NON-STOCK CORPORATIONS DISCUSSION OUTLINE

Defined-

Section 86 defines a non stock corporation as one where no part of its income is
distributable as dividends to its members, trustees or officers, and when any
profit is obtained as an incident if its operations shall, whenever necessary or
proper be used for the furtherance of the purposes for which the corporation
was organized.

Under Section 87, the purposes for which a non-stock corporation may be
organized are: charitable, recreational, fraternal, religious, trade, cultural,
educational, literary, scientific, professional, social, civic service industry,
agricultural, chambers or any combination subject to special provisions.

A non-stock corporation cannot amend its articles and convert itself into a stock
corporation, as the members are not entitled to share in the profits of the
corporation as all present and future profits belong to the corporation. By
converting to a stock corporation it will be deemed to have distributed corporate
assets among members without a prior dissolution. On the other hand, if it were
a stock corporation at the onset, it may be converted to a non-stock corporation
as the corporation is not distributing assets without dissolution, but rather, they
are waiving their rights to any profits or dividends.

The nationality is determined on the basis of the nationality of the members and
not on the basis of the contributions.

Differences between stock and non-stock corporations

1. Subject to the Articles of Incorporation or By-Laws, the right to vote may

be limited, broadened or denied to some extent.

Section 88 states that unless so provided, each member is entitled to one vote. In
exercising the right, he may vote by proxy and also by mail or other similar
means as authorized by the Articles of Incorporation or By-Laws with the
approval of and under conditions prescribed by the SEC. The By-laws can also
provide for voting through remote communication or in absentia.

2. Under Section 89, membership and all rights are personal and non
transferable unless provided in the articles of incorporation or by-laws. A SEC
Opinion, dated December 11, 1996 states that the reason for the rule is that
membership in a stock corporation has personal elements, which require
qualification by social and other ties.

Section 90 provides that it may be terminated in the manner and for causes
provided in the articles of incorporation or by-Laws. To be valid, the member
must be give reasonable notice and be given an opportunity to be heard as
required in a SEC Opinion, dated September 29, 1987.
In Chinese YMCA v Ching (71 SCRA 460), it was held that courts have no power
to strip membership, as it constitutes an unwarranted and undue interference
with the right of a corporation to determine its membership.

Termination of membership carries with it all rights to property and other

privileges unless the By-Laws provide otherwise. Note that admission is an
expressly granted power as stated in (6), Section 36.

3. Under Section 91, it may have any number of trustees as fixed in the
Articles of Incorporation or By-laws, which may or may not be more than 15.
Except with respect to independent trustees of non-stock corporations vested
with public interest, only a member shall be elected as a trustee.

As per SEC Opinion, dated May 12, 1995, the trustee may be a nominee when the
membership of a non-stock corporation consists of corporations or juridical
persons.

A non-stock corporation may have more than fifteen trustees to afford more
representation for corporations with a nationwide membership. However, the
number should not exceed the membership as per SEC Opinion, dated August 21,
1987. The SEC has adopted a policy of requiring a registrant to explain or justify
why it wants to have more than fifteen trustees which would allow it to
disapprove the stipulation if the circumstances do not warrant it.

Trustees shall hold office for not more than three years until their successors are
elected and qualified. Trustees elected to fill vacancies, shall only serve for the
unexpired portion.

4. Corporate officers are elected by the members, unless otherwise provided

by the articles of incorporation or by-laws.

List of members, proxies and place of meetings-

Section 92 requires that the corporation shall at all times, keep a list of members
and their proxies in the form required by the SEC. The list shall be updated to
reflect members and proxies of record twenty (20) days prior to any scheduled
election.

The By-laws can provide that meetings can be held outside the place of principal
business. Provided, there be notice of the date, time, and place but should always
be in the Philippines.

Distribution of assets upon dissolution-

Section 93 requires the assets of a non-stock corporation to be distributed in

accordance with the following rules:
1. Liabilities and obligations of the corporation shall be paid, satisfied or
discharged, or adequate provisions made therefore

2. Assets held under a condition requiring return, transfer, conveyance and

which condition occurs by reason of dissolution should be returned, transferred
and conveyed.

3. Assets received and held by the corporation subject to limitations

permitting use only for charitable, religious, benevolent, educational or similar
purposes, but not subject to return, transfer or reconveyance by reason of
dissolution shall be transferred to one or more corporations undertaking similar
activities pursuant to the plan of dissolution.

4. Other assets shall be distributed in accordance with the Articles of

Incorporation or By-Laws determining the distributive rights of its members or
as provided.

5. In any other case, assets shall be distributed to such persons, societies or

organizations whether organized for profit or not as provided in the plan of
distribution. There can be a provision as to distribution in the articles. However,
the provision cannot cover a distribution of the items in referred to in 1 to 3
above.

Section 94 requires the plan of distribution to be consistent with the distribution

rules in Section 93 and is to be adopted pursuant to a majority vote of the Board
of Trustees, then submitted for the affirmative vote of 2/3 of the members
having voting rights at a regular or special meeting, prior notice having been
given.

TRANSCRIPTION
Non-stock corporations as defined in section 86 refers to corporations where no
part of its income is distributable as dividends to its members, trustees or
officers, and when any profit is obtained as an incident of its operation, it shall
whenever necessary or proper, be used for the furtherance of the purposes for
which the corporation was organized.

Section 87 provides the purposes for which a non-cooperation may be organized;

they are charitable, recreational, paternal, religious, trade, cultural, educational,
scientific, professional, social, civic service, industry, agricultural chambers, or
any combination subject to special provisions.

So those are the purposes for which a non-stock corporation may be organized.

NOTE: In so far as possible examination questions, one can be asked to

distinguish between a stock and a non-stock corporation.

The manner by which they can be distinguished is to go to the definition:

A stock corporation is one which has capital stock divided into shares and would
be authorized to distribute to the holders of those shares surplus profits or
dividends on the basis of the number of shares held.

Q: Another way by which this question can be asked is by showing you or

indicating a situation where a corporation will be distributing profits
A: the minute a corporation distributes profits then your conclusion should be
that it is a stock corporation because the distribution of profits or dividends as
the case may be is an inherent power of a stock corporation which on the other
hand is not possessed by a non-stock corporation because the definition
specifically states that no part of its income can be distributed as dividends and
the profits if any it will be utilized for the purpose of furthering the purpose or
purposes for which the cooperation was organized.

Q: Can a non-stock corporation engage in a profit making activity?

A: YES, it can engage in a profit making activity. However the profits should be
utilized to further the purpose or purposes for which it was organized.

Previously there was a bar examination question as to conversion from a non-

stock to stock and a conversion from stock to non-stock. A conversion from
non-stock to stock will not be allowed because the members are not entitled
to any share in the profits of the corporation. If they are converting to a stock
corporation then that means the assets of the non-stock corporation will now be
distributed to the members who will now then be the stockholders of the
corporation.

A conversion from stock to non-stock is allowed because this would be a

situation where the assets are not going to be distributed but rather the
stockholders will just be waiving their rights to any profits or dividends
with all the assets transferring to a non-stock corporation with no
expectation of any share in the profits or the dividends.

If you remember we had a discussion as to nationality of a cooperation

When we speak of a stock corporation it is a national of the country of

incorporation but depending upon the nature of the activity that will be entered
into. Where it may be required to be Filipino, then we would have to take a
look at stock ownership as being determinative of nationality.

When we speak of a non-stock corporation nationality is determined by the

nationality of the members.

Q: What are the other specific differences between stock and non-stock
corporations?
STOCK CORP NON-STOCK CORP
as the right to vote the right to vote in a the right to vote in a non-
stock corporation is stock corporation is
determined by stock determined by what is in
 ownership the articles of
incorporation or the by-
laws and that right to
vote may be limited
broadened or denied to
some extent under
section 88 each member
in the absence of any
limitation broadening or
denial is entitled to one
vote.

In exercising the right to

vote he may be allowed
to vote by proxy or by
mail or any other similar
means authorized under
the articles or the bylaws
with the approval of and
under conditions
prescribed by the
securities and exchange
commission.

The bylaws can likewise

provide pursuant to the
provisions of the revised
corporation code for
voting to remote
communication or in
absentia

the nature of stock ownership is In a non-stock

membership likewise personal but it is corporation membership
fully transferable is considered as personal
and it is non-transferable.

Generally speaking it is
non-transferable there is
the possibility of
transferability if the
articles of incorporation
or the bylaws of a non-
stock corporation will
allow it.

SEC opinion dated

December 11, 1996
provides that the reason
for non-transferability
is because membership
in a non-stock
corporation has
personal elements and
this require qualification
by social or other ties.

Remember: purposes for

the creation of a non-
stock corporation- when
you become a member of
a non-stop corporation
more often than not you
chose to be a member of
that non-stock
corporation because you
are likewise bound by the
purpose for which it was
created.

Section 90 in relation to
membership provides
that membership in a
non-stock corporation
can only be terminated in
the manner and for
courses provided in the
articles or by-laws.

For purposes of a valid

termination, there must
be reasonable notice and
an opportunity to be
heard. I call attention to
one particular case and
that is the case of Chinese
Ymca vs Ching where it
was held that the courts
have no power to strip
membership as it
constitutes an
unwarranted and
undue interference
with the right of a
corporation to
determine its
membership.
 So if one's membership is
terminated, it carries
with it termination of all
rights to properties and
other privileges unless
the bylaws provide
otherwise.

In paragraph 6 of
section 36- admission to
membership is an
express power granted to
a non-stock corporation.

As to number of Under section 91, a non-

member of the stock corporation can
board/trustees have any number of
trustees as fixed in the
articles or in the by-laws
which number may or
may not be more than 15.

(you can have less than

15 and you can also have
more than 15)

A principal
qualification for election
as a trustee is
membership. However,
in a non-stock
corporation vested with
public interest where
you have an
independent director
there is no requirement
that your independent
director should be a
member so that is the
exception to the rule that
a trustee must be a
member and the normal
term of office of a trustee
would be three years
unless otherwise
provided.

term director has a term of one

year
As to election of election of corporate in a non-stock
officers officers in a stock cooperation it is
corporation the election undertaken by the
of corporate officers is members unless the
undertaken by the board articles or the bylaws
provide otherwise

Section 92 of the RCC is a new addition to the corporation code it requires that
the corporation shall at all times keep a list of members and their proxies in the
form prescribed by the securities and exchange commission.

The list is required to be updated to reflect members and proxies of record 20

days prior to any scheduled election.

The bylaws can likewise provide that meetings can be held outside the place of
principal business provided that there be notice of the date time and place but
should always be in the Philippines.

We now go to Sections 93 and 94 which has something to do with the

distribution of the assets of a non-stock corporation.

In a stock corporation, usually the assets will be distributed in the following

manner:
- it will be applied to obligations
- thereafter, any surplus will be apportioned among the stockholders.

That is how the assets of a stock corporation will be disposed of subsequent to a

dissolution.

In a non-stock corporation, there is need to comply with section 93.

Section 93 requires the assets to be distributed in the following manner:

First, liabilities and obligations shall be paid

Second, assets that are held under a condition requiring return, transfer,
or conveyance and which condition occurs by reason of dissolution
should be returned, transferred, and conveyed.

So sometimes non-stock corporations receive property which upon

dissolution should be returned to the source of the property, or conveyed
to some other entity as dictated by the conditions of acquisition.

So when there are such conditions and the conditions occur by way or on
account of dissolution, then they should be returned, transferred or
conveyed.

Third, assets that are received and held by the corporation subject to
limitations that permit use only for charitable, religious, benevolent,
 educational or similar purposes but are not supposed to be returned,
transferred, or reconveyed, shall then be transferred to one or more
corporations undertaking similar activities pursuant to the plan of
distribution

NOTE: We are now referring to properties that can only be used for
specific purposes but are not supposed to be returned transferred or
reconvened. They can now be transferred to other entities who share or
engage in the same or similar purposes; meaning they are likewise
charitable, religious, benevolent, educational or engaged in similar
activities.

Fourth, any other asset if there are still assets remaining shall be
distributed in accordance with the articles of incorporation or
bylaws that determine the distributive rights of its members as provided
so.

Here, the situation is after going through the conditions laid down one
two and three the assets can now be given or distributed to the members
provided there is a provision in the articles or in the bylaws that
determine how these assets should be distributed and to what extent are
they entitled to.

Finally, in any other case the assets shall be distributed to such

persons societies or organization whether they are organized for
profit or not as provided for in the plan or distribution.

These assets however can only refer to assets that are not used to pay or
satisfy or discharge obligation, assets that are not required to be returned
transferred or reconveyed, or assets that are not being held subject to use
only as or for charitable religious benevolent educational or similar
purposes.

Section 94 on the other hand requires that this plan of distribution pursuant to
Section 93 should be adopted pursuant to a majority vote of the board of
trustees and subjected to an affirmative vote of two-thirds of the members
having voting rights at a regular or special meeting prior notice having been
given of the holding of that regular or special meeting.