TITLE 1.
GENERAL PROVISIONS justify a wrong, protect fraud, or perpetrate a
DEFINITIONS AND CLASSIFICATION
Sec. 1 Title of the Code
“Revised Corporation Code of the Philippines”, it
took effect on February 23, 2019
Sec. 2 Corporation Defined
A 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.
It is a juridical entity vested with a legal
personality separate and distinct from those acting
for and its behalf and, in general, from the people
comprising it.
It is a basic principle in Corporation Law
that a corporation has a personality separate and
distinct from the officers or members who
compose it. Not every stockholder or officer can
bind the corporation considering the existence of a
corporate entityseparate from those who compose
it
Characteristics of a corporation
1. It is an artificial-being
2. Created by operation of law
3. It has the right of succession
4. It has the powers, attributes and properties
expressly authorize by law or incidental to its
existence
Government-owned or controlled corporation
➢ 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 directly
or through its instrumentalities either wholly, or,
where applicable as in the case of stock
corporations, to the extent of at least 51% of its
capital stock.
➢ Requisites to be classified as stock corporation
a. It has capital stock divided into shares
b. It is authorized to distribute dividends and
allotments of surplus and profits to its stockholders
“Piercing the Veil of Corporation Fiction” or
“Instrumentality” or “Alter Ego” Doctrine
➢ It is basic in corporation law that a corporation
is juridical entity vested with a legal personality
separate and distinct
from those acting for and in its behalf, and in
general, from the people comprising it. The
corporate veil should not and
cannot be pierced unless it is clearly established
that the separate and distinct personality of the
corporation was used to
deception
➢ Factors for the application of the doctrine of
piercing the corporate veil
a. Stock ownership by one or common ownership
of both corporation
b. Identity of directors and officers
c. The manner of keeping corporate books and
records
d. Methods of conducting the business
➢ Elements of piercing the veil of a corporate
fiction
a. Control not a mere stock control, but complete
domination not only of – – finances, but of policy
and business
practice in respect to the transaction attacked, must
have been such that the corporate entity as to this
transaction had at the time no separate min, will or
existence of its own
b. Such control must have been used by the
defendant to commit a fraud or a wrong to
perpetuate the violation of a statutory or other
positive legal duty, or a dishonest and an unjust act
in contravention of plaintiff’s legal right
c. The said control and breach of duty must have
proximately caused the injury or unjust loss
complained of
Succession
➢ The continuation of a corporation’s legal status
despite changes in ownership or management
Powers of a corporation
➢ It has no power except those expressly
conferred on it by the Corporation Code (or special
laws) and those that are
implied or incidental to its existence
Right of a corporation to own property
➢ Property acquired by a corporation is the
property of a corporation and not the property of
stockholders or members
Sec. 3. Classes of a corporation
1 Stock Corporation corporations which have
capital stock dividend into shares and are
authorized to distribute to the
1. Stock Corporation – corporations which have
capital stock dividend into shares and are
authorized to distribute to the
holders of such share dividends or allotments of
the surplus profits on the basis of the shares held
2. Non-stock corporations one where no part of its
income is distributable as dividends – to its
members, trustees, or officers. Provided, that any
profit which a non-stock corporation may obtain as
an incidental to its operations shall, whenever
necessary or proper, be used for the furtherance of
the purpose for which the corporation was
organized
3. Other classes
a. As to purpose
i. Public corporation – a corporation organized for
the government of a portion of the Stat for the
general good and
welfare
ii. Private Corporation – a corporation formed for
some private purpose, benefit, or end
iii. Government-owned or controlled corporation –
corporation owned by the Government directly or
through its instrumentalities wither wholly, or,
where applicable as in the case of stock
corporations, to the extent of at least 51% of its
capital stock
iv. Quasi-public corporation – a private
corporation which has accepted from the State the
grant of franchise or
contract involving the performance of public
duties, but which is organized for profit
b. As to legal right to corporation existence
i. De jure corporation – a corporation created in
strict or substantial conformity with the mandatory
statutory
requirements for incorporation and the right of
which to exist as a corporation cannot be
successfully attacked or
questioned by any party even in a direct
proceeding for that purpose by the State
ii. De facto corporation – the due incorporation of
any corporation claiming in good faith to be a
corporation under
this Code, and its right to exercise corporate
powers shall not be inquired into collaterally in
any private suit to
which such corporation may be a party
iii. Corporation by estoppel – all persons 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 thereof
iv. Corporation by prescription – one which has
exercised corporate powers for an indefinite period
without
interference on the part of the government
c. As to laws of incorporation
i. Domestic corporation – a corporation
incorporated under the laws of the Philippines
ii. Foreign corporation – a 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
d. As to whether they are open to the public or
not
i. Open corporation – a corporation which is open
to any person who may wish to become a
stockholder or member
thereto
ii. Close corporation – one whose articles of
incorporation provide that: (1) all the corporation’s
issued stock of all
classes, exclusive of treasury shares, shall be held
of record by not more than a a specified number of
persons, not
exceeding 20; (2) all the issued stock of all classes
shall be subject to one or more specified
restrictions on
transfer; and (3) the corporation shall not list in
any stock exchange or make any public offering of
any of its
stock of any class
e. As to relationship of management and control
i. Parent or holding corporation – a corporation
that hold stocks in another corporation for the
purpose of control
ii. Subsidiary corporation – a corporation more
than 50% of the voting stock of which is controlled
directly or
indirectly by another corporation, which thereby
becomes its parent corporation
f. As to the number of persons who compose them
i. Corporation aggregate – a corporation consisting
of more than one member
ii. Corporation sole – a corporation consisting of
only one member for the purpose of administering
and managing,
as trustee, the affairs, property and temporalities of
any religious denomination, sect, or church
g. As to whether they are for religious purposes
or not
i. Ecclesiastical corporation – a corporation
organized for religious purposes
ii. Lay corporation – a corporation organized for
purpose other than for religion
h. As to whether they are for charitable purpose
or not
i. Eleemosynary corporation – a corporation
organized for charitable purposes
ii. Civil corporation – a corporation organized for
business or profit
Sec. 4. Corporations created by Special Laws or
Charters
General law vs. Special law
A corporation is created by operation of law, and it
acquires a judicial personality either by special law
or a general law.
a. General law – under which a private corporation
may be formed or organized is the Corporation
Code, the requirement
of which must be complied.
b. Special law – example is government
corporation, referred to as a charter.
Sec. 5. Corporators and Incorporators
Components of a corporation
1. Corporators – those who compose a corporation,
whether as stockholders or as members
2. Incorporators – the stockholders or members
mentioned in the articles of incorporation as
originally forming and
composing the corporation and who are signatories
thereof.
3. Stockholders – owners of shares of stock in a
stock corporation
4. Members – corporators of a non-stock
corporation
5. Board of Directors or Board of Trustees the
board of directors is the governing body i – n a
stock corporation, while the
Board of Trustees is the governing body in a non-
stock corporation
6. Corporate officers –
7. Subscribers – persons who have agreed to take
and pay for original, unissued shares of a
corporation formed or to be
formed
8. Underwriter – a person who guarantees on a
firm commitment and/or declared best effort basis
the distribution and sale
of securities of any kind by another company
9. Promoter – a person who brings about or cause
to bring about the formation and organization of a
corporation by:
a. Bringing together the incorporators or the
persons interested in the enterprise
b. Procuring subscriptions or capital for the
corporation
c. Setting in motion the machinery which leads to
the incorporation of the corporation itself
Sec. 6. Classification of Shares
Doctrine of equality of shares – each share shall be
equal in all respects to every other share except as
otherwise provided in the
articles of incorporation and stated in the
certificated of stock
Who may classify shares?
1. Incorporators – by stating it in their articles of
incorporation
2. Board of directors and stockholders – they can
amend the articles of incorporation by a majority
vote of the board of directors or written assent of
stockholder representing at least 2/3 of the
outstanding capital stock
Voting shares
- shares with a right to vote
The right to vote in Stock Corporation
- it is inherent in and incidental to the ownership of
corporate stocks. It is settled that unissued stocks
may not be voted or
considered in determining whether a quorum is
present in a stockholders’ meeting
- only stock actually issued and outstanding may
be voted
The right to vote in a Non-stock Corporation
- the voting rights attach to membership. Members
vote as persons, in accordance with the law and the
by-laws of the
corporation
Non-voting shares
- shares without a right to vote; the law provides
that share classified and issued as preferred or
redeemable shares may be
deprived of voting right
- Instances when holders of non-voting shares are
allowed to vote: (AASIIMID)
a. Amendment of the articles of incorporation
b. Adoption and amendment of by-laws
c. Sale, lease, exchange, mortgage, pledge, or other
disposition of all or substantially all of the
corporate property
d. Incurring, creating, or increasing bonded
indebtedness
e. Increase or decrease of authorized capital stock
f. Merger or consolidation of the corporation with
another corporation or other corporation
g. Investment of corporate funds in another
corporation or business in accordance with this
Code
h. Dissolution of the corporation
Common stock – a class of stock entitling the
holder to vote on corporate matters, to receive
dividends after other claims and
dividends have been paid, and to share in assets
upon liquidation; often called as a capital stock if it
is the corporation’s only
class of stocks outstanding; also termed ordinary
shares.
Preferred stock – one which entitles the holder
thereof to certain preferences over the holders of
common stock; designed to
induce persons to subscribe for shares of a
corporation; most common forms are:
1. Preferred shares as to assets – gives the holder
thereof preference in the distribution of the assets
of the corporation in
case of liquidation
2. Preferred shares as to dividends the holder of
which is entitled to receive dividends – on said
share to the extent agreed upon before any
dividends at all are paid to the holders of common
stock
Redeemable shares may be issued by the
corporation when expressly so provided in the
articles – of incorporation; may be
purchased or taken up by the corporation upon the
expiration of a fixed period, regardless of the
existence of unrestricted
retained earnings in the books of the corporation.
Par value shares – shares with a value fixed in the
articles of incorporation and the certificate of stock
No par value shares – shares with no par value
o Limitations on no par value shares
a. It cannot have an issued rice of less than P5.00
b. It is deemed fully paid and non-assemble
c. The entire consideration for its issuance
constitutes capital so that no part of it should be
distributed as dividend
d. It cannot be issued as preferred shares
e. It cannot be issued by banks, trust, insurance,
and preneed companies, public utilities, building
and loan associations,
and other corporations authorized to obtain or
access funds from the public whether publicly
listed or not
f. The articles of incorporation must state the fact
that it is issued no par value shares as well as the
number of said shares
Promotional share – a share issued to promoters or
those in some way interested in the company, for
incorporating the company, or for services
rendered in launching or promoting the welfare of
the company
Share in escrow – a share subject to an agreement
by virtue of which the share is deposited by the
grantor or his agent with a
third person to be kept by the depository until the
performance of certain condition or the happening
of a certain event contained
in the agreement
Fraction share – a share that is less than one full
share
Over-issued stock – a stock issued in excess of the
authorized capital stock, however, such issuance is
null and void
Convertible share – a share that is convertible by
the stockholder from one class to another class at a
certain price with a certain period
Sec. 7. Founders’ shares
Founders’ share
- shares classified as such in the articles of
incorporation which may be given certain rights
and privileges not enjoyed by
the owners of other stocks
- limitation on founders’ share
o the exclusive right to vote and be voted for in the
election of directors, if granted, it must be for a
limited period
not to exceed 5 year from the date of incorporation
Sec. 8. Redeemable shares
Redeemable shares
➢ shares usually preferred, which by their terms
are redeemable at a fixed date, or at the option of
either issuing
corporation, or the stockholder, or both at a certain
redemption price; once redeemed is retires unless
reissuance is
expressly allowed in the articles of incorporation
➢ The present Code allows redemption of shares
even if there are no unrestricted retained earnings
on the books of the
corporation
➢ 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
➢ Limitations on redeemable shares
a. It must be expressly provided in the articles of
incorporation
b. The terms and conditions affecting said shares
must be stated both in the articles of incorporation
and in the
certificate of stock
c. It may be deprived of voting rights in the articles
of incorporation
d. Redemption cannot be made if it will cause
insolvency of the corporation
➢ Kinds of redeemable shares
a. Compulsory – corporation is required to redeem
the shares
b. Optional – corporation is not required to redeem
the shares
Retained earnings
- a corporation’s accumulated income after
dividends have been distributed; also termed as
earned surplus or undistributed
profit
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
- the underlying principle I the procedure for the
distribution of capital assets, embodied in the
Corporation Code, which
allows the distribution of corporate capital only in
three instances:
1. amendment of the Articles of Incorporation to
reduce the authorized capital stock
2. purchase of redeemable shares by the
corporation, regardless of the existence of
unrestricted retained earnings
3. dissolution and eventual liquidation of the
corporation
Sec. 9. Treasury Shares
Treasury Shares shares of stock which have been
issued and fully paid for, but – subsequently
reacquired by the issuing
corporation by purchase, redemption, donation or
through some other lawful means
Rights that are denied to the treasury shares
1. Voting rights
2. Right to dividends
Watered Stocks – stocks issued for a consideration
less than the par or issued price thereof or in any
other form other than cash valued in excess of its
fair value
TITLE II. INCORPORATION AND
ORGANIZATION OF PRIVATE
COMPANIES
Sec. 10. Number and Qualifications of
Incorporators
- Any person, partnership, association, or
corporation, singly or jointly with others but not
more than 15 in number, may
organize a corporation for any lawful purpose/s;
who must be of legal age
One person corporation a corporation with a single
stockholder; only a natural person, t – rust, or an
estate may form
Incorporator
 Those stockholders or members
mentioned in the articles of
as originally forming and composing the
 Originally forming and composing the
corporation and who are signatories
thereof
 Does not cease to be an incorporator upon
sale of his shares
 Not more than 15 persons
Corporator
 Those who compose a corporation,
whether as stockholders or as members
 May or may not be a signatory of the
articles of incorporation
 Ceases to be a corporator by sale of his
shares in case of a stock corporation. In
case of a non-stock corporation, when the
corporator ceases to be a member
 There is no restriction as to number except
for a close corporation
Steps in the creation of a corporation
1. Promotion – includes activities done by
promoter for the founding and organizing of the
business or enterprise of the
issuer
2. Incorporation
a. Execution of the articles of incorporation by the
incorporators and other documents required for
registration of the
corporation
b. Filing of the articles of incorporation with the
SEC together with the treasurer’s affidavit
3. Formal Organization and commencement of
business transactions
Section 11. Corporate Term
General Rule: A corporation shall have perpetual
existence
Exception: if the articles of incorporation provides
otherwise or if it provides for a specific period
EXTENDING OR SHORTENING THE
SPECIFIC PERIOD
• No extension must be made earlier than three
years prior to the original or subsequent expiry
dates unless there are
justifiable reasons for an earlier extension as may
be determined by the Commission
• Extension of the corporate term shall take effect
only on the day following the original or
subsequent expiry dates
Revival of corporate existence
General rule: 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
Exception: If its application for revival provides
otherwise or provides for a specific period
Corporations may be required the favorable
recommendation of the appropriate government
agency before the SEC will approve the
application for revival of certificate of
incorporation
1. Banks
2. Banking and quasi-banking institutions
3. Preneed
4. Insurance and trust companies
5. Nonstock savings and loan associations
6. Pawnshops
7. Corporation engaged in money service business
8. Other financial intermediaries
Sec. 12 Minimum Capital Stock Not Required
of Stock Corporations
General Rule: There is no minimum authorized
capital stock
Exception: if provided by special law
Sec. 13. Contents of the Articles of
Incorporation
1. Name of the corporation
2. Specific purpose/s for which the corporation is
being formed. Where a corporation has more than
one state purpose, the
articles of incorporation shall indicate the primary
purpose and the secondary purpose/s
3. Place where the principal office of the
corporation is to be located, which must be within
the Philippines
4. Term for which the corporation is to exist, if the
corporation has not elected perpetual existence
5. Names, nationalities, and residence addresses of
the incorporators
6. Number of directors, which shall not be more
than 15 or he number of trustees which may be
more than 15
7. Names, nationalities, and residence addresses of
person who shall act as directors or trustees until
the first regular
directors or trustees are duly elected and qualified
in accordance with this Code
8. If it be a nonstock corporation, the amount of its
capital, the names, nationalities, and residence
addresses of the contributors, and amount
contributed by each
9. Such other matters consistent with law and
which the incorporators may deem necessary and
convenient
Sec. 14 Form of Articles of Incorporation
Subscription a written contract to purchase newly
issued shares of stock or bonds; – also termed
stock subscription
Paid-up capital – portion of the authorized capital
stock which has been both subscribed and paid.
Articles of Incorporation – defined the charter of
the corporation and the contractual relationships
between the State and the
corporation, the stockholder, and the State, and
between the corporation and its stockholders
Three-fold nature of the articles of incorporation
1. A contract between the State and the corporation
2. A contract between the corporation and its
stockholders
3. A contract between the stockholders inter se
Name of the corporation
- One of its attributes, an element of its existence,
and essential to its identity
- General rule – each corporation must have a
name by which it is to sue and be sued and do all
legal acts
- Limitations on the use of corporate name – must
not be identical; deceptively or confusingly similar
to that of any existing
corporation or to any other name already protected
by law; or patently deceptive
- Must contain “Inc., Corporation, or OPC”
- Can be changed by amending its articles of
incorporation
Purpose clause – this will confer, as well as limits
the powers which a corporation may exercise.
Ultra vires acts – any act beyond its powers
• If a corporation has more than one purpose, the
articles of incorporation shall state which Is the
primary purpose and
which are the secondary purpose/s to determine
which investment of corporate funds require the
authority of both the
Board and Stockholders
Principal office of the corporation (purpose)
1. To fix the residence of the corporation in a
definite place
2. To determine the venue of court cases involving
corporation
3. For purposes of stockholders or members
meeting
4. To determine the place where the books and
records of the corporation are ordinarily kept
Term of existence – a corporation shall have
perpetual existence unless its articles of
incorporation provides otherwise
Number of board of directors or trustees
• Directors – shall not be more than 15
• Trustees – may be more than 15
Authorized capital stock – maximum amount fixed
in the articles of incorporation that ma be
subscribed and paid by the
stockholders of the corporation
Sec. 15 Amendment of Articles of Incorporation
Limitations in the amendment of the articles of
incorporation
1. The amendment must be for legitimate purposes
and must not be contrary to the Corporation Code
and special laws
2. The amendment must be approved by a majority
of the board of directors or board of trustees
3. The amendment requires the vote or written
asset of stockholders’ representing 2/3 of the
outstanding capital stock or
2/3 member if it be a non-stock corporation
10
4. The original and amended articles together shall
contain all provisions required by law to be set out
in the articles of
incorporation. Such articles, as amended, shall be
indicated by underscoring the changes made
5. Certification under oath by the corporate
secretary and a majority of the board od directors
or board of truteed stating the
fact that said amendments have been duly
approved by the required vote of the stockholders
or members, shall be
submitted to the SEC
6. The amendment must be accompanied by a
favorable recommendation of the appropriate
government agency in cases
of:
a. Banks
b. Banking and quasi-banking institutions
c. Preneed
d. Insurance and trust companies
e. Nonstock savings and loan associations
f. Pawnshops
g. Other financial intermediaries
Sec. 16. Grounds when articles of incorporation
or amendment may be disapproved
1. The articles of incorporation or any amendment
thereto is not substantially in accordance with the
form prescribed
herein
2. The purpose/s of the corporation are patently
unconstitutional, illegal, immoral, or contrary to
government rules and
regulations
3. The certification concerning the amount of
capital stock subscribed and/or paid is false
4. The required percentage if Filipino ownership of
the capital stock under existing laws or the
Constitution has not been
complied with
Sec. 17. Corporate Name
• The name shall be reserved if:
1. Name is distinguishable from a name already
reserved or registered for the use of another
corporation
2. Name is not protected by law
3. Name is not contrary to law, rules, and
regulations
Sec. 18. Registration, Incorporation and
Commencement of Corporate Existence
• It is the certificate of incorporation that gives
juridical personality to a corporation and places it
under the jurisdiction of
the SEC
• A corporation commences its corporate existence
and juridical personality and is deemed
incorporated from the date the
SEC issues certificate of incorporation under its
official seal
Sec. 19. De facto Corporation
Requirements before one can qualify as a de facto
corporation
1. The existence of a valid law under which it may
be incorporated
2. An attempt in good faith to incorporate
3. Assumption of corporate powers
Two conflicting public interest under de facto
doctrine
1. The one opposed to an unauthorized assumption
of corporate privileges
2. The other in favor of doing justice to the parties
and of establishing a general assurance of security
in business dealing
with corporations
Sec. 20. Corporation by Estoppel
Doctrine of Estoppel - predicated on, and has its
origin in, equity which broadly defined, is justice –
according to law and right. It is a principle
intended to avoid a clear case of injustice
Corporation by Estoppel – founded on principles
of equity and is designed to prevent injustice and
unfairness. T
 There is corporation by estoppel- persons
assume to form a corporation and exercise
corporate functions and enter into
business relations with third persons.
 There is no corporation by estoppel - Where
there is no third person involved and the conflict
arises only among those
assuming the form of a corporation, who therefore
know that it has not been registered
Sec. 21. Effects of Non-Use of Corporate
Charter and Continuous Inoperation
I. Failure to formally organize and commence its
business within 5 years from the date of its
incorporation
- The certificate shall be deemed revoked as of the
day following the end of the 5-year period
II. Continuous inoperation for at least 5
consecutive years
- The SEC may after due notice and hearing, place
the corporation under delinquent status
TITLE III. BOARD OF
DIRECTORS/TRUSTEES AND OFFICERS
Correlation of board of directors/trustees, officers,
and stockholders
• Board of directors
- Elected periodically by stockholders or members
- Periodically elects officers to carry out
management functions on a day-to-day basis
• Stockholders or members
- Charged with the management of the corporation
Acts of management – board of directors
Acts of ownership – stockholder or members
Important rights of a qualified shareholder or
member is the right to vote for the directors or
trusteed who are to manage corporate
affairs
What is business judgment rule?
Contracts intra vires entered into by the board of
directors are binding upon the corporation and
courts will not interfere unless
such contracts are so unconscionable and
oppressive as to amount to wanton destruction to
the rights of the minority
Sec. 22. The Board of Directors or Trustees of a
Corporation; Qualification and Term
Unless otherwise provided, the board of directors
or trustees shall exercise the corporate powers,
conduct all business, and control all properties of
the corporation.
• Directors – shall be elected for a term of one year
from the holders of stocks registered in the
corporations’ books
• Trustees – shall be elected for a term not
exceeding three years from among the members of
the corporation
Governing body of the corporation
- Board of directors
Each director and trustee shall hold office until the
successor is elected and qualified
A director who ceases to own at least one share of
stock or a trustee who ceases to be a member of the
corporation shall cease to
be such.
At least 20% of board of directors shall have
independent directors of the following
corporations:
a. Corporations covered by Section 17.2 of RA No.
8799, otherwise known as “The Securities
Regulation Code”, or
corporations listed with an exchange or with assets
of at least fifty million and having two hundred or
more holders of
shares, each holding at least one hundred shares of
a class of its equity shares
b. Banks and quasi-banks, nonstock savings and
loan associations, pawnshops, corporations
engaged in money service
business, preneed, trust and insurance companies
and other financial intermediaries
c. Other corporations engaged in businesses vested
with public interest similar to a and b, as may be
determined by the
Commission
Independent director
- 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 reasonably be perceived to materially
interfere with the exercise of
independent judgment in carrying out the
responsibilities as a director
- must be elected by the shareholders present or
entitled to vote in absentia during the election of
directors
- shall be subject to rules and regulations
governing their qualifications, disqualifications,
voting requirements, duration of
term and term limit, maximum number of board
memberships and other requirements that the
Commission will prescribe
to strengthen their independence and align with
international best practices
Governing body of a corporation is the board of
directors. Concentration in the board of the powers
of control of corporate business
and of appointment of corporate officers and
managers is necessary for efficiency in any large
organization
The board shall exercise good faith -- where
corporate directors are guilty of a breach of trust, a
stockholder may institute a suit
on behalf of himself and other stockholders and for
the benefit of the corporation
Derivative suit- The common law that gradually
recognize the right of a stockholder to sue on
behalf of a corporation.
Authority of the board of director or trustees -
they have the sole authority to determine policies,
enter into contracts, and
conduct the ordinary business of the corporation
within the scope of its charter
Raison d’etre - Behind the conferment of corporate
powers on the board of directors is not lost on the
court.
Corporation exercise its powers through its
board of directors
1. Exercises all powers provided for under the
Corporation Code
2 Conducts all business of the corporation
Emergency BOD- the vacancy may be
temporarily filled from among the officers of
the corporation.
Sec. 29. Compensation of
Directors/Trustees
General rule: Directors or Trustees shall not
receive any compensation, as such directors or
trustees, except for reason
diems.
Exceptions:
✓ When it is fixed by the corporation’s by -
laws
✓ When the stockholders, representing at least
a majority of the outstanding capital stock, or
majority of the members
grant the same.
Limitation on compensation- In no case shall
the total yearly compensation of directors, as
such directors, exceed 10% o
income before income tax of the corporation
during the preceding year.
Sec. 30. Liability of Directors, Trustees or
Officers
Doctrine of corporate opportunity
✓ Bad Faith- breach of faith and willful
failure to respond to plain and well understood
obligation.
✓ Gross Negligence- is the want of even
slight care, acting or omitting to act in a
situation where there is duty to
inadvertently but willfully and intentionally.
Error in Business Judgment- If the cause of
the losses is merely error in business
judgement, not amounting to bad
negligence, directors/officers are not liable.
Sec. 31. Dealing of Directors, Trustees, or
Officers with the Corporation
A contract of the corporation with one or more
of its directors or trustees, officers, or their
spouses and relatives within the degree of
consanguinity or affinity.
General Rule: A contract of the corporation
with one or more of its directors or trustees,
officers or their spouses and relatives
within the 4th civil degree of consanguinity or
affinity is voidable, a th t the option of such
corporation.
Exceptions:
1. That the presence of such director or
trustees in the board meeting in which the
contract was approved was not ne
to constitute a quorum for such meeting.
10
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 circumstance.
4. In case of corporations vested with public
interest, material contracts re approved by at
least 2/3 of the entire mem of the board, with
at least a majority of the independent directors
voting to approve the material contract.
5. That in case of an officer, the contract has
been previously authorized by the board of
directors.
Ratification by stockholder on self-dealing
directors, or trustees
1. Any of the 1st 3 condition set forth in the
first paragraph of st the above section is absent
2. Full disclosure of the adverse interest of the
directors or trustees involved is made at such
meeting
3. That the contract is fair and reasonable
under the circumstances.
Sec. 32. Contracts Between Corporations
with Interlocking Directors
Interlocking Directors- These are the
members of the board of directors in a certain
corporation who are also directors on
corporation.
General Rule: A contract between two or
more corporations having interlocking
directors shall not be invalidated on that
alone.
Requisites
1. The contract is not fraudulent
2. The contract is fair and reasonable under the
circumstances.
Exception: If the interest of the interlocking
director in one corporation is substantial and
his interest in the other corpor
merely nominal, he shall be subject to the
provisions of section 31 insofar as the latter
corporation or corporations are con
Sec. 33. Disloyalty of a Director
Doctrine of Corporate Opportunity- A
director, by virtue of his office, acquires for
himself a business opportunity which
belong to the corporation, thereby obtaining
profits to the prejudice of such corporation, he
must account to the latter for profits by
refunding the same.
Sec. 34. Executive, Management, and Other
Special Committees
Executive Committee- It is a body of created
by the by-laws and composed of not less than
3 members of the board which to the statutory
limitations, has all the authority of the board
of directors to the extent provided in the by-
laws.
Limitations on the powers of the executive
committee
1. Approval of any action for which
shareholders’ approval is also required
2. Filling of vacancies in the board
10
3. Amendment or repeal of by-laws or the
adoption of new by-laws
4. Amendment or repeal of any resolution of
the board which by its express terms is not
amendable or repealable.
5. Distribution of cash dividends to
shareholders.
Quorum required of the executive
committee- Majority vote of all its members.
10
TITLE IV. POWERS OF
CORPORATIONS
A corporation exercise it powers through it
board of directors and/or its duly authorized
officers and agents, except in inst
where the Corporation Code required
stockholders’ approval for certain specific
acts.
It has no power except those expressly
conferred on it by the Corporation Code and
those that are implied or incidental to
existence.
Sec. 35. Corporate Powers and Capacity
General powers and capacity of a
corporation
a. To sue and be sued in its corporate name
b. To have perpetual existence unless the
certificate of incorporation provides otherwise
c. To adopt and use a corporate seal
d. To amend its articles of incorporation in
accordance with the provisions of this Code
e. To adopt bylaws, not contrary to law,
morals or public policy, and to amend or
repeal the same in accordance wit
Code
f. In case of stock corporations, to issue or sell
stocks to subscribers and to sell treasury
stocks to subscribers and to
treasury stocks in accordance with the
provisions of this Code; and to admit members
to the corporation if it be a
nonstock corporation
g. To purchase, receive, take or grant, hold,
convey, sell, lease, pledge mortgage, and
otherwise deal with such real
personal property, including securities and
bonds of other corporations, as the
transactions of the lawful business
corporation may reasonably and necessarily
require, subject to the limitations prescribed
by law and the constitut
h. To enter into a partnership, joint venture,
merger, consolidation, or any other
commercial agreement with natural
juridical persons
i. To make reasonable donations, including
those for the public welfare or for hospital,
charitable, cultural, scientifi
civic, or similar purposes: Provided, that no
foreign corporation shall give donations in aid
of any political party o
candidate or for purposes of partisan political
activity
j. To establish pension, retirement, and other
plans for the benefit of its directors, trustees,
officers, and employees
k. To exercise such other powers as may be
essential or necessary to carry out its purpose/s
as stated in the articles o
incorporation
Derivative suits action brought by a
stockholder on behalf of the corporation to
enforce – corporate rights against the
corporation’s directors, officer or other
insiders
Sec. 36. Power to extend or shorten
corporate term
Requirements to extend or shorten
corporate term
a. Approval by a majority vote of the board of
directors or trustees
b. Ratification by the stockholders represent
representing at least 2/3 of the outstanding
capital stock or by at least 2
the members in case of non-stock corporations
Appraisal right – a stockholder who dissented
and voted against the proposed corporate
action, may choose to get out of t
corporation by demanding payment of the fair
market value of his shares
Sec. 37. Power to increase or decrease
capital stock; incur, create or increase
bonded investments
Three instances of distribution of corporate
capital
1. Amendment of the Articles of Incorporation
to reduce the authorized capital stock
2. Purchase of redeemable shares by the
corporation, regardless of the existence of
unrestricted retained earnings
3. Dissolutions and eventual liquidation of the
corporation
Requirements for increase or decrease of
authorized capital stock
1. Written notice of the proposed increase or
diminution of the capital stock and of the time
and place of the stockholder’s meeting at
which the proposed increase or diminution of
the capital stock is to be considered, must be
addressed. Stockholder at his place of
residence as shown on the books of the
corporation and deposited to the addressee by
m
served personally, or through electronic means
recognized in the corporation’s bylaws and/or
the Commission’s r
a valid mode for service of notices
2. No decrease of the capital stock shall be
approved if its effect shall prejudice the rights
of corporate creditors
3. Approval by a majority vote of the board of
directors
4. Ratification by the stockholders holding at
least 2/3 of the outstanding capital stock
5. A certificate must be signed by a majority
of the directors of the corporation and
countersigned by the chairperson
secretary of the stockholders’ meeting
6. Approval thereof by the SEC
7. Treasurer’s affidavit showing that at least
25% of such increased capital stock has been
subscribed and that at least of the amount
subscribed has been paid
Bonded indebtedness a long-term
indebtedness – secured usually by real
property
Sec. 38. Power to deny preemptive right
Pre-emptive right
- Preferential right of all stockholders of a
stock corporation to subscribe to all issued or
disposition of share of any
in proportion to their respective shareholdings
- (Purpose) to enable the shareholder to retain
his proportionate control in the corporation
- Not available when:
1. Share to be issued in compliance with laws
requiring stock offerings or minimum stock
ownership by the pub
2. Shares to be issued in good faith with the
approval of the outstanding capital stock, in
exchange for property
for corporate purposed or in payment of a
previously contracted debt
Sec. 39. Sale or other disposition of assets
Sale or disposition – shall be deemed to cover
substantially all the corporate property and
assets if thereby the corporation be rendered
incapable of continuing the business or
accomplishing the purpose for which it was
incorporated
Ratification not required
1. If the same is necessary in the usual and
regular course of business of said corporation
2. If the proceeds of the sale or other
disposition of such property and assets be
appropriated for the conduct of its
remaining business
Requirement of sale or other disposition of
assets (approval of SEC is not required)
1. Written notice of the proposed action and of
the time and place of the meeting shall be
addressed to each stockholder
member at his place of residence as shown on
the books of the corporation and deposited to
the addressee in the p
office with postage prepaid, or served
personally, or when allowed by the bylaws or
dine with the consent of the
stockholder, sent electronically
2. Approval by a majority vote of the board of
directors
3. Ratification by the vote of the stockholders
representing at least 2/3 of the outstanding
capital stock, or in case of stock corporation,
by the vote of at least to 2/3 of the members
4. Any dissenting stockholder may exercise
his appraisal right
Sec. 40. Power to acquire own shares
Instances when a corporation may acquire
its own shares
1. To eliminate fractional shares arising out of
stock dividends
2. To collect or compromise an indebtedness
to the corporation, arising out of unpaid
subscription, in a delinquency
and to purchase delinquent shares sold during
said sale
3. To pay dissenting or withdrawing
stockholders entitled to payment for their
shares under the provisions of this Corporation
4. To acquire treasury shares
5. Redeemable shares regardless of existence
of retained earnings
6. To effect a decrease of capital stock
7. In close corporations, when there is a
deadlock in the management of the business,
the SEC may order the purchase their fair
value of the shares of any stockholder by a
corporation regardless of the availability of
unrestricted earning in its books, or by the
other stockholders
General rule: the corporation may only acquire
its own stocks in the presence of unrestricted
retained earnings
Exceptions:
1. Redeemable shares may be acquired even
without surplus profit for as long as it will not
result to the insolvency o
Corporation
2. In a close corporation
Basis of unrestricted retained earnings
- Trust fund doctrine, reason is that creditors
of a corporation are preferred over the
stockholders in the distribution
corporate assets
Sec. 41. Power to invest corporate funds in
another corporation or business or for any
other purpose
Requisites to invest corporate funds in
another corporation or business or for any
other purpose
1. To accomplish its primary purpose
a. Approval of the majority of the board of
directors or trustees
b. The approval of the stockholders or
members shall not be necessary
2. To accomplish a purpose other than the
primary purpose
a. Approval of the majority of the board of
directors or trustees
b. Ratification by the stockholders
representing at least 2/3 of the outstanding
capital stock, or by at least 2/3 members in the
case of non-stock corporations, at a
stockholders’ or members’ meeting duly
called for the
purpose
c. Written notice of the proposed investment
and the time and place of the meeting shall be
addressed to eac
stockholder or member by mail or served
personally, or sent electronically in
accordance with the rules a
regulations of the Commission on the use of
electronic data message, when allowed by the
bylaws or don
the consent of the stockholders
d. Any dissenting stockholder shall have
appraisal rights
e. The ratification must be made at a
stockholders’ or members’ meeting duly
called for the purpose
Sec. 42. Power to declare dividends
Requirement for the declaration of
dividends
1. Existence of unrestricted retained earnings
2. Resolution of the board of directors
3. For stock dividend, the additional
requirements are:
a. A vote representing not less than 2/3 of
outstanding capital
b. A corporation must have also a sufficient
number of authorized unissued shares for
distribution to stockholders
Payment of dividends to a stockholder is not a
matter of right but a matter of consensus
Limitation on dividends
1. The right to dividend is base on duly
recorded stockholdings
2. Dividends among stockholders of the same
class must always be pro rata equal and
without discrimination and
regardless of the time when the shares were
reacquired. The right of the stockholder to be
paid dividends accrues
as the declaration is made
3. The right to dividend accrues even if there
is no SEC approval
4. Declaration of dividends is discretionary
upon the board of directors
5. Dividends cannot be declared out of paid-in
surplus and revaluation surplus
6. Treasury shares cannot be declared as stock
or cash dividends
General rule: stock corporations are prohibited
from retaining surplus profits in excess of
100% of their paid-in capital stock
Exceptions:
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 lo
foreign, from declaring dividends without
its/his consent, and such consent has not yet
been secured
3. When it can be clearly shown that such
retention is necessary under special
circumstances obtaining n the corpor
such as when there is need for special reserve
for probable contingencies
Sec. 43. Power to enter into management
contract
Management contract agreement whereby a
corporation delegates the management of its –
affairs to another corporation in a certain
period of time, no management contract shall
be entered into for a period longer than five
years for any one term
Requirements:
1. Approval by the majority of the quorum, of
the board of directors
2. Ratification by the stockholders owning at
least the majority of the outstanding capital
stock, or by at least a majority
the members in the case of a non-stock
corporation, of both the managing and the
managed corporation, at a mee
duly called for the purpose
3. Approval by the stockholders of the
managed corporation owning at least 2/3 of
the total outstanding capital stoc
entitled to vote, or by at least 2/3 of the
members in the case of a non-stock
corporation, in case of:
a. Interlocking stockholder – where a
stockholder/s representing the same interest of
both the managing and
managed corporations own or control more
than 1/3 of the total outstanding capital stock
entitled to vote
managing corporation
b. Interlocking directors – where a majority of
the members of the board of directors of the
managing corporation
also constitute a majority of the members of
the board of directors of the managed
corporation
4. No management contract shall be entered
into for a period longer than five years for any
one term
10
Exception:
Service contracts or operating agreement
which relate to the exploration, development,
exploitation or utilization of natural resources
may be entered into for such periods as may
be provided by the pertinent laws or
regulations
Sec. 44. Ultra vires acts of corporations
Ultra vires act
- refers to an act outside or beyond corporate
powers, including those that may ostensibly be
within such powers bu
by general or special laws, prohibited or
declared illegal
- (Corporation code) act outside the powers
conferred by the Code or by the Articles of
Incorporation, or beyond w
necessary or incidental to the exercise of the
powers so conferred
10
TITLE V. BYLAWS
Bylaws signifies the rules and regulations or
private laws enacted by the corporation to
regulate, govern and control its actions, affairs
and concerns and its stockholders or members
and directors or officers with relation thereto
and among themselves in their relation to it
- Relatively permanent and continuing rules of
action adopted by the corporation for its own
government and that only individuals
composing it having the direction,
management, and control of its affairs, in
whole or in part, in the
management and control of its affairs and
activities
Purpose of a bylaw
- To regulate the conduct and define the duties
of the members towards the corporation and
among themselves
- Self-imposed and, although adopted pursuant
to statutory authority, have no status as public
law
Sec. 45. Adoption of Bylaws
Bylaws are indispensable to corporations
- Means that they may not be essential to
corporate birth but certainly, these are required
by law for an orderly gov
and management of corporation
Adoption of bylaws
I. Before incorporation (Pre-incorporation)
o They bylaws must be singed and approved
by all the incorporators and filed with the SEC
together with t
articles of incorporation
II. After incorporation (Post-incorporation)
o The affirmative vote of the stockholders
representing at least a majority of the
outstanding capital stock, or at least a majority
of the members shall be necessary. The
bylaws shall be signed by the stockholders or
members voting for them
Effectivity of by-laws
- Upon the issuance by the SEC of a
certification that the by-laws are in accordance
with the Revised Corporation
Effect of substantial compliance with by-
laws
- Adoption and filing of by-laws is also a
condition subsequent that will suffice to
perfect corporate personality. Ex
are organization and commencement of
transaction of corporate business.
Sec. 46. Content of bylaws
Contents of bylaws
1. The time, place and manner of calling and
conducting regular or special meetings of the
directors or trustees
2. The time and manner of calling and
conducting regular or special meetings and
mode of notifying the stockholder or members
thereof
3. The required quorum in meetings of
stockholders or members and the manner of
voting therein
4. The modes by which a stockholder, must comply because they presumed to know
member, director, or trustee may attend the provisions of the bylaws
meetings and cast their votes 2. As to third persons – they are not bound
5. The form for proxies of stockholders and unless they have knowledge of the bylaws
members and the manner of voting them
6. The directors’ or trustees’ qualifications,
duties and responsibilities, the guidelines for
setting the compensation o
directors or trustees and officers, and the
maximum number of other board
representations that an independent di
or trustee may have which shall, in no case, be
more than the number prescribed by the
Commission
7. The time for holding the annual election of
directors or trustees and the mode or manner
of giving notice thereof
8. The manner of election or appointment and
the term of office of all officers other than
directors or trustees
9. The penalties for violation of the bylaws
10. In the case of stock corporations, the
manner of issuing stock certificates
11. Such other matters as may be necessary for
the proper or convenient transaction of its
corporate affairs for the proof of good
governance and anti-graft and corruption
measures
Sec. 47. Amendment of bylaws
Amendment of bylaws
General rule: The board of directors or
trustees, by a majority vote thereof, and the
owners of at least a majority of the
outstanding capital stock, or at least a majority
of the members of a non-stock corporation, at
a regular or special meeting
called for the purpose, may amend or repeal
any bylaws or adopt new by laws
Exceptions:
The owners of 2/3 of the outstanding capital
stock or 2/3 of the members in a non-stock
corporation may delegate
board of directors or trustees the power to
amend or repeal any bylaws or adopt new
bylaws
Binding effects of the bylaws
1. As to directors or trustees, officers, and
stockholder or members they a – rebound and