, the Board may fix a reasonable time within which
the stockholders may exercise the right
The stockholder must exercise his preemptive right within the time fixed in the resolution
authorizing the increase of capital stock.
The pre-emptive right applies to any and all issuance of shares by the corporation
whether sourced form unissued portion of the authorized capital stock or in case of an
increase of capital stock.
Purpose of pre-emptive right
The purpose of pre-emptive right is to enable the shareholder to retain his

proportionate control in the corporation and to retain his equity in the surplus.
Exercise of pre-emptive right
Pre-emptive right must be exercised within the period stated in the AOI or the By-Laws.
When the AOI and the By-Laws are silent, the Board may fix a reasonable time within
which the stockholders may exercise the right.
Pre-emptive right can only be exercised to the same class of shares issued or disposed
with that owned by the stockholder (Share-a-like basis).
All stockholder has the preemptive right to all issues of shares made by the
corporation in proportion to the number of share he holds on record in the corporation
including the issuance of treasury shares.
Instances when pre-emptive right is NOT available
1. In case the right is denied in the AOI.

2. Shares issued in payment of previously contracted debts.
3. Waiver of the right by the stockholder whether express or implied.

ADMINISTRATION
4. Shares to be issued to comply with laws requiring stock offering or minimum
stock ownership by the public.
5. Shares issued in good faith with the approval of the stockholders representing
2/3 of the outstanding capital stock in exchange for property needed for
corporate purposes.
A stockholder cannot be forced to waive his pre-emptive right even if the majority of the
stockholders opt to waive it. A stockholder can only be denied this right when it is
provided for in the articles of incorporation or an amendment thereto.
Shares may be issued for property needed for corporate purposes but subject to SEC
approval to ensure that the real property is fairly valued, to prevent the issuance of
watered stocks. The increase of capital stock is also subject to the approval of the
stockholders representing at least 2/3 of the OCS.
Right of first refusal
It is a right that gives shareholders the preferential right to buy or to refuse the selling
party’s(co-shareholder’s) shares. It is meant to protect the original or remaining
shareholders from entry of third person who are not acceptable to it as co-shareholder.
It provides that a stockholder who may wish to sell or assign his shares must first offer
the shares to the corporation or to the existing stockholders of the corporation. Only
when the corporation or the other stockholders do not or fail to exercise their option, is
the offering stockholder at liberty to dispose of his shares to third parties.
A right that grants to the corporation or another stockholder the right to buy the shares
of stock of another at a fixed price and only valid if made on reasonable terms and
consideration.
The right where the existing stockholders are given priority to buy the shares of others
in the event that the latter offered those shares for sale.
Right of first refusal is not a substantive right under the Corporation Code
GR: The right of first refusal can only arise by means of a contractual stipulation, or
when it is provided for in the AOI.
XPN: In the case of a close corporation, the right of first refusal to be found in the AOI.

ADMINISTRATION
When only the bylaws provide a right of first refusal without the corresponding provision
in the AOI and not printed in the stock certificate, it is null and void. There is no
authority to create property restrictions in bylaws provisions.
Pre-emptive right vs. Right of First refusal
Basis Pre-emptive right Right of First refusal

Description Right to subscribe to all Right to purchase shares of a
issuance or dispositions of stockholder
shares of the corporation
even to the subsequent sale Right of first refusal is the option
of treasury stocks granted to the corporation and/or its
stockholders to purchase the shares
of a transferring stockholder upon
reasonable terms and conditions.
To what does it Pertains to unsubscribed Pertains to the sale of the stocks by
pertain portion of the authorized another stockholder
capital stock.
Against who it is Right exercised against the Right exercised against a co-
exercised corporation. stockholder
Effect of the May be exercised even Can only be exercised when so
absence of when there is no express provided in the AOI, bylaws and
express provision provision in the AOI or printed in the stock certificate. It is a
in the AOI amendment thereto. creature of contract law
Treasury shares It includes treasury shares Does not include treasury shares
Source of Right Common law right Arises by virtue of:
Contractual stipulations or specified

statutory provision.
Requisites for a valid restriction on the right to transfer
1. Restrictions on the right to transfer shares must appear in the AOI, in the bylaws,
as well as in the certificate of stock; otherwise, the same shall not be binding on
any purchaser in GF.
2. Restrictions shall not be more onerous than granting the existing stockholders or
the corporation the option to purchase the shares of the transferring stockholder
with such reasonable terms, condition s or period stated.
3. Upon the expiration of said period, the existing stockholders or the corporation
fails to exercise the option to purchase, the transferring stockholder may sell their
shares to any third person.

ADMINISTRATION
Power to sell or dispose of corporate assets (SLEMPAD)
Substantially all of corporate assets
There is a sale, lease, exchange, mortgage, pledge, and any other disposition
(SLEMPAD) of substantially all of corporate asset if in the SLEMPAD thereof, the
corporation would be rendered:
1. Incapable of continuing the business; or

2. Incapable of accomplishing the purpose for which it was incorporated
Note: This is subject to the provisions of Republic Act No. 10667, otherwise known as
the “Philippine Competition Act.”
Requisites of sale, lease, exchange, mortgage, pledge, or other disposition of all

or substantially all of corporation’s assets including goodwill
1. Approval of majority vote of the board

2. Approval of stockholders representing 2/3 of the outstanding capital or 2/3 of
members
3. The stockholders/members approval should be in a meeting duly called for such
purpose
4. There must be written notice of the proposed action and of the time and place of
the meeting in accordance with Section 39.
5. It must comply with the formalities of Bulk Sales Law
6. It must comply with the requirements of the Philippine competition act and related
laws
7. It must not have ben disapproved or abandoned by the Board after approval by
the stockholders
Disposition in the ordinary course of business requires only board approval, meaning,
majority of the quorum of the board.
The disposition of all or substantially all properties of the corporation requires approval
by at least majority of the board and the affirmative votes of the stockholders
representing at least 2/3 of the voting power in the corporation in a meeting duly called
for the purpose or at least 2/3 of the members for a non-stock corporation in a meeting
called for the purpose.

ADMINISTRATION
To determine if the sale is made in the ordinary course of business, the test is not the
amount involved but the nature of the transaction.
The sale shall be considered substantially all if after the sale, the seller cannot continue
with the business for which it was organized.
Effect of sale of all or substantially all of assets of one corporation to another

corporation (1996, 2005 Bar)
GR: The corporation who acquired all or substantially all of the assets of the selling
corporation shall not be liable for the debts of the latter.
XPNs:
1. Express or implied assumption of liabilities;

2. Merger or consolidation;
3. If the purchase was in fraud of creditors;
4. If the purchaser becomes a continuation of the seller;
5. If there is violation of the Bulk Sales Law
Power to acquire own shares
For a corporation to acquire its own shares the following conditions must be
present:
1. It is for a legitimate and proper corporate purpose

2. There shall be unrestricted retained earnings to purchase the same its capital is
not thereby impaired
3. The corporation acts in GF and without prejudice to the rights of creditors and
stockholders
4. The conditions of corporate affairs warrant it.
Instances when a corporation may acquire its own shares (1991, 1992, 2005 Bar)
1. To acquire treasury shares

2. To effect a decrease of capital stock
3. To eliminate fractional shares out of stock dividends
4. To acquire Redeemable shares regardless of existence of retained earnings
5. To pay dissenting or withdrawing stockholders (in the exercise of the
stockholder’s appraisal right)

ADMINISTRATION
6. To collect or compromise an indebtedness to the corporation, arising out of
unpaid subscription, in a delinquency sale and to purchase delinquent shares
sold during said sale
7. In close corporations, when there is a deadlock in the management of the
business, the SEC may order the purchase at their fair value of the shares of
any stockholder by a corporation regardless of the availability of unrestricted
retained earnings (URE’s) in its books.
NOTE: Where a corporation reacquires its own shares, it does not thereby become a
subscriber thereof.
Rule in order that a corporation may acquire its own shares
GR: The corporation may only acquire its own stocks in the presence of unrestricted
retained earnings (URE).
XPNs: (RDC)
1. Redeemable shares may be acquired even without surplus profit for as long as it
will not result to the insolvency of the Corporation
2. In cases that the corporation conveys its stocks in payment of a Debt
3. In a Close corporation, a stockholder may demand the payment of the fair value
of shares regardless of existence of retained earnings for as long as it will not
result in the insolvency of the corporation.
Statutory requirements that the corporation needs to comply with to invest in

another corporation or business or for any purpose other than a primary purpose
(1995, 1996 Bar)
1. Approval by the majority vote of the BOD or BOT

2. Ratification by stockholders representing at least 2/3 of the outstanding capital
stock or by at least 2/3 of the members in case of non-stock corporations
3. Ratification must be made at a meeting duly called for the purposes
4. Prior written notice of the proposed investment and the time and place of the
meeting shall be made addressed to each stockholder or member by mail or by
personal service

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NOTE: Investment of a corporation in a business which is in line with its primary
purpose requires only the approval of the board. Any dissenting stockholder shall have
appraisal right.
Power to declare dividends
Dividends are corporate profits allocated, lawfully declared and ordered by the directors
to be paid proportionately to the stockholders in the form of cash, property or stocks.
Requirements for the declaration of dividends
1. Existence of URE’s. (Unrestricted Retained Earnings)

2. Resolution of the board.
NOTE: In case stock dividend is to be declared, an additional requirement of:
a. A vote representing 2/3 of outstanding capital.

b. A corporation must have also a sufficient number of authorized unissued
shares for distribution to stockholders.
A declaration of stock dividend should initially be taken by the BOD and thereafter to be
concurred in by 2/3 vote of the stockholders.
Cash dividend – BOD approval is sufficient

Stock dividend – BOD approval plus approval of the stockholders representing 2/3 of
the OCS at a regular or special meeting duly called for the purpose.
The declaration of dividends is discretionary, covered by the business judgment rule.
Property dividends is essentially a cash dividend; thus, stockholder’s approval is not

needed.
The corporation may set-off or apply the cash dividends against any debt of the
stockholders because as to cash dividends that are declared, the stockholders are
creditors of the corporation.
What corporate acts require the existence of UREs?
1. Power to acquire own shares

2. Power to declare dividends

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3. Payment of stocks to dissenting stockholder in exercise of his appraisal right
Cash Dividends vs. Stock Dividends
Cash Dividends Stock Dividends

Part of general fund Part of capital
Results in cash outlay No cash outlay
Not subject to levy by corporate creditors Once issued, can be levied by corporate
creditors because they’re part of
corporate capital
Declared only by the board of directors at Declared by the board with the
its discretion (majority of the quorum only, concurrence of the stockholders
not majority of all the board) representing at least 2/3 of the
outstanding capital stock at a
regular/special meeting
Does not increase the corporate capital Corporate capital is increased
Its declaration creates a debt from the No debt is created by its declaration
corporation to each of its stockholders
If received by individual: subject to tax; Not subject to tax either received by
individual or a corporation
If received by corporation: not subject to
tax
Cannot be revoked after announcement Can be revoked despite announcement
but before issuance
Applied to the unpaid balance of Can be withheld until payment of unpaid
delinquent shares balance of delinquent shares
The declaration of cash dividends cannot be recalled, because it can affect the
market for the shares of stock. Stock Dividends can be revoked before their issuance,
because they do not give any additional assets to the stockholders.
Stockholders are the only ones entitled to receive stock dividends.
A corporation may validly declare cash or property dividends, upon approval of the BOD
alone. It is only when stock dividends are declared that the consent of the stockholders
is needed.
Paid-in surplus can be declared stock dividend but not cash dividend, because a stock
dividend merely transfers the paid-in surplus to capital

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Prohibition imposed by law on URE’s of a stock corporation
GR: Stock corporations are prohibited from retaining surplus profits in excess of one
hundred (100%) percent of their paid-in capital stock.
XPNs: (2001 Bar)
1. When justified by definite corporate expansion projects or programs approved

by the board of directors;
2. When the corporation is prohibited under any loan agreement with any financial
institution or creditor, whether local or foreign, from declaring dividends without
its/his consent, and such consent has not yet been secured; or
3. When it can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there is need for
special reserve for probable contingencies.
Holders of subscribed shares, not fully paid which are not delinquent, shall have all the
rights of a stockholder.
Power to enter into management contract
Management Contract
Management Contract is 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.
A corporation cannot enter into a management contract with a natural person. Such
contract is an employment contract and not a management contract contemplated
under the Code.
Management contract is an agreement under which a corporation delegates the

management of its affairs to another corporation for a certain period of time. The
contract can have a different nomenclature but falls within the purview of a management
contract for so long as the intention is to entrust to another corporation the management
of the business affairs of the corporation.
No corporation shall conclude a management contract with another corporation unless

such contract shall have been approved by the BOD and the stockholders owning at
least the majority of the OCS or by at least a majority of the members in a non-stock

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corporation of both the managing and managed corporation at a meeting duly called for
the purpose.
Period for every management contract entered into by the corporation
GR: Management contract shall be entered into for a period not longer than 5 years
for any one term.
XPN: In cases of service contracts or operating agreements which relate to the

exploitation, development, exploration or utilization of natural resources, it may be
entered for such periods as may be provided by the pertinent laws or regulations.
Ultra Vires Acts (UVA)
An ultra vires act refers to an act outside or beyond express, implied and
incidental corporate powers. The concept also includes those acts that may
ostensibly be within such powers but are, by general or special laws, either proscribed
or declared illegal.
An ultra vires act is an act committed outside the purpose for which a corporation is
created as defined by the law and its organization, and therefore beyond the powers
conferred upon it.
An ultra vires act is an act done by a corporation outside of the express and implied
powers vested in it by its charter and by the law.
It is one committed outside the object for which a corporation is created as defined by
the law of its organization and therefore beyond the power conferred upon it by law.
Ultra vires acts are not illegal but not merely within the scope of the articles of
incorporation and the by-laws. They are merely voidable and may become binding and
enforceable when ratified by the stockholders.
Ultra vires act is an act done by a corporation outside of the express and incidental
powers vested in it by its charter and by law.
Types of UVA
1. Acts done beyond the powers of the corporation as provided in the law or AOI
2. Ultra vires acts by corporate officers

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3. Acts or contracts which are per se illegal as being contrary to law
When is there an ultra vires act on the part of (a) the corporation; (b) the board of
directors; and (c) the corporate officers?
1. when a corporation does an act or engages in an activity that is outside of its

express, implied or incidental powers set out in the RCC and its articles of
incorporation, the act is deemed to be ultra vires.
2. The board commits an ultra vires act when it engages in an activity or performs a
corporate act without the ratificatory or affirmative vote of the stockholders in
those instances where the RC or the bylaws require such vote or in cases where
corporate powers are reserved solely to the stockholders.
3. When a corporate officer enters into a contract on behalf of the corporation
without having been so expressly or impliedly authorized by the laws of the
corporation or by the BOD, even when the act or contract falls within the
corporations express, implied or incidental power, then the unauthorized act of
the corporate officer is deemed to be ultra vires.
Settled rules in ultra vires act
1. A wholly executory ultra vires contract cannot be enforced.

2. A wholly executed ultra vires contract on both sides will not be set aside nor
interfered with by courts
3. In ultra vires contracts executed by one party but executory on the other,
recovery may be had under the principle of unjust enrichment.
The investment of funds of a corporation in the equity of another corporation is an

extraordinary corporate power which can be exercised by its board of directors only on
authority from stockholders holding at least 2/3 of the outstanding capital stock of the
corporation, the decision being made in a regular or special meeting of said
stockholders.
Ultra vires acts are merely voidable which may be enforced by performance,
ratification or estoppel, while illegal acts are void and cannot be validated.
An illegal act, such as one that is contrary to law, is necessarily ultra vires but an ultra
vires act is not necessarily an illegal act if it only one that is outside the conferred
powers of the corporation.

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An ultra vires act, which is not an illegal act, maybe ratified by the stockholders of the
corporation.
Ultra vires acts by reason of lack of authority vs. Ultra vires acts by reason of
illegality (illegal acts)
Basis Ultra Vires Act Illegal acts

Lawfulness Not necessarily unlawful, but Unlawful; against law,
outside the powers of the morals, public policy, and
corporation public order
Enforceability Merely voidable and may be Cannot be validated. VOID
enforced by performance,
ratification or estoppel
Ratification Can be ratified Cannot be ratified
Binding Effect Can bind the parties if wholly or Cannot bind the parties
partly executed
Distinguished from acts that do not comply with formalities and unauthorized
acts
Acts that do not comply with Unauthorized acts

formalities
If certain procedures or formalities are The act may be within the powers of the
prescribed in the AOI or BL and the same corporation but not within the powers of the
are not complied with, the resulting act is particular officer. The latter is sometimes
not an ultra vires act of the corporation. referred to as ultra vires act of the officer.
The law on agency applies
Instances when the acts of the officers bind the corporation(PRADa)
1. If it is provided in the by-laws

2. When the act was ratified
3. If authorized by the board
4. Under the doctrine of apparent authority
What is the remedy of the stockholder against an ultra vires act?
If the act is yet to be done, the remedy is one of injunction to enjoin the performance
or continued performance of the ultra vires act. If the act has already been performed,
a stockholder may file a derivative suit on behalf of the corporation to set aside the ultra
vires act.

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Doctrine of apparent authority
It provides that a corporation will be estopped from denying the agent’s authority if it
knowingly permits one of its officers or agent to act within the scope of apparent
authority, and it holds him out to the public as possessing the power to do those acts.
If a corporation knowingly permits one of its officers, or any other agent, to act within
the scope of an apparent authority, it holds him out to the public possessing the power
to do those acts; and thus, the corporation will, as against anyone who has in good faith
dealt with it through such agent, be estopped from denying the agent’s authority.
It is sometimes referred to as the holding out theory or doctrine of ostensible agency.
Its existence may be ascertained through:
1. The general manner in which the corporation holds out an officer or agent as
having the power to act, or in other words, the apparent authority to act in
general, with which it clothes him; or
2. The acquiescence in his acts of a particular nature, with actual or constructive
notice thereof, within or beyond the scope of his ordinary powers.
It is not the quantity of similar acts which establishes apparent authority but the vesting
of a corporate officer with the power to bind the corporation.
Apparent authority is determined by the acts of the principal and not by the acts of the
agent.
What is the concept of emergency quorum under the RCC?
Emergency quorum means that in certain cases, stock or membership represented in a

meeting called by the SEC may constitute a quorum to elect directors of corporation
even though the number of shares or members present is less than majority of the
outstanding capital stock or total members or the quorum required under the articles
and bylaws of the corporation.
If no election is held consecutive times or if the non-holding of election is unjustified, the

SEC may, upon application of a stockholder or member, director or officer and after
verification of the unjustified non-holding of the election, summarily order that an
election be held.

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Consequences of Ultra Vires Acts
Ultra vires acts entered into by the board of directors bind the corporation, and the
courts will not interfere unless terms are oppressive and unconscionable.
These are the effects for the specific acts:
1. Executed contract – courts will not set aside or interfere with such contracts
2. Executory contracts – no enforcement even at the suit of either party (void and
unenforceable);
3. Partly executed and partly executory – principle of “no unjust enrichment at
expense of another” shall apply;
4. Executory contracts apparently authorized but ultra vires – the principle of
estoppel shall apply.
Remedies in case of ultra vires act
1. State
a. Obtain a judgment of forfeiture; or
b. The SEC may suspend or revoke the certificate of registration
2. Stockholders
a. Injunction; or
b. Derivative suit
3. Creditors- Nullification of contract in fraud of creditors.
Power of directors or trustees to delegate authority
GR: The board may validly delegate, either expressly or impliedly, some of its powers
and functions to other officers or agents of the corporation appointed by it.
XPNS:
1. Entire supervision and control of the corporation cannot be delegated

2. Discretionary powers which, are vested exclusively in the board of directors.
3. Special powers especially conferred upon it by a resolution of the stockholders
or members of the corporation.

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Limitations on the holding of a corporate officer’s position
Any two or more positions may be held concurrently by the same person, except that
no one shall act as president and secretary or as president and treasurer at the same
time.
The treasurer must be a resident of the Philippines (s24, RCC)
The secretary is required to be BOTH a resident and a citizen of the Philippines.
Positions of corporate officers to be filled up by the Directors
Corp. Membership Citizenship Residency

Officer Requirement
President 1. Must be a director at Need NOT be a Need NOT be a
the time he assumes office Filipino Citizen Philippine Resident
2. Must be the stockholder
on record of at least 1
share of stock
Secretary May or may not be a Must be a Filipino Must be a
director, unless required by citizen Philippine resident
the bylaws
Treasurer May or may not be a Need NOT be a Must be a
director Filipino Citizen Philippine
Resident
Such other Qualifications may be provided for in the bylaws
officers as
may be
provided in
the bylaws
If a corporation is vested with public interest, the board shall also elect a compliance
officer.
The same person may hold two (2) or more positions concurrently, except that no one
shall act as president and secretary or as president and treasurer at the same time,
unless otherwise allowed in the RCC (President and treasurer is allowed in OPC)
Every director must own at least one share of the capital stock of the corporation of
which he is a director, which share shall stand in his name on the books of the

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corporation. Any director who ceases to be the owner of at least 1 share of the capital
stock of the corporation of which he is a director shall thereby cease to be a director.
CORPORATE OFFICERS:
Immediately after their election, the directors of a corporation must formally organize
and elect:
1. A president who must be a director

2. Treasurer who must be a resident
3. A secretary who must be a citizen and resident of the Philippines
4. Such other officers as may be provided in the by-laws
5. If the corporation is vested with public interest, the board shall also elect a
compliance officer.
The same person may hold 2 or more positions concurrently, except that no one shall
act as president and secretary or as president and treasurer at the same time, unless
otherwise allowed in the Code.
Treasurer must be a resident.
Compliance officer was added in corporations vested with public interest.
The provision:
SEC. 24. Corporate Officers. – Immediately after their election, the directors of a
corporation must formally organize and elect: (a) a president, who must be a director;
(b) a treasurer, who must be a resident; (c) a secretary, who must be a citizen and
resident of the Philippines; and (d) such other officers as may be provided in the bylaws.
If the corporation is vested with public interest, the board shall also elect a
compliance officer. The same person may hold two (2) or more positions
concurrently, except that no one shall act as president and secretary or as president
and treasurer at the same time, unless otherwise allowed in this Code.
The officers shall manage the corporation and perform such duties as may be provided
in the bylaws and/or as resolved by the board of directors.
ADDITIONAL REGULATORY CONDITIONS AND OFFICERS AND IN

CORPORATION VESTED WITH PUBLIC INTEREST.

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Corporations vested with public interest are required to elect a compliance officer upon
organization. (Sec. 24) They are required to submit additional annual reports to the
SEC, particularly a director/trustee compensation report and a director/trustee appraisal
or performance report. (Sec. 177) At least 20% composition of the boards of such
corporations shall be independent directors. (Sec. 22)
Corporations vested with public interest are:
a) Those whose securities are registered with the SEC, corporations listed
with an exchange or with assets of at least P50Million and having two
hundred (200) or more holders of shares, each holding at least one
hundred (100) shares of a class of its equity shares;
b) Banks and quasi-banks, NSSLAs, pawnshops, corporations engaged in money
service business, pre-need, trust and insurance companies, and other financial
intermediaries; and
c) Other corporations engaged in business vested with public interest similar to the
above, as may be determined by the SEC.
Trust Fund Doctrine
The trust fund doctrine provides that subscriptions to the capital stock of a corporation
constitute a fund to which the creditors have a right to look for the satisfaction of their
claims.
Under the trust fund doctrine, the capital stock, property, and other assets of a
corporation are regarded as equity in trust for the payment of corporate creditors
which are preferred over the stockholders in the distribution of corporate assets.
The capital stock, property and other assets of the corporation are regarded as equity in
trust for the payment of corporate creditors. The subscribed capital stock of the
corporation is a trust fund for the payment of the debts of the corporation which the
creditors have the right to look into to satisfy their credits, and which the corporation
may not dissipate.
The subscribed capital stock of the corporation is a trust fund for the payment of debts
of the corporation which the creditors have the right to look up to satisfy their credits,
and which the corporation may not dissipate. The creditors may sue the stockholders
directly for the latter’s unpaid subscription.

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The trust fund doctrine is applicable in case the appraisal right of a withdrawing
stockholder is involved. The corporation is prohibited from paying the withdrawing
stockholder if the rights of the creditors are affected. Only URE of the corporation are
available for said payment, otherwise the preference of creditors to corporate assets
would be relocated.
The only exceptions from the trust fund doctrine are the redemption of redeemable
shares and in the case of close corporation, when there should be a deadlock and the
SEC orders the payment of the appraised value of a stockholder’s share.
Exceptions to the trust fund doctrine
1. Dissolution and eventual liquidation of the corporation.

2. Amendment of the AOI to reduce the authorized capital stock.
3. Purchase of redeemable shares by the corporation, regardless of the existence
of unrestricted retained earnings;
4. In close corporation, when there is a Deadlock and the SEC orders the payment
of the appraised value of the stockholder’s share
The trust fund doctrine is not limited to reaching the stockholder’s unpaid subscriptions.
The scope of the doctrine when the corporation is insolvent encompasses not only the
capital stock, but also other property and assets generally regarded in equity as a trust
fund for the payment of corporate debts.
In summary the TFD is violated in the following instances:
1. When it acquired its shares without URE

2. When there is payment of dividends without URE
3. When properties are transferred in fraud of creditors
4. The corporation has distributed its capital among the stockholders without
providing for the payment of creditors
5. When properties are disposed or undue preference is given to some creditors
even if the corporation is insolvent.
6. When the corporation releases or condones payment of the unpaid subscription
and the stockholder has no right to demand the refund of his investment
Effects of trust fund doctrine
1. Dividends must never impair the subscribed capital stock and must only be
declared out of unrestricted retained earnings (URE).

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2. Subscription commitments cannot be condoned or remitted
3. GR: The corporation cannot buy its own shares using the subscribed capital as
the consideration therefore.
XPN: (ReDeC)
a. Redeemable shares may be acquired even without surplus profit for as

long as it will not result to the insolvency of the Corporation;
b. In cases that the corporation conveys its stocks in payment of a Debt; or
c. In a Close corporation, a stockholder may demand the payment of the fair
value of shares regardless of existence of retained earnings for as long as
it will not result to the insolvency of the corporation
4. Rescission of a subscription agreement is not allowed since it will effectively

result in the unauthorized distribution of the capital assets and property of the
corporation
Board of Directors and Trustees
Doctrine of centralized management
All businesses of the corporation shall be conducted and all its properties shall be
controlled and held by the BOD or BOT. A corporation can act only through its directors
and officers.
GR: The Doctrine of Centralized Management states that all corporate powers are
exercised by the BOD or BOT.
The Board is the body which: (ExBuCo)
(2) Exercises all powers provided for under the Corporation Code;
(3) Conducts all Business of the corporation; and
(4) Controls and holds all the properties of the corporation
XPN: The doctrine is not applicable to the following instances:
1. In case of delegation to the Executive Committee duly authorized in the by-laws;

2. Authorization pursuant to a contracted manager which may be an individual, a
partnership, or another corporation; and

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3. In case of close corporations, the stockholders may manage the business of the
corporation instead of a board of directors, if the articles of incorporation so
provide.
Three levels of control
1. The BOD which is responsible for corporate policies and the general
management of the business affairs of the corporation.
2. The officers who in theory execute the policies laid down by the board but in
practice often have wide latitude in determining the course of business
operations;
3. The stockholders who have the residual power over fundamental corporate
changes like amendments of the articles of incorporation.
Independent Director
An independent director is a person who apart from shareholdings and fees received
from the corporation, is independent of management and free from any business or
other relationship which could materially interfere with the exercise of independent
judgment in carrying out the responsibilities as a director.
The board of corporations vested with public interest shall have independent directors
constituting at least 20% of such board.
Cases where independent directors are required
At least two (2) independent directors are required in the following companies:
1. Banks;
2. Corporations with secondary franchise.
3. Any corporation with a class of equity securities listed for trading on an Exchange
(Publicly traded companies);
[New provision in RCC:]
The board of the following corporations vested with public interest shall have
independent directors constituting at least twenty percent (20%) of the board:
1. Corporations whose:

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a. Securities are registered with the Commission
b. Corporations listed with an exchange
c. Corporations with:
i. assets of at least 50 Million Pesos;
ii. having 200 or more shareholders;
iii. each shareholder holding at least 100 shares of a class of its equity
shares
2. Banks, quasi-banks, preneed, insurance and trust companies, nonstock savings

and loan associations, pawnshops, corporations engaged in money service
business and other financial intermediaries; and
3. Other corporations engaged in business vested with public interest similar to
the above, as may be determined by the Commission, after taking into account
relevant factors which are germane to the objective and purpose of requiring the
election of independent director
[New provision in RCC]
Factors to consider by the Commission in determining a corporation engaged in

business with public interest: ExTyPO
1. Extent of minority ownership

2. Type of financial products or securities issued or offered to investors
3. Public interest involved in the nature of business operations
4. Other analogous factors
Required number of independent directors for the corporations covered by the

Revised Code of Corporate Governance (RCCG)
At least two (2) or such number of independent directors that constitute 20% of the
members of the board, whichever is lesser, but in no case less than two (2) (RCCG, Art.
3 [A]).
TERM OF TRUSTEES AND INDEPENDENT DIRECTORS IN CORPORATIONS

VESTED WITH PUBLIC INTEREST:
Trustees shall be elected for a term not exceeding three (3) years. Corporations
vested with public interest shall have independent directors constituting at least twenty
percent (20%) of such board.

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Doctrine of corporate democracy
The doctrine of corporate democracy enunciates that a corporation is always presumed

to operate upon the democratic principle that the rule of the majority prevails, in the
absence of clear and express statutory provisions.
A corporate act is valid if it is approved by at least a majority of the directors or trustees

present at a meeting at which there is a quorum.
Business Judgment Rule
Under the business judgment rule, questions of policy and management are left to the
sound discretion of the board of directors and their acts are valid as long as they acted
in GF and not contrary to law.
Business judgment rule is a principle under which judgments and decisions of the
corporation, made by its management body, the board of directors, should not be
interfered with, even by courts unless such acts are so oppressive and unconscionable
as to amount to a wanton destruction of the rights of the minority.
Questions of policy or management are left solely to the honest decision of officers and
directors of a corporation and the courts are without authority to substitute their
judgment for the judgment of the board of directors; the board is the business manager
of the corporation and so long as it acts in good faith, its orders are not reviewable by
the courts or the SEC
GR: Contracts intra vires entered into by the board of directors are binding upon the
corporation beyond the interference of courts. The courts are barred from intruding into
business judgments of corporations, when the same are made in good faith.
XPNs: Courts can inquire unto contracts which are:
1. Unconscionable and oppressive as to amount to wanton destruction to the rights

of the minority; or
2. When there is bad faith or gross negligence by the directors
Under the business judgment rule, the courts are barred from intruding into the business
judgments of the corporation, when the same are made in good faith.
Compensation of directors/trustees

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GR: Directors, in their capacity as such, are not entitled to receive any compensation
except for reasonable per diems.
NOTE: Directors or trustees shall not participate in the determination of their own per
diems or compensation (Sec 29, RCC)
XPNs:
1. When their compensation is fixed in the bylaws;

2. When granted by the vote of stockholders representing at least a majority of the
outstanding capital stock at a regular or special meeting; or
3. If they perform services other than as directors of the corporation (i.e. where
directors are also corporate officers or employees of the corporation) (Sec. 30,
CC).
NOTE: Per diems are paid attendance in board meetings. Other benefits and
emoluments of directors fall within the term “compensation.”
Per diem (Latin term for each day) is a specific amount a corporation or organization
gives an individual per day to cover living expenses when travelling and attending
board meetings.
Majority Rule Doctrine in the dealings of directors with stockholders
The majority rule states that a director has a fiduciary duty with respect to the
corporation as an entity, and not to the stockholders as individuals. Consequently,
he is subject to the duty to disclose all material facts only to the corporation and not
to the stockholders.
Meeting of stockholders or members
A stockholder’s or members meeting must comply with the following requisites to be

valid:
1. The meeting must be held on the date fixed in the by-laws or in accordance with
law.
2. Prior written notice of such meeting must be sent to all stockholders or members
of record
3. It must be called by the proper party

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4. It must be held at the proper place; and
5. Quorum and voting requirements must be met.
Of the 5, the existence of a quorum is crucial. Any act or transaction made during a
meeting without quorum is rendered of no force and effect, thus, not binding on the
corporation or parties concerned.
The law only requires the sending or mailing of the notice of a stockholder’s or
members meeting to the stockholders of the corporation.
Special Fact Doctrine
Special fact doctrine is a doctrine holding that a corporate officer with superior
knowledge gained by virtue of being an insider owes a limited fiduciary duty to a
shareholder in transactions involving a transfer of stock.
The special fact doctrine is an exception to the majority rule doctrine. It states that
where special circumstances or facts are present which make it inequitable for the
director to withhold information from the stockholder, the duty to disclose arises, and
concealment is fraud.
Liability of the directors/ trustees or officers of a corporation for their official

acts
GR: The officers of a corporation are not personally liable for their official acts.
XPNs: If it is shown that they exceeded their authority.
1. He agrees to hold himself personally liable with the corporation;

2. Gross negligence or bad faith in directing the affairs of the corporation
3. Knowingly voting for or assenting to patently unlawful acts of the corporation
4. He is made, by specific provision of law, to personally answer for this corporate
action.
5. Acquiring any personal or pecuniary interest in conflict with his duty as director or
trustee or officer resulting in damage to the corporation
6. He consents to the issuance of watered stocks or who, having knowledge
thereof, does not forthwith file with the corporate secretary his written objection
thereto;

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The enumerated exception is exclusive. The doctrine of piercing the corporate veil is
pierced, the director/officers become one with the corporation. Thus, it is not an
exception.
Bad faith or negligence is a question of fact. Bad faith does not simply mean bad
judgment or negligence. It imparts a dishonest purpose or some moral obliquity and
conscious doing of wrong. It means breach of a known duty through some motive or
interest or ill-will; it partakes of the nature of fraud.
A corporation is an artificial entity created by fiction of law. This means that while it is
not a person, naturally, the law gives it a distinct personality and treats it as such. A
corporation, in the legal sense, is an individual with a personality that is distinct and
separate from other persons including its stockholders, officers, directors,
representatives, and other juridical entities.
Requisites before a Director or Officer of a Corporation can be held personally

liable for corporate obligations:
1. The complainant must allege in the complaint that the director or officer assented
to patently unlawful acts of the corporation, or that the officer was guilty of gross
negligence or bad faith; and
2. The complainant must clearly and convincingly prove such unlawful acts,
negligence or bad faith
Liability of directors for the issuance of watered stocks
A director or trustee who:
(1) Consents to the issuance of stocks for a consideration less than its par or
issued value;
(2) Consents to the issuance of stocks for a consideration other than cash,
valued in excess of its fair value; or
(3) Having knowledge of the insufficient consideration, does not file a written
objection with corporate secretary.
Shall be liable to the corporation or its creditors, solidarily with the stockholder
concerned for the difference between the value received at the issuance of the stock
and the par or issued value of the same.

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NOTE: The prohibition to issue “watered stock” refers only to the original issue of
stocks but not to a subsequent transfer of such stocks by the corporation, for then it
would no longer be an “issue” but a sale thereof.
Doctrine of Corporate Opportunity
The doctrine of corporate opportunity means that if the director acquired for himself a
business opportunity that should belong to the corporation, he must account to the
corporation for all the profits he obtained unless his act was ratified by the stockholders
representing at least 2/3s of the OCS.
Where a director, by virtue of his office, acquires for himself a business opportunity
which should belong to the corporation, thereby obtaining profits to the prejudice of such
corporation, is guilty of disloyalty and should, therefore, account to the latter for all such
profits by refunding the same, notwithstanding that he risked his funds in the venture.
A director shall refund to the corporation all the profits he realizes on a business
opportunity which:
1. The corporation is financially able to undertake;

2. The corporation has an interest or a reasonable expectancy.
3. From its nature, is in line with corporation’s business and is of practical
advantage to it;
The rule shall be applied notwithstanding the fact that the director risked his own funds
in the venture.
NOTE: If such act is ratified by a vote of the stockholders representing at least 2/3 of
the outstanding capital stock, the director is excused from remitting the profit realized.
The doctrine disqualifies a director, trustee, or officer from appropriating for his personal
benefit a transaction or opportunity that pertains to the corporation, and which under the
duty of loyalty he should first bring to the corporation for its use or exploitation. A
director has a duty to act in the best interest of the corporation. He must refrain from
acting in a manner that conflicts or contradicts the interests of the corporation. If he
acquires for himself a business opportunity which should belong to the corporation, he
must account for and refund the profits which would have otherwise accrued to the
corporation. This applies notwithstanding the fact that the director risked his own funds
in the venture.

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Dealings of directors, trustees or officers with the corporation
A self-dealing director is one who deals or contracts with his company. A contract of the
corporation with one or more of its directors or trustees or officers or their spouses and
relatives within the 4th civil degree of consanguinity or affinity is generally voidable at
the option of the corporation.
RCC: Prohibition now covers directors’, trustees’ or officers’:
(1) Spouses
(2) Relatives within the fourth civil degree of consanguinity or affinity (RCC, Sec
31)
A contract of the corporation with one or more of its directors or trustees or officers is
voidable, at the option of the corporation unless all the following conditions are
present:
1. That the presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such
meeting;
2. That the vote of such director or trustee was not necessary for the approval
of the contract;
3. That the contract is fair and reasonable under the circumstances;
4. In case of corporations vested with public interest, material contracts are
approved by at least 2/3 of the entire membership of the board, with at least
a majority of the independent directors voting to approve the material contract;
and
5. That in the case of an officer, the contract with the officer has been previously
authorized by the board of directors.
NOTE: Sec. 32 (RCC, SEC 31) does not require that the corporation suffers injury or
damage as a result of the contract.
Contracts between corporations with interlocking directors
An interlocking director is one who is elected as director of 2 or more corporations.
A contract between two or more corporations having interlocking directors shall not be
invalidated on that ground alone. Provided that:

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1. Contract is not fraudulent;
2. Contract is fair and reasonable under the circumstances;
If the interest of the interlocking director in one corporation or corporations is merely

nominal (not exceeding 20% of the outstanding capital stock), he shall be subject
to the provisions of Sec. 32 insofar as the latter corporation or corporations are
concerned. (CC, Sec. 33)
NOTE: Stockholdings exceeding 20% of the outstanding capital stock shall be

considered substantial for purposes of interlocking directors.
An interlocking director is a director in two or more corporations. A corporation has

interlocking director if one (or some or all) of its directors is also a director in another
corporation.
When the interest of an interlocking director in one corporation is substantial

(stockholdings more than 20% of the outstanding capital stock and nominal (20% or
less) in another corporation, the contract is valid provided that:
1. The contract is fair and reasonable under the circumstances.

2. The vote of such director or trustee was not necessary for the approval for the
contract;
3. The presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such
meeting;
Third parties may not assail the contract if the only ground is interlocking directorship.
Only the corporations which are parties to the contract may file it.
The RCC does not prohibit interlocking directorship as long as there is no fraud and the
contract is fair and reasonable under the circumstances.
Executive Committee
It is a committee that the board creates pursuant to an authority granted under the
corporation’s bylaws, composed of at least 3 members of the Board, that can act on
matters falling within the board’s competence.
An executive committee is a body created by the bylaws and composed of not less
than three (3) members of the board which, subject to the statutory limitations, has all

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the authority of the board to the extent provided in the board resolution or by-laws. The
committee may act by a majority vote of all of its members.
The board may not by itself create the executive committee if there is no provision in the
bylaws.
The law requires that the creation of an executive committee be explicitly stated in the
bylaws. A mere board resolution will not suffice.
Only board of directors, not less than 3 can be appointed members of the Executive
Committee. Non-board directors can be appointed members but only in an advisory
capacity.
Limitations on the powers of the executive committee (powers that cannot be

delegated)
The executive committee cannot act on the following:
1. Cash dividend declaration

2. Filling up of board vacancies;
3. Matters needing stockholder approval;
4. Amendment, repeal or adoption of by-laws;
5. Amendment or repeal of any resolution of the Board which by its express terms
is not amendable or repealable;
Quorum in board meetings
GR: Majority of the number of directors or trustees.
XPN: If AOI or the by-laws provide for a greater number.
NOTE: The quorum is the same even if there is vacancy in the board.
The articles of incorporation or by-laws may fix a greater number than the majority of
the number of directors to constitute a quorum. Any number less than the number
provided in the articles or by-laws cannot constitute a quorum; any act therein would not
bind the corporation; all that the attending directors could do is to adjourn
Directors or trustees cannot attend or vote by proxy at board meetings.


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The notice of meetings should be sent at least 2 days before the meeting of the BODs.
Under the RCC, the SEC is now empowered, motu proprio or upon verified complaint,
and after due notice and hearing to order the removal of a disqualified director/trustee.
The said removal is without prejudice to other sanction that the SEC may impose on the
board/member who, despite knowledge of disqualification, failed to remove the
director/trustee involved.
Place of Meetings
Stockholders or members meeting– at the principal place of business or if not

practicable in the city or municipality where the principal office of the corporation is
located.
BOD/T – anywhere in or outside the Philippines unless the bylaws provide

otherwise.
Binding effect of acts of corporate officers
GR: The acts of corporate officers within the scope of their authority are binding on the
corporation
XPN: When the officers exceed their authority, their actions cannot bind the
corporations.
XPN to the XPN:
When the corporation ratified such acts; or is estopped from disclaiming them.
Term of office of BOD/T
Under the RCC, BOD shall hold office for a period of 1 year while trustees shall hold
office for 3 years.
Majority of the board is no longer required to be residents of the Philippines.
Ground for disqualification of Directors, Trustees or officers (NOT exclusive)
1. Those made administratively liable for offenses involving fraudulent acts;

2. Those who have been found, within 5-year period, to have violated the SRC

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3. Conviction by final judgment of an offense punishable by imprisonment not
exceeding 6 years; and
4. Violation of the Corporation Code committed within 5 years prior to the date of
the election or appointment
5. Those found by the foreign court to have violated or engaged in similar
misconduct; and
6. Such other disqualifications/qualifications that the SEC and the PCC may
prescribe.
The bylaws may validly provide that a stockholder is ineligible to be director if he is also
a director of a corporation whose business is in competition with that of the other
corporation.
A stockholder’s or members meeting must comply with the following requisites

to be valid: (Requisites also for a valid board meeting)
1. It must be held at the stated date and the appointed time or at a reasonable time
thereafter.
2. Prior written notice of such meeting must be sent to all stockholders or members
of record
3. It must be called by the proper party
4. It must be held at a proper place
5. Quorum and voting requirements must be met
It is mandatory that stockholders meeting be held in the principal office of the

corporation, as indicated in the AOI and if not practicable, in the city or municipality
where the principal office of the corporation is located.
Regular meetings of stockholders or members shall be held annually on a date fixed in

the bylaws, or if not so fixed, on any date after April 15 of every year as determined by
the BOD/T.
Special meetings of stockholders or members shall be held at any time deemed

necessary or as provided in the bylaws.
The meeting should be called by the person authorized by the bylaws.
Stockholders or members of a corporation may participate in a meeting through remote

communication or other alternative modes of communication when it is so provided in
the bylaws of the corporation or when authorized by a majority of the BOD.

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If there is a failure to give notice of the board meeting, such board meeting is
legally infirm considering that there is a failure to comply with the requirements
or formalities of the law or the corporations bylaws.
The removal of a director or trustee by the stockholders or members is subject to

the following requisites:
1. There must be a previous notice of meeting to stockholders or members, and the

procedures prescribed by RCC and bylaws must be followed.
2. The notice of meeting must specify the intention to prose the removal of director
3. The removal must be approved by stockholders representing at least 2/3 of the
OCS or by at least 2/3s of the members entitled to vote for non-corporation
4. The removal may be with or without cause. However, if the removal is intended
to deprive the minority of their representative, the removal has to be with cause.
5. The vacancy brought about by the removal of the director may be filled at the
same stockholder’s meeting where the removal was effected as long as this fact
is similarly stated in the agenda and notice of the said meeting or in a separate
meeting called for the purpose.
The removal of directors in a meeting called by a committee not authorized to call a

meeting is void even if the removal was approved by the required number of
stockholders. All actions taken up during such void meeting like the expulsion of
directors from the Corporation and sale of their shares is likewise void. The removal
being void ab initio cannot be ratified in the subsequent regular stockholders meeting.
Rule on Removal of Director
Any director or trustee of a corporation may be remove from office by a vote of

stockholder’s holder or representing at least 2/3 of the OCS or in case of non-stock
corporation by a vote of at least 2/3 of members entitled to vote.
Exception
The removal without cause may not be used to deprive minority stockholders or
members of the right of representation to which they are entitled under the law.
Rule on Removal by the SEC


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The SEC 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 whose
disqualification arose or is discovered subsequent to an election.
The BOD may fill the vacancy if the following requisites are present:
1. The cause of the vacancy is due to any ground other than expiration of term,
removal of a director or increase in the number of board seats; and,
2. The remaining directors constitute a quorum.
Rights of a Shareholder
1. Management Right
a. To elect and remove directors;

b. To approve certain corporate acts;
c. To compel the calling of the meetings;
d. To enter into a voting trust agreement;
e. To have the corporation voluntarily dissolved.
f. To adopt and amend or repeal the by-laws of adopt new by-laws;
g. To attend and vote in person or by proxy at a stockholders’ meetings;
2. Proprietary rights
a. To transfer stock in the corporate book;

b. Right to dividends. To receive dividends when declared;
c. To the issuance of certificate of stock or other evidence of stock ownership;
d. To participate in the distribution of corporate assets upon dissolution; and
e. Pre-emptive right. To pre-emption in the issue of shares.
3. Remedial rights
a. Appraisal right
b. Pre-emptive right
c. To inspect corporate books;
d. Right to copy of the FS of the company
e. Right to file derivative suit
f. To recover stock unlawfully sold for delinquent payment of subscription;
g. To be furnished with most recent financial statements or reports of the
corporation’s operation;
h. To bring suits (derivative suit, individual suit, and representative suit); and

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i. To demand payment in the exercise of appraisal right.
Right to dividend
Dividends are payable to the stockholders of record as of the date of the declaration
of dividends or holders of record on a certain future date, as the case may be unless the
parties have agreed otherwise.
Transfer of shares which is not recorded in the books of the corporation is valid only as
between the parties.
Doctrine of Equality of Shares
Where the articles of incorporation do not provide for any distinction of the shares of
stock, all shares issued by the corporation are presumed to be equal and enjoy
the same rights and privileges and are also subject to the same liabilities.
Each share shall be equal in all respects to every other share, except as otherwise
provided in the articles and in the certificate of stock.
The doctrine of equality of shares means that all stocks issued by the corporation are
presumed equal, with the same privileges and liabilities provided that articles of
incorporation is silent on such differences.
Any restriction on shares should also be stated in the articles of incorporation, otherwise
it is not valid.
Voting Trust Agreement
It is an agreement where one or more stockholders of a stock corporation confer upon a

trustee or trustees the right to vote and other rights pertaining to the shares for a period
generally not exceeding 5 years at any time.
A voting trust agreement (VTA) is an agreement whereby one or more stockholders

transfer their shares of stocks to a trustee, who thereby acquires for a period of time the
voting rights (and/or any other specific rights) over such shares; and in return, trust
certificates are given to the stockholder/s, which are transferable like stock certificates,
subject, to the trust agreement.

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A voting trust agreement results in the separation of the voting rights of a stockholder
from his other rights such as the right to receive dividends and other rights which a
stockholder may be entitled until the liquidation of the corporation.
No voting trust agreement shall be entered into for purposes of circumventing the laws
against anti-competitive agreements, abuse of dominant position, anti-competitive
mergers and acquisitions, violation of nationality, and capital requirements, or for the
perpetration of fraud.
If he executes the VTA during his term as a director, he shall cease to be a director of
the corporation.
Voting Trust Agreement vs. Proxy
Voting Trust Agreement Proxy

If validly executed, VTA is intended to be A proxy, unless coupled with interest, is
irrevocable for a definite and limited revocable at any time.
period of time.
Trustee acquires legal title to the shares Proxy has no legal title to the shares of
of the transferring stockholder the principal.
Right to vote as well as other rights may Only right to vote is given. The proxy
be given except the right to receive must vote in person.
dividends. The trustee may vote in person
or by proxy unless the agreement
provides otherwise
The agreement must be notarized Proxy need not be notarized
Trustee is not limited to act at any Proxy can only act at a specified
particular meeting stockholder’s meeting (if not continuing)
The stock certificate shall be cancelled No cancellation of the certificate shall be
and a new one in the name of the trustee made
shall be issued stating that they are
issued pursuant to a VTA.
A trustee can vote and exercise all the A proxy can only vote in the absence of
rights of the stockholder even when the the owner of the stocks
latter is present.
An agreement must not exceed 5 years at A proxy is usually of shorter duration
any one time except when the same is although under Sec. 58 it cannot exceed
made a condition of a loan. 5 years at any one time
Governed by the law on trust Governed by the law on agency
A trustee has the right to inspect A proxy does not have a right of
corporate books. inspection of corporate books.
As to form: it must be in writing, signed It must be in writing, signed by the

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by the stockholder and filed with the stockholder and notarized. A copy of the
corporate secretary on the date fixed in VTA must be submitted to the SEC,
the bylaws but not later than a reasonable otherwise it is not enforceable
time before the meeting.
The RCC clarified that proxy may be in

any form as long as the same is
authorized by the bylaws
As to the rights conferred: A proxy is A trustee is vested legal title to the shares
vested the right to vote and as such may exercise not only voting
right but the right of inspection as well.
Nor right to inspect is granted unless
separately authorized for that purpose A trustee is qualified to be elected as
director or trustee.
A proxy cannot be voted and cannot
qualify as director of a corporation unless All rights of the stockholder may be
he is a stockholder in his own right. exercised by trustee EXCEPT proprietary
rights. (e.g., right to receive dividends and
to receive the assets upon dissolution
and liquidation of the corporation.
As to term: Valid only for the meeting Valid for a period not exceeding 5 years.
intended, unless general and continuing The voting trust can be longer than 5
in nature but not to exceed 5 years. years if executed pursuant to a loan
agreement, but expires upon full payment
The presence of stockholder or principal of the loan
revokes the authority of the proxy holder
The voting trust can be extended if it is
co-terminus with the loan agreement.
The presence of trustor does not revoke

the authority of the trustee.
Proxy
A proxy is the written instrument signed by the stockholder authoring another person to
exercise the voting rights of the former. It may also refer to the person exercising the
voting authority granted by the stockholder.
Limitations on Proxies

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1. Proxies shall be in writing, signed and filed, by the stockholder in any form and
received by the corporate secretary within a reasonable time before the
scheduled meeting.
2. It shall be valid only for the meeting for which it is intended
3. No proxy shall be valid and effective for a period longer than 5 years at any one
time.
4. No broker or dealer shall give any proxy, consent or any authorization, in
respect of any security carried for the account of the customer, to a person
other than the customer, without written authorization of the customer.
Proprietary Rights
1. Right to dividends
2. Right of appraisal
3. Right to inspect
4. Pre-emptive right
5. Right to vote
6. Right of first refusal.
Rights of Appraisal
It refers to the right of the stockholder to demand payment of the fair value of his
shares, after dissenting from a proposed corporate action involving a fundamental
change in the charter or articles of incorporation in the cases provided by law.
It is the right of the stockholder to demand the payment of the FV of his shares after
dissenting against a proposed corporate act in the cases specified by law.
The right of appraisal refers to the right of a stockholder who dissents from certain
corporate actions to demand payment of the FV of his/her share.
It refers to the right of dissenting stockholder to withdraw from the corporation and
demand payment of the FV of his/her shares, which right is exercised after dissenting
from or voting against proposed corporate acts involving fundamental change in the
corporate structure.
It is the right of a stockholder to withdraw from the corporation and demand payment of
the fair value of his shares following his dissent on certain corporate acts.

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It is the right of a stockholder to withdraw from corporation and demand payment of the
fair value of his shares after dissenting from certain corporate acts involving
fundamental changes in the corporate structure.
The valuation of the shares of a stockholder who exercises his appraisal rights is
determined as of the day prior to the date on which the vote was taken, regardless of
any depreciation or appreciation in the shares fair value.
Although dissenting stockholders have the right of appraisal, the law provides that no
payment shall be made to any dissenting stockholder unless the corporation has URE in
its books to cover the payment.
Appraisal right is a statutory right. It cannot be denied to the stockholders in cases

where the law allows such right.
Requisites: (GWAFU)
1. Any Ground for appraisal must be present.

2. A written demand on the corporation must be made within 30 days after the date
when the vote was taken.
3. The dissenting stockholders attend the meeting of the stockholders and voted
against the proposed action.
4. The price of the Fair Market Value of the shares on the day before the date of
voting.
5. The corporation has sufficient unrestricted retained earnings to pay
Note: In case of disagreement, the value will be determined by appraisal of 3

disinterested persons.
Instances when appraisal right may be exercised.
1. In case of merger or consolidation

2. Investment of corporate funds in another business or purpose
3. In case of extension or shortening the term of corporate existence
4. In case of sale or disposition of all or substantially all assets of the corporation.
5. In case of amendment to the AOI that has the effect of changing or restricting
the right of a shareholder.
Cite examples of the amendment to the AOI that has the effect of changing or
restricting the rights of any stockholder or class of shares, or of authorizing

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preferences in any respect superior to those of outstanding shares of any class,
which then warrants the exercise of appraisal right.
1. Denial of pre-emptive right

2. Converting non-voting preferred shares to voting shares
3. Making no-voting redeemable PS into convertible voting shares in case of non-
redemption of the redeemable shares.
4. Creating shares which are given preferences in payment of dividends or in the
distribution of assets or other preferences as may be indicated in the amendment
to the AOI provided they are not contrary to law
A stockholder is entitled to exercise his appraisal right by reason of the automatic

conversion of the term to perpetual existence.
If the dissenting stockholder is not paid the value of said shares within 30 days after the
award, the voting and dividend rights shall immediately be restored.
When is the right of appraisal extinguished.
1. Non-existence of URE.
2. The stockholder withdraws the demand and the corporation consents thereto;
3. The proposed corporate action is abandoned or rescinded by the corporation
4. The SEC disapproves or determines that the stockholder is not entitled to the
appraisal right;
Right of the stockholder shall be restored.
As a GR, a stockholder who dissents from a certain corporate action has the right to
demand payment of fair value of his or her shares and that is known as right of
appraisal. However, no payment shall be made to any dissenting stockholder unless the
corporation has unrestricted retained earnings in its books to cover the payment.
Right to vote
The stockholders can exercise their right to vote through the election, replacement and
removal of Board of Directors or Trustees and on other corporate acts which require
stockholders’ approval.
Non-voting shares are entitled to vote in merger and consolidation.


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Nature of the right to vote
One of the rights of a stockholder is the right to participate in the control and
management of the corporation that is exercised through his vote. The right to vote is a
right inherent in and incidental to the ownership of corporate stock, and such is a
property right.
Right of inspection
No specific amount of interest is required for the exercise of the right to inspect.
A 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.
The right to examine the books of the corporation must be exercised in GF, for specific
and honest purpose and not to gratify curiosity or for speculative or vexatious purposes
Limitations on the right of inspection:
1. Must be made at reasonable hours on business days;

2. The demand is made in GF or for legitimate purpose.
3. It can only be exercised for a purpose germane to his interest as a
stockholder.
4. Stockholder has not improperly used any information he secured through any
previous examination;
Remedies if the right to inspection is denied
1. Action for specific performance

2. Petition for mandamus
3. Damages;
4. Criminal suit
Available defenses
1. The person demanding to examine has improperly used any information secured
through any prior examination of the records or minutes of such corporation or for
any other corporation; or
2. The one requesting to inspect was not acting in GF or the demand is not a
legitimate purpose.

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The RCC does not allow a requesting party who is not a stockholder/member or is a
competitor, director, officer, controlling stockholder or otherwise represents the interests
of a competitor, to inspect or demand reproduction of corporate records.
Likewise, the RCC provides that any stockholder who abuses the right to inspect
corporate records shall be penalized under Sec. 158 of the RCC which governs
administrative sanctions for violations of the RCC.
Can a petition for injunction be filed by the corporation to prevent inspection?
No. the petition for injunction is a pre-emptive action unjustly intended to impede and
restrain the stockholder’s rights. If the stockholder demands inspection of the corporate
books, the corporation could refuse to heed such demand. When the corporation,
through its officers, denies the stockholder of such right, the latter could then go to court
and enforce their right.
SEC power to conduct summary investigation on denial of inspection
If the corporation denies or does not act on a demand for inspection and/or
reproduction, the aggrieved party may report such denial or inaction to the SEC. Within
5 days from receipt of such report, the SEC shall conduct a summary investigation AND
issue an order directing the inspection of the requested records.
The RCC expanded the remedies available to stockholder exercising his right of
inspection in that if the corporation denies or does not act on a demand for inspection
and/or reproduction, the aggrieved party may report such denial or inaction to the SEC.
Within 5 days from receipt of such a report, the SEC shall conduct a summary
investigation and issue an order directing the inspection or reproduction of the
requested records.
Intra-corporate disputes
An intra-corporate controversy is one which pertains to any of the following

relationships:
1. Between the CPA and the public

2. Between the CPA and its stockholders, partners or associate themselves.
3. Between the CPA and the State in so far as its franchise, permit or license to
operate is concerned;

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CPA – Corporation, partnership and association
The dismissal of a corporate officer is considered an intra-corporate dispute, not a

labor dispute.
Jurisdiction over intra-corporate disputes involving the illegal dismissal of corporate

officers was with the RTC, not with the Labor Arbiter.
An intra-corporate controversy is one which arises between a stockholder and the

corporation and pertains to the enforcement of the party’s correlative rights and
obligations under the Corporation Code and the internal and intra-corporate regulatory
rules of the corporation.
Two tests to determine if a case involves an intra-corporate dispute
1. Relationship test
2. Nature of controversy test
Relationship Test
Under the relationship test, the existence of any of the following relationships makes
the conflict intra-corporate:
1. Between the CPA and the public

2. Between the CPA and its stockholders, partners or associate themselves.
3. Between the CPA and the State in so far as its franchise, permit or license to
operate is concerned;
The controversy arose from the affairs between stockholders, partners, members or
associates and corporations, partnerships or associations
Nature of Controversy Test
The nature of controversy test dictates that the controversy must not only be rooted in
the existence of an intra-corporate relationship but must as well pertain to the
enforcement of the parties’ correlative rights and obligations under the Revised
Corporation Code and internal and intra-corporate regulatory rules of the corporation.

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The dispute is intrinsically connected to the regulation of the corporation, partnership or
association.
Individual Suit
It is an action brought by the shareholder in his own name against the corporation when
a wrong is directly inflicted against him personally and to determine his individual
right.
Individual suits are filed when the cause of action belongs to the stockholder personally,
and not to the stockholders as a group or to the corporation.
An individual suit is one brought to assert a right by a stockholder peculiar to himself.

Suits brought by a stockholder for the issuance to him of a stock certificate, payment of
his dividend, payment to him of the book value of his stocks, in those instances where
the law allows him the right to appraisal are individual suits.
Reasons why individual suits are not allowed at times
1. It would result to multiplicity of suits;

2. The prior rights of the creditors may be prejudiced
3. To allow shareholders to sue separately would conflict with the separate
corporate entity principle;
4. Filing such suits would conflict with the duty of management to sue for the
protection of all concerned
5. It would involve confusion as ascertaining the effect of partial recovery by an
individual on the damages recoverable by the corporation for the same act.
Representative Suit
A representative suit is one brought by a stockholder in his own behalf, and in behalf of
other stockholders similarly situated, and having a common cause against the
corporation.
A representative suit is one filed by the shareholder individually, or on behalf of a class

of shareholders to which he or she belongs, for injury to his or her interest as a
shareholder.

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It is proper where the wrong is done to a group of stockholders, as where preferred
stockholders’ rights are violated, a class or representative suit will be proper for the
protection of all stockholders belonging to the same group.
Remedies of representative suit and derivative suit are mutually exclusive.
Derivative Suit
One brought by one or more stockholders in the name on behalf of the corporation
to redress wrongs or to protect or vindicate corporate rights, whenever corporate
officials refuse to sue OR are the ones to be sued OR hold control of the corporation.
In derivative suit, the real party in interest is the corporation, while a stockholder is a
mere nominal party.
A derivative suit is in the nature of intra-corporate controversy because it is a suit

initiated by a stockholder against other stockholders who are officers and directors of
the same corporation and pertains to the enforcement of their rights and obligations
under the RCC.
A derivative suit is one which is instituted by a shareholder or a member of a

corporation, for and in behalf of the corporation for its protection acts committed by
directors, trustees, corporate officers, and even third persons. The whole purpose of the
law authorizing a derivative suit is to allow the stockholders/members to enforce rights
which are derivative (secondary) in nature, i.e., to enforce a corporate cause of action.
A derivative suit is a suit brought by a stockholder, for and in behalf of the corporation
and against any person be he also a stockholder, director officer or third person. The
right can be availed of the stockholder aft er he has exhausted intra-corporate
remedies, by requesting the board to act, and the board does not act at all.
The legal standing of a minority stockholders to bring derivative suits is not a statutory
right but is instead a product of jurisprudence based on equity.
The derivative suit is an action brought by minority shareholders in the name of the
corporation to redress wrongs committed against it, for which the directors refuse to
sue. It is a remedy designed by equity and has been principal defense of the minority
shareholders against abuses by the majority.

ADMINISTRATION
A stockholder’s right to institute a derivative suit is not based on any express provision
of the RCC, or even the SRC, but is impliedly recognized when the said laws make
corporate directors or officers liable for damages suffered by the corporation and its
stockholders for violation of their fiduciary duties.
For a derivative suit to prosper, it is required that the minority stockholder suing for
and on behalf of the corporation must allege in his complaint that he is suing on a
derivative cause of action on behalf of the corporation and all other stockholders
similarly situated who may wish to join him in the suit.
A derivative suit is an action filed by stockholder in the name and in behalf of the
corporation to enforce a corporate right or cause of action to set aside the wrongful acts
of the corporation’s directors and officers.
It concerns a wrong to the corporation itself. The real party in interest is the corporation,
not the stockholders filing the suit. The stockholders are technically nominal parties but
are nonetheless the active persons who pursued the action for and on behalf of the
corporation.
What is the basis behind the right of the shareholder to file a derivative action?
The stockholder’s right to institute a derivative suit is not based on any express
provision of the Corporation Code but is impliedly recognized when the law makes
corporate directors or officers liable for damages suffered by the corporation and its
stockholders for violation of their fiduciary duties.
Requisites for the existence of a derivative suit
1. He was a stockholder at the time the acts or transactions subject of the

action occurred AND at the time the action was filed;
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, bylaws, laws or rules governing the corporation to obtain the
relief he desires;
3. No appraisal right is available for the act or acts complained of;
4. The suit is not a nuisance or harassment suit.
5. The action must be brought in the name of the corporation which must be
alleged.

ADMINISTRATION
NOTE: if the cause of action is continuing in nature, the only requisite is that the party
is a stockholder at the time the action was filed.
As a general rule, a stockholder cannot bring a derivative suit in the name of the
corporation concerning an act that took place before he become a stockholder.
For a derivative suit to prosper, it is required that he minority stockholder suing for and
on behalf of the corporation must allege in his complaint that he is suing on a derivative
cause of action on behalf of the corporation and all other stockholders similarly situated
who may wish to join him in the suit.
While the complaining stockholder must satisfactorily show that he has exhausted all
means to redress his grievances within the corporation, such remedy is no longer
necessary where the corporation itself is under the complete control of the person
against whom the suit is being filed.
Exhaustion of intra-corporate remedies cannot be dispensed with even if the company

is a family corporation.
A corporate’s officers dismissal is always a corporate act, or an intra-corporate

controversy which arises between a stockholder and a corporation, and the nature is not
altered by the reason or wisdom with which the BOD may have in taking such action.
A stockholder filing a derivative suit is not suing in his own behalf but in behalf of the
corporation, the fact that his shareholding is insignificant does not preclude him from
filing the suit. It is also not necessary that a stockholder be a director to be entitled to file
a derivative suit.
The board of directors may fill up vacancy only if the ground is not due to the expiration
of term, removal or increase in the number of board seats.
Representative Suit vs. Derivative Suit
Representative Suit Derivative Suit

Initiated by the stockholder under his own Initiated by the stockholder on behalf of
name or on behalf of other stockholders the corporation
Seeks vindication for injury to his or her Seeks to recover for the benefit of the
interest as a shareholder corporation and its whole body of
shareholders when injury is caused to the
corporation that may not otherwise be

ADMINISTRATION
redressed because of failure of the
corporation to act
Deals with individual stockholders or a Deals with corporate rights.
class of stockholder’s rights
Capital Structure
Subscription Agreements
It is a contract for the acquisition of unissued stock in an existing corporation or a

corporation still to be formed. It is considered as such notwithstanding the fact that the
parties refer to it as purchase or some other contract.
It is a contract by which the subscriber agrees to take a certain number of shares of the
capital stock corporation, paying the consideration therefor or expressly or impliedly
promising to pay the same. Thus, any contract for acquisition of unissued stock in an
existing corporation or corporation still to be formed shall be deemed a subscription.
A subscription for shares of stock of a corporation still to be formed shall be irrevocable

for a period of at least 6 months from the date of subscription, unless all other
subscribers consent to the revocation or unless the incorporation of said corporation
fails to materialize within said period or within a longer period as may be stipulated in
the contract of subscription. No pre-incorporation subscription may be revoked after the
submission of the articles of incorporation to the SEC.
Nature of a subscription contract
A subscription contract is indivisible. Consequently, where stocks were subscribed

and part of the subscription contract price was not paid, the whole subscription shall be
considered delinquent and not only the shares which correspond to the amount not
paid.
This is called the Doctrine of Individuality (Indivisibility) of Subscription. A

subscription is one, entire and indivisible whole contract. It cannot be divided into
portions.
The failure to pay any of the installments due would necessarily affect all other
installments because the subscription is to be treated as one, whole, entire and
indivisible contract. The default of payment on any of the installment results to entire
subscription becoming due and demandable.

ADMINISTRATION
Subscription to the capital of a corporation constitute a fund to which the creditors have
a right to look for the satisfaction of their claims and that the assignee in insolvency can
maintain an action upon any unpaid stock subscription in order to realize the assets for
the payment of its debt.
Unpaid subscription is not due and payable until a call is made by the corporation for
payment, through a board resolution, unless there is due date specified in the contract
of subscription.
Non-payment on due date does not mean that the stocks covered by the subscription
have become delinquent. Stocks become delinquent only if not paid after 30 days from
the due date of payment.
The corporation is only allowed to apply the cash dividends against the unpaid
subscription only for delinquent stocks.
No delinquent stock shall be voted for, be entitled to vote, or be represented at any

stockholder’s meeting, nor shall the holder thereof be entitled to any of the rights of a
stockholder except the right to dividends.
Payment of balance of subscription
If the subscription contract fixes the date for payment
1. Failure to pay on such date shall render the entire balance due and payable with
interest
2. 30 days therefrom, if still unpaid, the shares become delinquent, as of due date,
and subject to sale, unless the board declares otherwise
If there is no date in the subscription contract:
1. The BOD can make the call for payment and specify the due date
2. 30 days therefrom, the shares become delinquent, as of the due date of call, and
subject to sale unless the board declares otherwise.
Notice of call is mandatory. Mere demand is insufficient.
Stock option vs. Warrant


ADMINISTRATION
Stock option Warrant
A privilege granted to a party to subscribe A type of security which entitles the
to a certain portion of the unissued capital holder the right to subscribe to a
stock of a corporation within a certain predetermined number of unissued
period and under the terms and capital stock of a corporation
conditions of the grant exercisable by the (subscription warrant), or to purchase a
grantee at any time within the period predetermined number of issued or
granted. existing shares in the future (covered
warrant).
NOTE: A warrant is detachable if it may

be sold, transferred or assigned to any
person by the warrant holder separate
from and independent of the
corresponding beneficiary securities, or
shares of stock or other securities of the
issuer which form the basis of the
entitlement in a warrant. It is non-
detachable if it may not be sold etc.
Shares of Stock
In order to comply with the 60% capital requirement for ownership by Filipinos of
certain corporations, what does the term capital refer to?
A. The term “capital” refers to shares with voting rights, and with full beneficial
ownership, which must be owned and held by citizens of the Philippines.
Rationale: The right to vote in the election of directors, coupled with full beneficial
ownership of stocks, translates to effective control of a corporation.
Legal title without beneficial title of stocks is not sufficient to meet the ownership
requirement.
For stocks to be deemed owned and held by Philippine Citizen or Philippine Nationals,
mere legal title is not enough to meet the required Filipino Equity. Full beneficial
ownership of the stocks is essential. Thus, stocks, voting rights which have been
assigned or transferred to aliens cannot be considered held by Philippine citizens or
Philippine Nationals.

ADMINISTRATION
Shares of stock covered by a stock certificate may be transferred by the delivery of the
certificate endorsed by the stockholder owner or his authorized representative or other
person legally authorized to make the transfer. The endorsement need not be
specifically in favor of the purchaser.
Watered Stock
A watered stock is a stock issued in exchange for cash, property, share, stock
dividends, or services lesser than its par value or issued value.
Watered Stocks include stocks:
1. Issued without consideration (bonus share);

2. Issued for a consideration other than cash, the fair valuation of which is less than
its par or issued value;
3. Issued as stock dividend when there are no sufficient retained earnings to justify
it; and
4. Issued as fully paid when the corporation has received a lesser sum of money
than its par or issued value (discount share).
NOTE: Watered stocks can either be par or no-par value shares.
The watered stocks refer only to original issue of stocks but not to a subsequent
transfer of such stocks by the corporation, for then it would no longer be an “issue” but
a sale thereof.
The issuance of watered stock cannot be ratified by shareholders.
There is a violation of the trust fund doctrine when stocks of the corporation are issued
less than the par value except when the shares issued are treasury shares.
There is water in the stocks because the shares are issued as fully paid up when in fact
the consideration agreed to and accepted by the directors was much less than the par
value or issued value of the shares. The subsequent increase in the value of the
property used in paying the stocks does not do away with the water in the stock
because the existence of “water” is determined at the time of issuance of the
stock.
Common Shares vs. Preferred Shares


ADMINISTRATION
Common Shares Preferred Shares
These are ordinarily and usually issued These entitle the shareholder to some
stocks without extraordinary rights and priority on distribution of dividends and
privileges and entitle the shareholder to a assets over those holders of common
pro rata division of profits. shares.
It represents the residual ownership Preferred shares may be issued only with
interest in the corporation. a stated par value
The holders of this kind of share have

complete voting rights and they cannot be
deprived of the said rights except as
provided by law.
Holders of preferred shares are not creditors.
Cumulative Participating preferred share
A cumulative participating preferred share is one which entitles the shareholder to:
1. Receive not only the current dividends but also back dividends not previously
paid, whether or not during the past years dividends were declared or paid, and
2. Participate with the common shares after receiving its dividends at a preferred
rate.
A stock corporation may declare dividends only out of URE. Preferences granted to
preferred stockholders do not give them a lien upon the property of the corporation nor
make them creditors of the corporation, the right of the former being always subordinate
to the latter.
Cumulative PS The stipulated dividend, if not paid on any given

share, shall be added to dividends which shall
be due the following year and holder of said PS
shall be paid the accumulated dividends during
the accumulated period before dividends are
paid to the holder of common shares
Noncumulative PS If dividends are not declared for a particular year
within the covered period, the right to receive
dividend for such year is extinguished.
Participating PS After payment of the dividends due to the
shares, the holder is entitled to participate in the
remaining dividends with the holders of the

ADMINISTRATION
common shares based on the amount specified
in the agreement in proportion to common
shares
Non-participating PS After receiving the dividend due on the shares,
the remaining dividends are distributed
proportionately to the holders of common shares
Redeemable shares
These are shares of stocks issued by a corporation which said corporation can
purchase or take up from their holders upon expiry of the period stated in
certificates of stock representing said shares.
NOTE: Under the Revised Corporation Code for Redeemable shares, their
redemption shall now be subject to the rules and regulations that may be issued by
SEC, in addition to what may be stipulated in the AOI and Certificate of Stock.
Are sequestered shares voting shares?
Yes, sequestered shares have voting rights if they are common shares, or if they are
preferred/redeemable shares that are not denied the right to vote in the articles of
incorporation.
No share may be deprived of voting rights except those classified and issued as
preferred or redeemable shares.
Kinds of redeemable shares
1. Compulsory - the corporation is required to redeem the shares.

2. Optional - the corporation is not mandated to redeem the shares.
A corporation can be compelled to redeem redeemable shares even if it has no

available surplus profit if the redeemable shares are mandatory in nature. It should be
noted however, that redemption 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 mature.
Reacquired redeemable shares are considered retired and may no longer be reissued
unless otherwise stated in the AOI.
Limitations on redeemable shares


ADMINISTRATION
1. Issuance of redeemable shares must be expressly provided in the Articles of

incorporation;
2. Terms and conditions affecting said shares must be stated both in the articles of
incorporation and in the certificates of stock
3. Redeemable shares may be deprived of Voting rights in the articles of
incorporation, unless otherwise provided in the Code
4. Redemption cannot be made if it will cause Insolvency of the corporation.
Reissuance of redeemed shares
Redeemable shares, once redeemed are retired unless reissuance is expressly allowed
in the AOI.
Treasury Shares
TS are shares of stock which have been issued and fully paid for, but subsequently
reacquired by the issuing corporation through lawful means. Such shares may again be
disposed of for a reasonable price fixed by the board of directors.
Shares that have been earlier issued as fully paid and have thereafter been acquired by
the corporation by purchase, donation, and redemption or through some lawful means.
Treasury shares are not retired shares. They do not revert to the unissued shares of
the corporation but are regarded as property acquired by the corporation which may be
reissued or resold at a price to be fixed by the Board of Directors
TS has no voting rights as long as they remain the treasury.
The following are the legitimate corporate purpose/s where a corporation is allowed to
acquire its own shares.
1. To eliminate fractional shares arising out of stock dividends;

2. To pay dissenting or withdrawing stockholders entitled to payment for their share
under the RCC.
3. To collect or compromise an indebtedness to the corporation, arising out of the
unpaid subscription, in a delinquency sale and to purchase delinquent shares
sold during the said sale;

ADMINISTRATION
Shares of stock are personal properties of the stockholders. Thus, the corporation not
even the state can forcibly acquire, confiscate or sequester such shares of stock without
due process of law, as it partakes of the property right protected by the constitution.
Treasury shares are still considered issued and fully paid but are not considered
outstanding shares since they are held by the issuing corporation. They are not entitled
to dividends and are not entitled to vote until they are reissued.
Limitations on treasury shares
1. It has no voting right.

1. Cannot participate in dividends.
2. It cannot be represented during stockholder’s meetings
3. They may be re-issued or sold again as long as it is for a reasonable price fixed
by the BOD.
4. The amount of URE equivalent to the cost of treasury shares being held shall be
restricted from being declared and issued as dividends.
When TS are sold below its par or issued value, there can be no watering of stock
because such watering of stock contemplates an original issuance of shares.
TS can be distributed only as property dividends.
Since a treasury share is a fully paid share reacquired by the corporation, it is not
outstanding and may be re-issued and resold. It cannot receive dividends before the
resale, because the corporation cannot grant dividends to itself.
Treasury shares vs. Redeemable shares
Basis Treasury Shares Redeemable shares

Description Shares so acquired by the Issued by the corporation when
corporation through purchase, expressly so provided in the AOI.
donation, redemption or any
other lawful means.
Manner of Can only be acquired in the Redeemable shares may be
acquisition presence of Unrestricted acquired even without UREs for
retained earnings as long as it will not result to the
insolvency of the corporation
Applicability of Must comply with the trust fund Is an exception to the trust
the trust fund doctrine fund doctrine
doctrine

ADMINISTRATION
Founder’s Shares
Shares classified as such in the articles of incorporation and which may be given
special preference in voting rights and dividend payments.
The five-year limitation is counted from the date of incorporation and not from SEC’s
approval.
Note that only the exclusive right to vote and be voted for in the election of directors is
subject to a limited period of 5 years from the date of incorporation.
The right granted to founder shares cannot be exercised if it will violate the anti-dummy
law. Foreigners can be elected to the board of directors of corporations engaged in
partially nationalized activities only in proportion to their actual foreign equity in the
corporation.
NOTE: Under the Revised Corporation Code, Founder’s shares given the exclusive
right to vote and be voted for are not allowed to exercise that right in violation of
the Anti-Dummy Law and the Foreign Investment Act.
Shares that cannot be issued without par value
1. Preferred shares
2. Shares in banks
3. Shares in trust companies
4. Shares in insurance companies
5. Shares in public utilities
6. Shares in building and loan associations
Certificate of Stock
Certificate of Stock
A certificate of stock is a 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 of shares of its stock. It indicates the name of the holder, the number, kind and
class of shares represented, and the date of issuance. It is a prima facie evidence that
the holder is a shareholder of a corporation.

ADMINISTRATION
It is a written evidence of ownership of shares of stock.
A stock certificate is prima facie evidence that the holder is a shareholder of the
corporation, but the possession of the certificate is not the sole determining factor of
one’s stock ownership. The certificate is not stock in the corporation but is merely
evidence of the holder’s interest and status in the corporation, his ownership of the
share represented thereby, but is not in law the equivalent of such ownership.
Surrender of the original certificate of stock is necessary before the issuance of a new
one so that the old certificate may be cancelled. A corporation is not bound and cannot
be required to issue a new certificate unless the original certificate is produced and
surrendered. Surrender and cancellation of the old certificates serve to protect not only
the corporation but the legitimate shareholder and the public as well, as it ensures that
there is only one document covering a particular share of stock.
Stock and transfer book
A STB is the book which records the names and addresses of all stockholders arranged
alphabetically, the installments paid and unpaid on all stock for which subscription has
been made, and the date of payment thereof; a statement of every alienation, sale or
transfer of stock made, the date thereof and by and to whom made; and such other
entries as may be prescribed by law.
Only absolute transfers of shares of stock are required to be recorded in the

corporation’s stock and transfer book in order to have force and effect as against third
persons.
Only the corporate secretary is duly authorized to make entries in the STB. Hence,
entries made by the Chairman or President are invalid.
Shares of Stock vs. Certificates of Stock
Share of Stock Certificate of Stock

Unit of interest in a corporation Evidence of the holder’s ownership of the
stock and of his right as a shareholder
and of his extent specified therein.
It is an incorporeal or intangible property It is concrete and tangible
It may be recognized by the corporation It may be issued only if the subscription is

even if the subscription is not fully paid fully paid.

ADMINISTRATION
A certificate of stock is a prima facie evidence of ownership and evidence can be
presented to determine the real owner of the shares.
A certificate of stock has a value separate and distinct from the value of the shares
represented.
Stockholder may alienate his shares even if there is no certificate of stock issued by the
corporation.
Stock certificate is NOT NEGOTIABLE.
Remedies where corporation refuses to transfer certificate of stocks
1. Petition for mandamus

2. Suit for specific performance of an express or implied contract
3. May sue for damages where specific performance cannot be granted
A transfer of shares not registered in the books of the corporation is not valid as against
subsequent attachment of the shares. All transfers of shares not so entered in the
books of the corporation are invalid as to attaching or execution creditors of the
assignors, as well as to the corporation and to subsequent purchasers in good faith,
and, indeed, as to all persons interested, except the parties to such transfers.
Requisites for the issuance of certificate of stock
1. The certificate must be delivered.

2. The certificate must be sealed with the seal of the corporation.
3. The certificate shall be issued in accordance with the by-laws.
4. The certificate must be signed by the president or vice-president, countersigned
by the corporate secretary or assistant Secretary.
5. The original certificate must be surrendered where the person requesting the
issuance of a certificate is a transferee from the stockholder
6. The par value as to par value shares, or full subscription as to no par value
shares must be fully paid, the basis of which is the doctrine of indivisibility
of subscription.
Liability of the corporation for the issuance of new certificates of stock in case of
lost or destroyed certificate

ADMINISTRATION
GR: No action may be brought against any corporation which shall have issued
certificate of stock in lieu of those lost, stolen or destroyed pursuant to the procedure
above-described (safe harbor provision).
XPN: Where there is fraud, bad faith, or negligence on the part of the corporation and its
officers.
How are shares of stock transferred
Shares of stocks are personal property and may be transferred by:
1. Delivery of the certificate/s

2. Indorsement by the owner or his attorney-in-fact or other person legally
authorized to make the transfer.
3. To be valid against third parties, the transfer must be recorded in the books of
the corporation.
For transfer to be binding on the corporation, the transfer, apart from complying with the
first two requirements, must likewise be recorded in the books of the corporation.
It is the delivery of the certificate coupled with endorsement by the owner or his
authorized representative that is the operative act of transfer of shares from the original
owner to the transferee.
Only the transferor may file the petition for mandamus. The transferee cannot compel
the corporate secretary to cause the registration and issuance of a stock certificate
because the transferee has not acquired standing yet in the books of the corporation
and that the transferee can only file such petition if he has been authorized by the
transferor to cause the transfer.
A mere indorsement by the supposed owners of the stock, in the absence of express
instructions from them, cannot be the basis of an action for mandamus and that the
rights of the parties have to be threshed out in an ordinary action.
Why is registration of the transfer necessary?
1. To enable the transferee to exercise all the rights of a stockholder

2. To inform the corporation of any change in share ownership so that it can
ascertain the persons entitled to the rights and subject to the liabilities of a
stockholder

ADMINISTRATION
3. To avoid fraudulent transfers.
Until challenged in a proper proceeding, as stockholder of record has a right to

participate in any meeting; his vote can be properly counted to determine whether
stockholder’s resolution was approved, despite the claim of alleged transferee.
The registration of a transfer of shares of stock is a ministerial duty on the part of the
corporation. Aggrieved parties may resort to the remedy of mandamus to compel
corporations that wrongfully or unjustifiably refuse to record the transfer or to issue new
certificates of stock.
Stockholder’s of record
A person who desires to be recognized as stockholder for the purpose of exercising

stockholder’s right must secure standing by having his ownership of share recorded on
the stock and transfer book. Only those whose ownership of shares are duly registered
in the STB are considered stockholders of record and are entitled to all rights of a
stockholder.
Distinction between Close corporation and ordinary corporation
Close corporation Ordinary Corporation

There is a limitation on the number of There is no limit as to the number of
stockholders to a maximum of 20 shareholders
There must be a restriction on the A restriction need not be provided for
transfer of shares
Specific qualifications to be eligible as Qualifications of stockholders are not
stockholder are usually provided in the normally prescribed.
AOI.
Public Offering of shares is prohibited Public Offering of shares is not prohibited
May be managed directly by It is managed by the Board of Directors
stockholders; in which case assume the and not the stockholders.
liabilities of directors
A shareholder can withdraw by Generally, a shareholder cannot withdraw
compelling the close corporation to and compel the corporation to purchase
purchase his/her shares his/her share; the exceptions are
provided under Section 40 of the RCCP
Rules on deadlock are provided for There are no rules on deadlock
Close corporation

ADMINISTRATION
1. All the corporations issued stock of all classes, exclusive of TS, shall be held of
record by not more than a specified number of person not exceeding 20.
2. All the issued stock of all classes shall be subject to one or more specified
restrictions on transfer
3. The corporation shall not list in any stock exchange or make any public
offering of any of its stock of any class.
A corporation shall not be deemed a close corporation when at least 2/3 of its voting
stock or voting rights is owned or controlled by another corporation which is not a close
corporation.
The following cannot be incorporated as a close corporation:
1. Banks
2. Public utilities
3. Stock exchanges
4. Insurance companies
5. Educational institutions
6. Mining or oil companies
7. Corporations vested with public interest
The AOI of a close corporation may provide that the business of the corporation shall be
managed by the stockholders of the corporation rather than by the BOD.
Stockholders actively engaged in the management or operation of the business and

affairs of a close corporation shall be held to strict fiduciary duties to each other and
among themselves. The stockholders shall be personally liable for corporate torts
unless the corporation has obtained reasonably adequate liability insurance.
Religious corporations
May be incorporated by one or more persons
A corporation sole is one formed by the chief archbishop, or other presiding elder of
religious denomination for the purpose of administering or managing as trustee, the
affairs, properties and temporalities of such religious denomination.
Foreign corporations

ADMINISTRATION
A foreign corporation is done, formed, organized or existing under any laws other than
those of the Philippines and whose laws allow Filipino citizens and corporations to do
business in its own country or State.
Principle of reciprocity
It allows Filipino citizens to do business in the foreign state or country. This is merely
prescribed as a requirement to secure a license and not an essential element of being a
foreign corporation.
Reasons why a license is necessary
1. To place them under the jurisdiction of the courts

2. Protection for the public in dealing with said corporations
3. To place them in the same footing as domestic corporations;
In the following instances, foreign corporations may sue in the Philippines, whether
or not licensed to do business:
1. To seeks redress for an isolated business transaction

2. To protects its corporate reputation, name and goodwill
3. To enforces a right not arising out of a business transaction
4. Where the parties have contractually stipulated that Philippines is the venue of
the actions;
5. When the party sued is barred by the principle of estoppel and/or principle of
unjust enrichment from questioning the capacity of the foreign corporation.
6. A license subsequently granted enables the foreign corporation to sue on
contracts executed before the grant of the license.
7. By reason of the doctrine of estoppel.
Jurisdiction over foreign corporation
If the foreign corporation is the If the foreign corporation is the

plaintiff defendant
1. Voluntary appearance before the local 1.GR: Voluntary appearance of the
courts by the filing of an action by a corporation by interposing a defense
licensed corporation
XPN: A special appearance to file a
2. If the foreign corporation is a co- motion to dismiss based on lack of
plaintiff with a domestic corporation and jurisdiction
the latter filed a suit here in the

ADMINISTRATION
Philippines. 2. Service of summons to a foreign
corporation which has transacted
business in the Philippines whether
licensed or registered
3. Service of summons to its resident

agent in an isolated transaction.
Doctrine of doing business in the Philippines
A foreign corporation is “deemed doing business in the Philippines” if it is

continuing the body or substance of the business or enterprise for which it was
organized. It is the intention of an entity to continue the body of its business in the
country. The grant and extension of 90-day credit terms of a foreign corporation to a
domestic corporation for every purchase shows an intention to continue transacting with
the latter.
An essential condition to be considered as “doing business” in the Philippines is the

actual performance of specific commercial acts within the territory of the
Philippines for the plain reason that the Philippines has no jurisdiction over commercial
acts performed in foreign territories.
To be doing or transacting business in the Philippines, the foreign corporation must

actually transact business in the Philippines, that is, perform specific business
transactions within the Philippine territory on a continuing basis in its own name and for
its account. Actual transaction of business within the Philippine territory is an essential
requisite for the Philippine to acquire jurisdiction over a foreign corporation and thus
require the foreign corporation to secure a Philippine business license.
Being a resident agent does not mean that he is authorized to execute the requisite
CFS.
Examples of the acts or activities that are specifically identified under our foreign
investment law as constituting doing business in the Philippines.
1. Soliciting orders, purchases or service contracts

2. Opening offices whether called liaison offices or branches;
3. Appointing representatives or distributors domiciled in the Philippines.
4. Any act that imply a continuity of commercial dealings or arrangements.
Acts considered “Not doing business”


ADMINISTRATION
1. Collecting information in the Philippines

2. Mere investment as shareholder and exercise of rights as investor
3. Having a nominee director to represent its interest in the corporation;
4. Appointing a representative or distributor which transact business in its own
name and for its own account.
5. Publication of a general advertisement through any print or broadcast media
6. Performing services auxiliary to an existing isolated contract of sale which are
not on a continuing basis.
7. Maintaining a stock of goods in the Philippines solely for the purpose of having
the same processed by another entity in the Philippines
8. Consignment by the foreign corporation of equipment with a local company to be
used in the processing of products for export
It is the presence of clear and unmistakable intention on the part of the foreign
corporation to continue the body of its business in the Philippines that characterizes it
as doing business in the Philippines. It is doing business when it actually carries outs
the progressive prosecution of commercial gain and the pursuit of the purpose and
object of its business
Mere investment as a shareholder by a foreign entity in a domestic corporation or

having a nominee director to represent its interest in such corporation is not considered
as doing business and hence does not require a license for that purpose.
Jurisdictional tests of “doing or transacting business” in the Philippines for

foreign corporations
1. Twin Characterization Test
a. Continuity Test –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, the purpose and object of its organization.
b. Substance test – a foreign corporation is doing business in the country if it

is continuing the body or substance of the enterprise of business for which it
was organized

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2. 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
consummated in the Philippines.
Who are Philippine National under the Foreign investment act?
1. A citizen of the Philippines

2. A domestic partnership or association wholly owned by citizens of the
Philippines
3. DC organized under the laws of the Philippines of which at least 60% of the
capital stock outstanding and entitled to vote is owned and held by citizens of
the Philippines
4. Foreign corporation doing business in the Philippine of which 100% of the
capital stock outstanding and entitled to vote is wholly owned by Filipinos.
What is the legal test for determining if an unlicensed foreign corporation is

doing business in the Philippines?
The test is whether or not the unlicensed foreign corporation has performed an act or
acts that imply a continuity of commercial dealings or arrangements and contemplate to
that extent the performance of acts or works, or the exercise of some of the functions
normally incident to, and in progressive prosecution of, commercial gain or of the
purpose and object of the business corporation.
A corporation engaged in exporting goods to the Philippines is not required to obtain a

license. Actual transaction of business within the Philippines to acquire jurisdiction over
a foregoing corporation and thus require the foreign corporation to secure a Philippine
business license.
An exporter in one country may export its products to many foreign importing countries
without performing in the importing countries specific commercial acts that would
constitute doing business in the importing countries. The mere act of exporting from
one’s own country, without doing any specific commercial act within the territory of the
importing country, cannot be deemed as doing business in the importing country. The
importing country does not require jurisdiction over the foreign exporter who has not yet
performed any specific commercial act within the territory of the importing country.
Without jurisdiction over the foreign exporter, the importing country cannot compel the
foreign exporter to secure a license to do business in the importing country.
Isolated transaction

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The Court has not construed the term “isolated transaction” to literally mean “one” or a
mere single act. The phrase “isolated transaction” has a definite and fixed meaning, i.e.,
a transaction or series of transaction set apart from the common business of a
foreign enterprise in the sense that there is no intention to engage in progressive
pursuit of the purpose and object of the business organization.
A foreign corporation without a license is not ipso facto incapacitated from bringing an
action in Philippine courts. A license is necessary only if a foreign corporation is
transacting or doing business in the country. It may be based on the following:
1. If a foreign corporation does business in the Philippines without a license, it

cannot sue before the Philippine courts
2. If a foreign corporation does business in the Philippines with the required license,
it can sue before Philippine courts on any transaction.
3. If a foreign corporation is not doing business in the Philippines, it needs no
license to sue before Philippine courts on an isolated transaction or cause of
action entirely independent of any business transaction
4. If a foreign corporation does business in the Philippines without a license, a
Philippine citizen or entity which has contracted with said corporation may be
estopped from challenging the foreign corporation’s corporate personality in a
suit brought before Philippine courts;
Merger
Merger is the absorption of one or more corporations by another existing corporation,

which retains its identity and takes over the rights, privileges, franchises, properties,
claims, liabilities and obligations of the absorbed corporation(s).
Two or more corporations unite, one corporation which retains its corporate existence
absorbing or merging in itself the other which disappears as a separate corporation. It is
the absorption of one corporation by another which survives.
Merger is where one or more corporations are absorbed by another corporation which
survives and remains in existence while the others are dissolved.
A merger is a reorganization of two or more corporations that results in their

consolidating into a single corporation, which is one of the constituent corporations, one
disappearing or dissolving and the other surviving.

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Merger vs. De Facto Merger
Merger De Facto Merger

Merger is a reorganization of two or more Can be pursued by one corporation
corporations that results in their consolidating into acquiring all or substantially all of
a single corporation, which is one of the the properties of another
constituent corporations, one disappearing or corporation in exchange of shares
dissolving and the other surviving. To put it of stock of the acquiring
another way, merger is the absorption of one corporation. The acquiring
or more corporations by another existing corporation would end up with the
corporation, which retains its identity and business enterprise of the target
takes over the rights, privileges, franchises, corporation; whereas, the target
properties, claims, liabilities and obligations corporation would end up with basically
of the absorbed corporation(s). The absorbing its only remaining assets being the
corporation continues its existence while the life shares of stock of the acquiring
or lives of the other corporation(s) is or are corporation.
terminated.
Consolidation
Two or more corporations unite, giving rise to a new corporate body and dissolving the
constituent corporations which cease to exist as separate corporations
Consolidation is one where two or more existing corporations are combined to form a
new corporation called the consolidated corporation.
Constituent corporations are the parties to the merger or consolidation.
Consolidated corporation is the new corporation formed by virtue of a valid

consolidation.
Requisites for Merger or consolidation
1. Approval by majority vote of the BOD of each corporation

2. Approval of the stockholders of each corporation representing 2/3 of the OCS
3. Approval of the SEC
The separate existence of the absorbed corporation ceases and the surviving
corporation retains its identity and take over the rights, privileges, franchises, properties,
claims, liabilities and obligations of the absorbed corporations. The surviving corporation

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likewise acquires all the liabilities and obligations of the absorbed corporation as if it had
itself incurred these liabilities or obligations.
The merger does not become effective upon the mere agreement of the constituent
corporations, but upon the approval of the articles of merger by the SEC issuing the
certificate of merger.
By operation of law, upon the effectivity of the merger, the absorbed corporation ceases
to exists, but its rights and properties as well as liabilities, shall be taken and deemed
transferred to and vested in the surviving corporation.
Merger vs. Consolidation
Basis Merger Consolidation

Definition One where a corporation absorbs One where a new corporation
another corporation and remains in is created and consolidating
existence while others are corporations are
dissolved. extinguished.
Consequent All of the constituent corporations All consolidated corporations
dissolution of a involved are dissolved are dissolved without
corporation/s exception
Consequent No new corporation is created A new corporation emerges
creation of a new
corporation
Acquisition of The surviving corporation acquires All assets, liabilities, and
Assets, all the assets, liabilities and capital capital stock of all
Liabilities, Capital stock of all constituent consolidated corporations are
Stock corporations. transferred to the new
corporation
Procedure for merger or consolidation
1. There must be approval by a majority vote of each of the BOD/T of the

constituent corporations of the plan of merger;
2. There must be an affirmative vote of the stockholders representing 2/3 of the
OCS for the approval of such plan;
3. Execution of the articles of merger or consolidation by each of the constituent
corporations to be signed by the President or the VP and certified by the
Secretary or Assistant Secretary of each corporation
4. Submission of the articles of the mergers and consolidation for approval;
5. Approval by the SEC of the articles of merger or consolidation

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Can a proposed merger be disallowed?
Yes. Merger or acquisition agreements that substantially prevent, restricts or lessen

competition in the relevant market or market for goods for services as may be
determined by the PCC shall be prohibited.
Where one corporation sells or otherwise transfers all of its assets to another
corporation, is the latter liable for the debts and liabilities of the transferor?
GR: NO. The Nell Doctrine states that the transfer of all the assets of a corporation to
another shall NOT render the latter liable to the liabilities of the transferor.
XPNs:
1. Purchaser expressly or impliedly agrees to assume such debts;

2. Transaction amounts to a consolidation or merger of the corporations;
3. Transaction is entered into fraudulently to escape liability for such debts
4. Purchasing corporation is merely a continuation of the selling corporation
(business-enterprise transfer);
If any of the above-cited exceptions are present, then the transferee corporation shall
assume the liabilities of the transferor.
The Nell Doctrine dictates that where one corporation sells or otherwise transfers all of
its assets to another corporation, the latter is not liable for the debts and liabilities of the
transfer except when the four exceptions are present.
Can a shareholder intervene in a suit involving corporate assets?
No. While a share of stock represents a proportionate or aliquot interest in the property
of the corporation, it does not vest the owner thereof with any legal right or title to any of
the property, his interest in the corporate property being equitable or beneficial in
nature. The interest of a stockholder over corporate assets being indirect, contingent,
remote, conjectural, consequential and collateral and at the very least, is purely
inchoate, or in a sheer expectancy of a right in the management of the corporation and
to share in the profits thereof and in the properties and assets thereof on dissolution,
after payment of the corporate debts and obligations.
What is a business-enterprise transfer?


ADMINISTRATION
Under the business-enterprise transfer, the transferee purchases not only the assets of
the transferor, but also its business.
A business enterprise transfer is one where the transferee corporation’s interest goes
beyond the assets and properties of the transferor and it desires to acquire the latter’s
business enterprise, including its goodwill. The transferee purchases not only the assets
of the transferor, but also its business. As a result of the sale, the transferor is merely
left with its juridical existence, devoid of its industry and earning capacity.
Does the corporate life cease to exist immediately upon dissolution?
No. It shall continue as a body corporate for three (3) years from the time of
dissolution, of the purpose of prosecuting and defending suits by or against it and
enabling it to settle and close its affairs, to dispose of and convey its property and to
distribute its assets, but not for the purpose of continuing the business for which it was
established.
What do you mean by deadlock in a close corporation?
Deadlocks occur if the directors or stockholders are so divided in managing the

corporation’s business and affairs that the votes required for any corporate action
cannot be obtained and the business and affairs of the corporation can no longer be
conducted to the advance of stockholders.
What are the requirements for an individual to be considered as a corporate

officer, as against an ordinary employee or officer?
1. The creation of the position is under the corporation’s charter or by-laws; and
2. The election of the officer is by the directors or stockholders.
Corporate Officers are those officers of the corporation who are given that character
by the RCC or by the corporation’s bylaws.
A corporate officer’s dismissal is always an intra-corporate controversy.
Securities Regulation Code
Securities

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Securities are shares, participation or interests in a corporation or profit-making venture
evidenced by a written or electronic certificate, contract, or instrument.
Securities shall not be sold or offered for sale or distribution within the Philippines,
without a registration statement duly filed with and approved by the SEC.
The SRC is called a “truth in securities law” because the registration statement
required prior to a sale of securities discloses full and fair information about the
securities to minimize if not eliminate fraudulent and other manipulative devices.
A profit participation certificate is a security as defined by the SRC.
Registration statement is the application for the registration of securities required to be

filed with the SEC.
All securities before being offered for sale/sold to the public must first be registered with
the SEC, and information on the securities shall be made available to a prospective
purchaser.
Under the SRC, any short-swing profit or one obtained by the director from selling a
security of a corporation of which he is a director within 6 months from the purchase of
the said security shall be recoverable by the issuer.
The sale or offer of sale of securities, including investment contracts, must be registered
with the SEC.
The sale or issuances of securities to investment houses or investment banks is a

transaction exempt from registration.
A quasi-judicial function is a term which applies to the action, discretion, etc., of public
administrative officers or bodies, who are required to investigate facts or ascertain the
existence of facts, hold hearings, and draw conclusions from them, as a basis for their
official action and to exercise discretion of a judicial nature.
An investment house is an entity engaged in underwriting of securities of other

corporations. In turn, underwriting is defined as the act or process of guaranteeing the
distribution and sale of securities of any kind issued by another corporation while
securities is therein defined as written evidences of ownership, interest, or participation,
in an enterprise, or written evidences of indebtedness of a person or enterprise.

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Foreign currency exchange trading or forex trading is speculative trade of foreign
currency for the sole purpose of gaining profit from the change in prices.
A margin account is an account where the broker dealer lends money to the trader to
purchase currency using the same purchase currency as collateral.
What is a short-swing profit?
It is a regulation which requires certain persons (owner of more than 10% of shares of
the company, a director or officer of such corp.) to return any profits made from the
purchase and sale of company stock if both transactions occur within a 6-month period.
Mandatory close out rule
The rule vests upon a broker or dealer the obligation not just the right to cancel or
otherwise liquidate a customer’s order, if payment is not received within 3 days from
date of purchase.
A margin account is an account in which the broker lends the customer cash with which
to purchase securities.
What do the term securities includes?
1. Shares of stock, bonds, debentures, notes, evidence of indebtedness, asset-backed

securities
2. Investment contracts, certificates of interest or participation in a profit sharing
agreement, certificates of deposit for a future subscription;
3. Fractional undivided interests in oil, gas, or other mineral rights;
4. Derivatives like option and warrants;
5. Certificates of assignments, certificates of participation, trust certificates, voting trust
certificates or similar instruments; and
6. Proprietary or non-proprietary membership certificates in corporations; and other
instruments as may in the future be determined by the Commission.
Exempt securities (to be sold without need of registration)
1. Security issued by a bank except its own shares.

2. Issued by the government, subdivisions/instrumentalities
3. Issued by receiver/trustee of an insolvent approved by the court
4. Issued by foreign government with which the Philippines has diplomatic relations

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5. Security under supervision and regulation of the Insurance Commission, HLURB
or the BIR.
Exempt transactions (securities sold or offered for sale exempt from registration
requirement)
1. Shares subscription prior to incorporation

2. Such other transactions exempt by the SEC.
3. Brokers transaction, executed upon customer’s order
4. Distribution of stock dividends or other distribution out of surplus
5. Isolated transactions by owner/agent who is not an underwriter
6. Judicial and insolvency sale by an executor, administrator, guardian or
receiver or trustee in insolvency or bankruptcy
7. Sale by pledgee or mortgagee or any lienholder to liquidate a bona fide debt
8. Exclusive stockholder’s purchase. Sale of capital stock of a corporation to its
own stockholders exclusively, where no remuneration is paid or given directly or
indirectly in connection with the sale of such capital stock
9. Mortgage-backed securities sold to single purchaser at single sale.
Issuance of bonds or notes secured by mortgage upon real estate or personal
property, where the entire mortgage together with all the bonds or notes secured
thereby are sold to a single purchaser at a single sale.
Insider Trading
An insider trading is the buying or selling of securities by an insider while in the

possession of a material non-public information.
Insider’s misuse of nonpublic and undisclosed information is the gravamen of

illegal conduct.
A purchase or sale made by an insider, or such insider’s spouse or his relative by

affinity or consanguinity within the second degree, legitimate or common-law, shall be
presumed to be effected while in possession of material non-public information if
transacted after such information came into existence but prior to the public
dissemination of such information, and lapse of reasonable time for the market to
absorb such information.
The Securities and Regulation Code provides that it shall be unlawful for an insider to
sell or buy a security of the issuer, while in possession of material information with
respect to the issuer or the security that is not generally available to the public.

ADMINISTRATION
A fact is considered “of special significance” under the SRC if it is one which in
addition to being material, would be likely to affect the market price of a security to a
significant extent on being made generally available or one which a reasonable person
would consider especially important under the circumstances in determining his course
of action in the light of such factors as the degree of its specificity, the extent of its
difference from information generally available previously, and its nature and reliability.
Information is material when it will affect the price of the security or would influence a
person in deciding whether to buy, sell or hold a security.
The provision explains in simple terms that the insider’s misuse of nonpublic and
undisclosed information is the gravamen of illegal conduct. The intent of the law is the
protection of investors against fraud, committed when an insider, using secret
information, takes advantage of an uninformed investor. Insiders are obligated to
disclose material information to the other party or abstain from trading the shares of his
corporation.
Under the law, what is required to be disclosed is a fact of special significance, which
may be:
(a) a material fact which would be likely, on being made generally available, to affect
the market price of a security to a significant extent, or
(b) one which a reasonable person would consider especially important in
determining his course of action with regard to the shares of stock.
Who is the insider
1. The issuer
2. A director or officer of, or a person controlling the issuer
3. A person whose relationship or former relationship to the issuer gives or
gave him access to material information about the issuer or the security
that is not generally available to the public
4. A government employee, or director, or officer of an exchange, clearing agency
and/or self-regulatory organization who has access to material information about
an issuer or a security that is not generally available to the public
5. A person who learns such information by a communication from any of the
foregoing insiders.
GR: An insider cannot buy or sell a security while in possession of material non-public
information re: the security issuer, UNLESS

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1. Insider proves that the information was not gained by virtue of being an insider or
from an insider.
2. Thee counterparty is identified and the insider proves that he disclosed the
information to the counterparty or that he has good reason to believe that the
counterparty in in possession of the info.
If a person is guilty of insider trading the damages to be awarded to the winning party
could be an amount not exceeding TRIPLE the amount of the transaction plus actual
damages. Exemplary damages may also be awarded in case of bad faith, fraud,
malevolence or wantonness in the violation of the SRC or its implementing rules. The
court is also authorized to award attorney’s fees not exceeding 30% of the award.
A CRIMINAL complaint for violation of any law or rule administered by the SEC must
first be filed with it. If the SEC finds that there is probable cause, then it should refer the
case to the DOJ.
Possible defenses against insider trading
1. The information was acquired not on account of his relationship with the issuer.
2. He disclosed the information to the other party who knew or had the reason to
believe he knew the material information.
3. The purchaser or seller was not aware of the material, non-public information at
the time of the purchase or the sale.
Provisions in the SRC intended to protect the investors
1. Tender Offer Rule

2. Rules on Proxy Solicitation
3. Disclosure Rule
Tender Offer Rule
Tender offer is a publicly announced intention by a person acting alone or in concert

with others to acquire equity securities of a public company.
A tender offer is a publicly announced intention by a person acting alone or in

concert with others to acquire equity shares of public company or outstanding equity
securities of an associate or related company of such public company which controls
directly or indirectly the said public company.
It is an upside-down term – I MAKE THE OFFER, YOU MAKE THE TENDER.


ADMINISTRATION
Tender offer means a publicly announced intention by a person acting alone or in
concert with other persons to acquire equity securities of a public company. It is also
an offer by the acquiring person to stockholders of a public company for them to tender
their shares therein on the terms specified in the offer.
Tender offer means a publicly announced intention by a person acting alone or in

concert with other persons to acquire:
a. Outstanding equity securities of a public company; or

b. Outstanding equity securities of an associate or related company of such public
company which controls the said company.
Tender offer is in place to protect the interest of minority stockholders of a target

company against any scheme that dilutes the share value of their investments. It affords
such minority shareholders the opportunity to withdraw or exit from the company under
reasonable terms or a chance to sell their shares at the same price as those of the
majority stockholders.
The mandatory tender offer rule covers not only direct acquisition but also indirect
acquisition or “any type of acquisition.”
The tender offer rule requires any person or group of persons acting in concert who
intends to acquire at least 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 and having 200 or more stockholders with at least 100 shares each or who
intends to acquire at least 30% of such equity over a 12 month period to make a tender
offer to stockholders by filing a declaration to that effect. This was increase to 35%
under existing SRC rules.
The mandatory tender offer rule requires the offeror to make a tender offer not just to
those with sizable stockholdings but to all stockholders including minority stockholders.
The mandatory tender offer is still applicable even if the acquisition is less than 35%
when the purchase would result in ownership of over 51% of the total outstanding
equity securities of the public company.
The tender offer rule applies to both direct and indirect acquisitions.
A public company under the SRC refers to:
a. Any corporation with a security listed in an exchange, or

b. Any corporation with assets exceeding P50M and has 200 or more holders
each holding at least 100 shares of a class of its equity shares.

ADMINISTRATION
Illustration of the tender Offer Rule
Illustration of the application of tender offer in direct acquisition:
The shares of stock of X company are owned by A (19%), B (16%), C (20%), D (14%),
E (31%). If Aljon buys the shares of A (19%), the transaction is not subject to mandatory
tender offer. However, if Aljon buys the shares of A (19%) and the shares of B (16%),
then tender offer must be made because the total shares bought by Aljon is 35%.
Illustration of the application of tender offer in indirect acquisition:
The shares of stock of X company are owned by A (16%), B (19%), C (15%), D (18%),
and Corporation E (32%) respectively. The shares of Corporation E are owned by
Kenneth (50%), King (25%) and Jacq (25%). If Aljon acquires the shares of B (19%),
the transaction is not subject to mandatory tender offer because it did not reach the
35% threshold limit required by law. However, if Aljon acquires the shares of B (19%)
and the shares of Kenneth in Corporation E (50% of 32 is 16%), then, tender offer must
be made because the total shares bought by Aljon directly and indirectly is 35%.
Instances in which a tender offer is required to be made
1. The person intends to acquire 35% or more of the equity share of a public
company pursuant to an agreement made between or among the person and
one or more sellers.
2. The person intends to acquire 35% or more of the equity shares of a public
company within a period of 12 months.
3. The person intends to acquire shares that would result in ownership of more than
50% of the equity shares of a public company.
When may the SEC exempt a person from the mandatory tender offer
requirement?
Upon written application, the SEC may exempt from the requirement to make a
mandatory tender offer the following proposed purchases of equity shares of a public
company:
1. The purchase of newly issued shares from unissued capital stock

2. Purchases in connection with privatization undertaken by the government of the
Philippines; or
3. Purchases in connection with corporate rehabilitation under court supervision.
4. In connection with foreclosure proceeding involving a duly constituted pledge or
security arrangement where the acquisition is made by the debtor or creditor

ADMINISTRATION
When is a person presumed to be making voluntary tender offer?
1. Offer is only open for a limited period of time.

2. An offer is contingent on the tender of a fixed number of shares
3. Solicitation made for a substantial percentage of the issuer’s stock
4. Active and widespread solicitation of public shareholders for the shares of a
public company
5. Offer to purchase is made at a premium over the prevailing market price, at firm
rather than negotiable terms
Margin Trading or Margin Trading Rule
A kind of trading that allows a broker to advance for the customer/investor part of the
purchase price of the security and to keep the same security as collateral for such
advance.
Margin allowance standard
GR: The credit extended must be for an amount not greater than, whichever is higher
of:
1. 65% of the current market price of the security; or

2. 100% of the lowest market price during the preceding 36 calendar months, but
not more than 75% of the current market price.
XPN: The Monetary Board may increase or decrease the above percentages, in order
to achieve the objectives of the Government with due regard for promotion of the
economy and prevention of the use of excessive credit.
The purpose of the Margin Trading Rule is to prevent excessive use of credit for the
purchase of securities it is a counter to broker’s desire to generate more sales by
encouraging clients to buy securities on credit.
Civil suits falling under the SRC (like liability for selling unregistered securities) are
under the exclusive original jurisdiction of the RTC and hence, need not be first filed
before the SEC unlike criminal cases, wherein the latter body exercises primary
jurisdiction.
Investment Contract
It is a contract, transaction or scheme whereby a person invests his money in a

common enterprise and is led to expect profits primarily from the efforts of others.

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An investment contract that is a security must be registered with the SEC before its sale
or offer for sale or distribution to the public.
Requisites of an investment contract
1. An investment money
2. In a common enterprise
3. With expectation of profits
4. Primarily from efforts of others.
Common enterprise is deemed created when two or more investors pool their
resources, creating a common enterprise, even if the promoter receives nothing more
than a broker’s commission.
Multi-level marketing constitutes an investment contract under the SRC.
Network marketing scheme which aims to attract people to buy products does not
constitute investment contract.
Before an investment contract is sold or offered for sale or distribution to the public in
the Philippines, it should be registered with the SEC.
Howey Test
It is a test based on a landmark case of SEC v. WJ Howey Co which is used to

determine whether or not the security being offered takes the form of an investment
contract.
For an investment contract to exist, the following elements must concur:
a. A contract, transaction or scheme;

b. An investment of money;
c. Investment is made in a common enterprise;
d. Expectation of profits; and
e. Profits arising primarily from the effort of others.
A public company as any corporation with a class of equity securities listed on an

exchange or with assets in excess of P50M and having 200 or more holders, at least
two hundred of which are holding at least 100 shares of its equity securities.
Classes of securities under the revised securities act


ADMINISTRATION
1. Exempt securities, and securities emanating from exempt transactions

2. Non-exempt securities
Non-exempt securities are those which may be offered for sale or otherwise disposed of
to the general public by registration with the SEC done by the filing by the issuer, dealer
or underwriter of an application complying with the provisions of the code.
Market juggling or rigging is prohibited if its purpose is to create a false or misleading

appearance of active trading in any security.
Transferred jurisdiction
The following are within the jurisdiction of the RTC.
1. Fraudulent devices and schemes employed by directors detrimental to the public

interest and to other firms;
2. Intra-corporate dispute and with the state in relation to their franchise and right to
exist as such
3. Controversies in election, appointment of directors or trustees;
4. Petition to be declared in state of suspension of payments; and
5. Appointment of rehabilitation receiver or management committee.
What is proxy solicitation?
Proxy solicitation is:
1. Any request for proxy or authorization

2. Any request to exculpate or not to execute or to revoke a proxy or authorization
3. The furnishing of a form of proxy or other communication to security holders
under a circumstance reasonably calculated to result in the procurement,
withholding or revocation of a proxy.
Proxy solicitation involves the securing and submission of proxies, while proxy
validation concerns the validation of such secured and submitted proxies. Proxy
solicitation is a procedure that antecedes proxy validation.
Disclosure Rule

ADMINISTRATION
All companies, listed or applying for listing are required to divulge truthfully and
accurately all material information about themselves and the securities they sell for the
protection of the investing public and under pain of administrative, criminal and civil
sanctions. S8 of SRC requires disclosure of all material information during registration.
Wash sale
By effecting any transaction in such security which involves no change in the

beneficial ownership thereof.
Sale which does not involve any change in beneficial ownership.
Involves transactions in which there is no genuine change in actual ownership.
Market rigging or jiggling
Performing similar act where there is no change in beneficial ownership, or other acts
which tend to create a false appearance of active trading
Matched Order
By entering an order for the purchase or sale of security with the knowledge that a
simultaneous order or orders of substantially the same size, time and price, for the sale
or purchase of any such security, has or will be entered by or for the same or different
parties.
Short Sale
1. Any sale of a security which the seller does not own; or

2. Any sale which is consummated by the delivery of a security borrowed by or for
the account of the seller with the commitment of the seller or securities borrower
to return or deliver said securities or their equivalent to the lender on a
determined or determinable future time.
Short sale is a sale of security that was borrowed by the Seller. 3 parties are involved;
the seller, the buyer and the securities lender.
A short sale is a transaction in which the seller does not actually own the stock he or
she is selling but borrows it from the broker-dealer through which he or she is placing
the sell order.
A short-swing is a transaction where a person buys securities and sells or disposes of

the same within a period of 6 months.

ADMINISTRATION
References
De Leon, H. and De Leon Jr. H. (2019) the Law on Partnerships and Private
Corporations
Soriano, F. (2019). Notes in Business Law
Domingo, A. (2019). Partnership, Revised Corporation Law, Cooperative Law
Prepared by:
RYAN DAVES F. QUÑONES, CPA

Instructor I
Noted by:
LUVY S. ASIS, CPA

Chairperson, Accountancy Program

Philippine Corporation Code and Business Laws Overview

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Republic of the Philippines

CAMARINES NORTE STATE COLLEGE

COLLEGE OF BUSINESS AND PUBLIC

Subject: Business laws and Regulations

 Corporation Code as Revised under Republic Act 11232

COLLEGE OF BUSINESS AND PUBLIC

Revised Corporation Code

Corporation is an artificial being created by operation of law, having the right of

COLLEGE OF BUSINESS AND PUBLIC

Concept of Cuentas en participacion (Joint accounts)

A joint account is a transaction of merchants where other merchants agree to contribute

An arrangement whereby merchants may interest themselves in the transaction of other

Joint Account vs. Partnership

Joint account Partnership

Corporation as a creation of law or by operation of law

XPN: for corporations by prescription, such authority is not necessary.

COLLEGE OF BUSINESS AND PUBLIC

Concession or fiat theory or government paternity theory or franchise theory.

It is a principle in the creation of corporations, under which a corporation is an artificial

It states that a corporation is conceived as an artificial person owing existence through

COLLEGE OF BUSINESS AND PUBLIC

There are two types of GOCC, chartered and non-chartered.

A non-chartered GOCC is governed by the RCC.

Acquired asset corporation is a corporation under private ownership, the voting or

1. Its organization as stock or non-stock corporation

Government owns a stock or non-stock corporation if it has controlling interest in the

Stock corporation – the controlling interest of the government is assured by its

Non-stock corporation – Controlling interest of the government is affirmed when “at

COLLEGE OF BUSINESS AND PUBLIC

Primary vs. Secondary Franchise

Primary Franchise Secondary Franchise

The franchise to exercise powers and

It can be subject to levy and sale on

COLLEGE OF BUSINESS AND PUBLIC

Engagement into a contract of partnership or joint venture.

GR: corporations have no power to enter into partnership

1. The authority to enter into partnership relation is expressly conferred by the

Requisites for the formation of a stock corporation

1. A capital stock divided into shares; and

COLLEGE OF BUSINESS AND PUBLIC

It is a corporation organized with a colorable compliance with the requirements of a

Existing in fact but not in law.

For a corporation to be considered a de facto corporation, it is necessary that the

Requisites of a de facto corporation

1. Existence of a valid law under which it may be incorporated

If there is substantial compliance, de jure corporation results; only colorable compliance

Defects resulting in the creation of de facto corporation

COLLEGE OF BUSINESS AND PUBLIC

Defects precluding creation of corporation

1. Absence of articles of incorporation

In this case, neither de jure or de facto corporation is created.

The existence of a de facto corporation cannot be collaterally attacked.

De Facto Corporation vs. De jure Corporation

De facto corporation De jure corporation

COLLEGE OF BUSINESS AND PUBLIC

A corporation by estoppel has no real existence in law. It is neither a de jure nor de

A corporation by estoppel is neither a de jure or de facto corporation but is considered

Rules governing a corporation by estoppel

1. All person who assume to act as a corporation knowing it to be without authority

De facto corporation vs. corporation by estoppel

De facto corporation Corporation by estoppel

COLLEGE OF BUSINESS AND PUBLIC

Stock corporation vs. nonstock corporation