GENERAL PRINCIPLES
church. Allowed for the purposes of administering
What is a corporation?
- 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. (RCC, Sec. 2)
What are the attributes of a corporation?
1. It is an artificial being with a separate
and juridical personality;
a. A branch established by the
corporation does not have a
separate juridical personality.
b. Entitled to own properties in its
own name.
c. The interest of the stockholders
over the properties of the
corporation are merely inchoate.
(Jurisprudence)
d. Obligations of the stockholders,
directors, and officers are not the
obligations of the corporations.
2. It is created by operation of law;
3. It has the right of succession; and
a. Corporations are entitled to
certain constitutional rights i.e.
right against unreasonable
seizure. It is also a person under
the due process clause. Right
against self-incrimination is not
available particularly in the
production of corporate
documents.
4. It has powers, attributes, and properties
expressly authorized by law or incident
to its existence. (RCC, Sec. 2)
Stock corporation – a corporation in which capital
stock is divided into shares and is authorized to
distribute to holders of such shares dividends or
allotments of the surplus profits on the basis of the
shares held. (RCC, Sec.3)
Corporation Aggregate – corporation that is
formed by and is composed of two or more
stockholders or members.
Corporation Sole – a corporation that is organized
and formed by one person who may be the chief
archbishop, bishop, priest, minister, rabbi, or other
presiding elder of religious denomination, sect or
and managing as trustee, the affairs, property, and
temporalities of any religious denominations, sect or
church. (RCC, Sec 107 – 108)
Special Corporations
Educational Corporations
Religious Society – religious organization
of a religious denomination, sect or church
that is incorporated for administration of its
temporalities or for the management of its
affairs, properties and estate.
De Jure v. De facto
One created in strict or substantial conformity with
statutory requirements for incorporation.
Right to exist cannot be successfully attacked even
in a direct proceeding by the State.
v.
One which actually exist for all practical purposes
as a corporation but which has no legal right to
corporate existence as against the State.
Right to exist can be successfully attacked in a
direct proceeding by the State, by Quo Warranto
Proceedings.
Incorporators – those stockholders mentioned in
the AOI as originally forming and composing the
corporation having signed the AOI and
acknowledged the same before notary public. Reqs:
1. Must not be more than 15. Must be at
least 2.
2. If a natural person, he must be of legal
age.
3. Each incorporator must be a member or
stockholder must own at least one
shares of stock.
4. Juridical persons can be an
incorporator.
Promoters – self-constituted organizer who finds an
enterprise and helps attracts investors, forms a
corporation, and launches it into business, all in
view of promoting profits.
- The corporation is not bound by the
contract entered into by the promoter
before incorporation unless the contract
is ratified.
CORPORATORS v. Incorporators.
 - Stockholders/members
- Cease to be such if they are no longer
stockholders.
- No restrictions as to numbers.
- May be such through guardian.
- Can be juridical person.
Signatory to AOI
Do not cease to such incorporators if they are no
longer stockholders
Not exceed 15
Must have contractual capacity
Can now be a juridical person.
Contents of the AOI under Sec. 13 and 14 of the
RCC.
1. Names of the corp. which must include
the term INC, Corporation, OPC.
2. Purposes
3. Place of principal office
4. Term of corporate existence
5. Names, nationalities, an residential
address of the incorporators.
6. Number of directors or trustees.
7. Names, nationalities and residences of
the first directors or trustees.
8. In a stock corp., the amount of
authorized capital stock and number of
shares into which the ACS is divided.
9. In a stock corp. a statement that all or
some of the shares are with par value
indicating the par value per share and
the number of shares with such par
value.
10. In a stock corp. all of the shares with no
par value, the capital stock and a
statement that the shares are without
par value.
11. In a stock corp., name of subscribers
their nationalities, number of shares
subscribed, amount subscribed and
amount paid by subscribers.
12. In a non-stock corp. the amount of
capital or money contributed or
donated, the persons who contributed or
donated, their nationalities and
residence addresses.
13. Name of the treasurer elected by
subscribers and the certification of the
treasurer that the information set forth
in the seventh and eight clauses of the
Articles, and that the paid up portion of
the subscription in cash and/or in
property for the benefit and credit of the
corporation has been duly received.
14. If the corporation engages in a
nationalized industry, a statement that
no transfer of stock will be allowed and
recorded in the corporate books if it will
reduce the stock ownership of Filipino
percentage below the required legal
minimum.
15. Arbitration agreement.
Documents that should be filed with the SEC for
purposes of securing a certificate of
incorporation of a stock corporation.
1. Reservation of the corporate name.
2. AOI and bylaws. Note: Bylaws can be
filed after incorporation as provided for
in the RCC.
3. Certificate of authority or favorable
recommendation from proper
government agency for the incorporation
of banks, banking and quasi-banking
institutions, pre-need, insurance and trust
companies, pawnshops and other
financial institutions.
4. Cover sheet.
Real Estate Investment Fund (REIT) – stock
corporation established in accordance with the
Corporation Code of the PH and the rules and
regulations promulgated by the SEC principally for
the purpose of owning income-generating real estate
assets.
What are the principal tests in determining the
nationality of a corporation?
1. Place of incorporation test (RCC, Sec.
140 - the nationality of the corporation
is determined by under whose laws it
has been organized and registered,
regardless of the nationality of majority
of its stockholders;
2. Control Test – Determined by the
character or citizenship of its
controlling stockholders. (Narra Nickel
Mining & Development Corp. v
Redmont Consolidated Mines Corp.
GR. 195580)
Under the Foreign Investments Act, when is a
corporation considered as a PH National?
- Shall mean a corporation organized
under the laws of the PH of which at
least 60% of the capital stock
outstanding and entitled to vote is owned
and held by citizens of the PH shall be
considered a PH National.
- A corporation organized abroad and
registered as doing business in the PH
under the Corporation Code of which
100% of the capital stock outstanding
and entitled to vote is wholly owned by
Filipinos is a PH National. (FIA, Sec. 3)
What is the Grandfather Rule?
1. Method attributing the shareholdings
of a given corporate shareholder to the
second or even the subsequent tier of
ownership to determine the ultimate
ownership of the corporation.
2. Is the method by which the percentage of
Filipino equity in a corporation engaged
in nationalized and/or party nationalized
laws 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 the subsequent tier of
ownership to determine the nationality of
the corporate shareholder. It involves
further investigation as to the nationality
of the personalities with the beneficial
ownership and control of the corporate
shareholders in both the investing and
investee corporators. (Narra Nickel
Mining & Development Corp. v
Redmont Consolidated Mines Corp.
GR. 195580)
3. The percentage 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.
- Note: The strict rule or the grandfather
rule applies only when the 60-40
Filipino Foreign equity ownership is in
doubt, if there is no doubt the
Grandfather Rule will not apply.
What is the meaning of “doubt” for
purposes of applying the Grandfather
Rule?
a. That the foreign investors
provide practically all the funds
for the joint investment
undertaken by these Filipino
businessmen and their foreign
partner;
b. That the foreign investors
undertake to provide practically
all the technological support for
the joint venture;
c. That the foreign investors, while
being a minority stockholders,
manage the company and prepare
all the economic viability studies.
(Narra Nickel Mining &
Development Corp. v Redmont
Consolidated Mines Corp. GR.
195580)
What is the basis of computing for the 60-40
percentage requirement?
- The SC held that what the Constitution
requires is that full and legal beneficial
ownership of 60% of the OCS, coupled
with 60% of the voting rights, must rest
in the hands of Filipino nationals.
What is the beneficial ownership test?
- Under the beneficial ownership test,
mere legal title is insufficient to meet the
required Filipino equity, he should also
have full beneficial ownership of the
share. If the voting right of a share held
in the name of a Filipino citizen or
national is assigned or transferred to an
alien, that share is not to be counted in
the determination of the required
Filipino equity. In the same vein, if the
dividends and other fruits and accessions
of the share do not accrue to a Filipino
citizen or national, then that share is also
to be excluded or not counted. (Roy III
v. Herbosa. GR 207246)
What is the nationality of a corporation sole?
- It has no nationality as the framers of the
Constitution did not have in mind the
religious corporation sole – or any
corporation sole, for that matter – when
they provided the 60% requirement.
(Roman Catholic Apostolic
Administration of Davao, Inc. v. Land
Registration Commission GR. L - 8451)
- Moral Damages – Cannot be awarded in
favor of corporations because they do
not have feelings and mental state.
Mental suffering can be experienced
only by one having a nervous system
which cannot be suffered by an artificial
being.
o An obiter dictum in a statement,
that a corporation may recover
damages if it has good
reputation that is debased,
resulting in social humiliation.
o However the SC ruled in
Filipinas Broadcasting Network,
Inc. v. Ago Medical and
Educational Center, that a
corporation can recover moral
damages under Art. 2219 (7) if it
was a victim of defamation.
Doctrine of Separate Juridical Personality
What is the doctrine of separate juridical
liability?
- A corporation is a distinct legal entity to
be considered as separate and apart from
the individual stockholders or members
who compose it and is not affected by
the personal rights, obligations and
transactions of its stockholders or
members.
What is the principle of limited liability?
- The principle of limited liability
provides that a corporate or a
stockholder as a GR, is not personally
held liable for corporate debts. Since a
corporation has a separate and distinct
personality, it may incur its own
liabilities and is responsible for the
payment of its debts.
- While stockholders are generally not
liable for corporate obligations, the
stockholders may be held liable if they
do not have or have not fully paid the
subscription price of their shares, if the
corporation is insolvent or it cannot
comply with its obligations.
(Jurisprudence)
- Unpaid subscriptions are assets of the
corporation in the form of “receivables”.
(Jurisprudence)
Doctrine of Piercing the Corporate Veil
Concession Theory – 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 a
corporation is a concession made by the State.
What is the doctrine of piercing of the Corporate
Veil?
- Though the corporation has separate and
distinct personality from its
stockholders, such personality may be
disregarded, or veil of corporate fiction
may be pierced, attaching personal
liability to the responsible person, if the
corporate personality is used to defeat
public convenience, justify wrong,
protect fraud, or defend crime, or use to
defeat labor laws. Hence, the separate
juridical personality of a corporation is
disregarded or pierced.
Kinds of piercing cases?
a. Traditional Veil-Piercing Action
b. Reverse Piercing Action
What are the tests to determine the application
of the Alter Ego Theory which would warrant
the piercing of the corporate veil?
1. Instrumentality or Control Test –
Control, not mere majority or complete
stock control, but complete domination
not only of finances but also policy and
business practice in respect to the
 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. Fraud Test – Such control must have
been used by the defendant to commit
fraud or wrong in the contravention of
plaintiff’s legal right; and
3. Harm/Causal Connection Test – The
aforesaid control and breach of duty
must proximately cause the injury or
unjust loss complained of.
Absence of any of these three elements prevents
the piercing of the corporate veil.
What are the indicia that a subsidiary company
is merely an alter ego of its corporation?
1. The parent corporation owns all or most
of the capital stock of the subsidiary;
2. The parent and the subsidiary
corporations have common directors or
officers;
3. The parent corporation finances the
subsidiary;
4. The parent corporation subscribes to all
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 corporation or in the
statements of its officers, the subsidiary
is described as a department or division
of the parent corporation, or 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
orders from the parent corporation; and
11. The formal legal requirements of the
subsidiary are not observed. (PNB v
Ritratto Group Inc. GR 142616)
DE FACTO CORPORATION V.
CORPORATION BY ESTOPPEL
What is a de facto corporation?
1. A valid law under which the corporation
is organized;
2. A bona fide attempt in good faith to
incorporate; and – The issuance of the
certificate of incorporation is essential
to the claim of a good faith.
3. An assumption of corporate powers.
(Seventh Day Adventist Conference
Church of Southern Ph Inc. v.
Northeastern Mindanao Mission of
Seventh Day Adventist Inc, GR 150416)
What is the consequences of a de facto status?
- For all intents and purposes, a de facto
corporation has the same rights, powers,
obligations, and liabilities as a de jure
corporation. The only difference is that
the due incorporation of a de facto
corporation may be directly inquired into
by the Sol. Gen. in quo warranto
proceeding.(RCC, Sec. 19)
When is there a corporation by estoppel?
- When a group of persons assumes to act
as a corporation knowing it to be without
authority to do so, and enters into a
transaction with a 3rd person on the
strength of such appearance. It cannot be
permitted to deny its existence in an
action under said transaction. (RCC,
Sec. 20)
What is the consequence as to the liability
incurred by a corporation by estoppel?
- 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
its lack of corporate personality as a
defense. Anyone who assumes an
obligation to an ostensible corporation as
 such cannot resist performance thereof
on the ground that there was in fact no
corporation (RCC, Sec. 20)
CORPORATE POWERS
What corporate powers may a corporation
possess or exercise?
- Under the theory of specific capacity, no
corporation shall possess or exercise
corporate powers other than those
conferred by the RCC or by its AOI and
except as necessary or incidental to the
exercise of the powers conferred. (RCC,
Sec. 44)
What is the test of implied powers?
- The act in question is part of implied
powers of the corporation if it is in direct
and immediate furtherance of the
corporation’s business, incident to the
express powers and reasonably
necessary to their exercise.
(Montelibano v. Bacolod-Murcia
Milling Co. Inc. GR L-15092)
What are the general powers of a corporation?
1. To sue and to be sue in its corporate
name;
2. To have perpetual existence unless the
certificate of incorporation provide
otherwise;
3. To amend its AOI;
4. To adopt and use a corporate seal;
5. To adopt bylaws, amend and repeal the
same;
6. For stock corporations, to issue and sell
stocks to subscribers, 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;
8. To enter into partnership, joint venture,
merger, consolidation or any other
commercial agreements;
9. To make reasonable donations for public
welfare, hospital, charitable, cultural,
scientific, civic or similar purposes,
provided that no foreign corporation
shall give donations or aid to any
political party/candidate or for partisan
political activity;
10. To establish pension, retirement and
other plans for the benefit of its
directors, trustees, officers and
employees; and
11. To exercise such other powers essential
or necessary to carry out its purpose as
stated in the AOI. (RCC, Sec. 35)
What is the theory of General Capacity?
- A corporation can perform such acts as
long as it is not prohibited by general
law and not contrary to morals and
public policy. (RCC, Sec. 2 & 44)
What are the specific powers of a corporation?
1. Extend or shorten corporate term;
2. Increase or decrease capital stock and incur,
create or increase bonded indebtedness;
3. Deny pre-emptive right;
4. Sell or dispose its assets;
5. Acquire own shares;
6. Invest corporate funds in another
corporation or business or for any other
purpose;
7. Declare dividends;
8. Enter into management contract.
How is the power to extend or shorten
corporate term exercised?
1. When approved by a majority vote of the
BOD or BOT, and
2. Ratified at a meeting by the stockholders
or members representing at least 2/3 of
the OCS or its members.
When may a corporation extend its corporate
term?
- No extension may be made earlier than 3
years prior to the original or subsequent
expiry date unless there are justifiable
reasons for an earlier extension as may
be determined by the SEC. (RCC, Sec.
11)
What is bonded indebtedness?
- A secured indebtedness or those secured
by real or personal properties that are
covered by bond certificate. (AQUINO,
Corporation Law)
What are the requirements for the increase or
decrease of authorized capital stock or create,
incur bonded indebtedness?
1. Majority vote of the BOD;
2. Vote of the stockholders representing at
least 2/3 of the OCS.
3. Written notice of the purpose, time and
place of the meeting;
4. Meeting of stockholders duly called for
such purpose;
5. Certificate signed by a majority of the
directors of the corporation and
countersigned by the chairman and the
secretary of the stockholders meeting;
6. Approval of the SEC and where
appropriate of the PH Competition
Commission;
7. In case of decrease in capital stock, the
same must not prejudice the right of the
creditors;
8. In case of increase in capital stock,
treasurer’s sworn statement showing that
at least 25% of the increase in capital has
been subscribed and that at least 25% of
the amount subscribed has been paid
either in actual cash or property, the
valuation of which is equal to 25% of the
subscription. (RCC, Sec. 37)
What is pre-emptive right?
- The right of shareholders to subscribe to
all issues or dispositions of shares of any
class, in proportion to their respective
shareholdings. (RCC, Sec. 38)
When is pre-emptive right not available?
1. When it is denied in the AOI;
2. When shares are issued in compliance
with laws requiring stock offerings or
minimum stock ownership by public;
3. When shares are issued in good faith
with the approval of shareholders
representing 2/3 of the OCS, in exchange
for property needed for corporate
purposes or in payment of previously
contracted debt.
What are the requirements in order for a
corporation to sell or dispose Its corporate
assets?
a. As a GR, the majority vote of the board,
shall only be required if the sale or
disposition does not cover all or
substantially all of the assets;
b. However, it involves all or substantially
all of the corporate assets including its
goodwill, the ff shall be required:
i. Majority vote of the
Board;
ii. Assent of the
stockholders representing
at least 2/3 of the OCS or
2/3 of members in a non-
stock corporation; and
iii. Meeting duly called for
the purpose.
c. In case of non-stock corporation where
there are no members with voting rights,
the vote of the trustees in office will be
sufficient authorization for the
corporation to enter into any transaction
authorized by Sec. 39 (RCC, Sec. 39)
When is the authorization of the stockholders
not required even if there is sale or disposal of all
or substantially all of its assets?
1. If the transaction is necessary in the
usual and regular course of business; or
2. If the proceeds of sale or other
disposition of such property and assets
be appropriated for the conduct of the
remaining business. (RCC, Sec. 39)
What does the Nell Doctrine provide?
- The sale or transfer of the assets of one
corporation to another does not ipso
facto include the debts and liabilities of
the transfer. (Y-I Leisure Ph v. Yu, GR
207161)
What are the XPNs of the Nell Doctrine?
1. Where the purchaser expressly or
impliedly agrees to assume such
debts of the transferee;
2. Where the transaction amounts to
merger or consolidation of the
corporations;
 3. Where the purchasing company is
merely a continuation of the selling
company;
4. Where the transaction is entered into
fraudulently in order to escape
liability for such debts.
What are the conditions before a corporation
can acquire its own share?
1. The acquisition must be for a legitimate
purpose or purposes, such as the ff:
a. to eliminate fractional shares
arising out of stock dividends;
b. to collect or compromise
indebtedness to the corporation,
arising out of unpaid
subscription, in a delinquency
sale, and to purchase delinquent
shares sold during said sale;
c. to pay dissenting or withdrawing
stockholders entitled to payment
of their shares under the
provisions of this code;
d. to acquire treasury shares;
e. to effect a decrease in capital
stock;
f. to purchase or take up
redeemable shares;
g. When the SEC orders a close
corporation to purchase the
shares of stockholders in case of
deadlock in its management.
2. The corporation must have unrestricted
retained earnings to cover the purchase
of the shares except if the purpose for
Sec. 8 or Sec. 103 (Republic Planters
Bank v. Agana, GR 51765)
What are the instances when the corporation can
acquire its own shares even when there are no
available unrestricted retained earnings?
a. Redemption of redeemable
shares; (RCC, Sec. 8; Republic
Planters Bank v. Agana Sr. GR.
51765)
b. When the shares are reacquired
by a close corporation in case of
deadlock. (RCC, Sec. 103)
What are funds?
- Includes any corporate property to be
used in furtherance of business. It may
also include donations received by
corporation. Thus, a non-stock
corporation, may invest its funds or
subscribe to shares of another domestic
corporation (SEC Opinion No. 54, Nov.
3, 2003)
When may a private corporation invest
corporate funds in another corporation or
business?
1. When reasonably necessary to
accomplish its primary purpose; and
2. For any other purpose other than the
primary purpose for which it was
organized. (RCC, Sec. 41)
What are the requirements when a corporation
invests its funds for a primary purpose?
- Only the majority vote of the BOD or
BOT shall be required. (RCC, Sec. 41)
What are the requirements when a corporation
invests its funds for a secondary purpose?
a. Majority vote of the board;
b. Ratification of stockholders
representing at least 2/3 of the
OCS in a stock corporation or by
at least 2/3 of the members in
case of non-stock corporation;
c. Notice of the proposed
investment, time and place of the
meeting shall be addressed to
each stockholder or member at
the place of residence as shown
in the books of corporation; and
d. Meeting duly called for that
purpose.
What are dividends?
- Corporate profit allocated, lawfully
declared, and ordered by the directors to
be paid to the stockholders on demand or
at a fixed time (SEC Memorandum
Circular 11-09, Sec. 2)
Who has the power to declare the dividends?
- The BOD of a stock corporation may
declare dividends out of the unrestricted
retained earnings which shall be payable
in cash, property or in stock to all
 stockholders on the basis of outstanding pertinent laws or regulations. (RCC,
stock held by them. (RCC, Sec. 42) Sec. 43)
What are the requirements before dividends may
be declared? What are the reqs in order for a management
a. Unrestricted retained earnings; contract to be valid?
b. Resolution of the Board; a. Approval by a
c. In the case of stock dividends, majority of the
the approval of stockholders BOD;
representing at least 2/3 of the b. Ratification by the
OCS at a regular or special majority of the
meeting duly called for that stockholders
purpose. (RCC, Sec. 42) owning at least the
majority of the
What is URE? OCS, or by at least
- The amount of accumulated profits and a majority of the
gains realized out of normal operations members in case of
of the company after deducting non-stock
therefrom distributions to stockholders corporation of both
and transfers to capital stock or other the managing and
accounts, and which is; the managed
o Not covered by a restriction corporation; and
under a loan agreement; c. Meeting duly called
o Not approved by board for for that purpose.
corporate expansion; and (RCC, Sec. 43)
o Not required to be retained
under special circumstances.
(SEC Memorandum Circular In entering into management contracts, under
11-09, Sec. 2) what circumstances shall the vote of at least 2/3
of the OCS or 2/3 of the members be required?
What is a management contract? 1. Interlocking stockholders – where
- It is a contract whereby a corporation stockholders representing the same
undertakes to manage or operate all or interest in both the managing and the
substantially all of the business of managed corporations own or control
another corporation, whether such more than 1/3 of the total OCS entitled
contracts are called service contracts, to vote of the managing corporation or;
operating agreements or otherwise. - Interlocking directors – where majority
(RCC, Sec. 43) of the members of the board of directors
of the managing corporation also
Note: A management contract where a constitute a majority of the board of
natural person undertakes to manage all directors of the managed corporation.
or substantially all of a corporation’s (RCC, Sec. 43)
business is essentially an employment
contract. (AQUINO,, Corporation Law) What is the Trust Fund Doctrine?
- The capital stock, property, and other
- Must not be longer than 5 years for any 1 assets of a corporation are regarded as
term except those contracts which relate equity in trust for the payment of
to the exploration, development, corporate creditors. The subscriptions to
exploitation or utilization of natural the capital of a corporation constitute a
resources that may be entered into for fund to which the creditors have a right
such period as may be provided by to look for satisfaction of their claims.
(Turner v. Lorenzo Shipping Corp. GR.
157479)

BOARD OF DIRECTORS AND TRUSTEES
Ultra vires acts – one committed outside of the
object for which the corporation is created as
defined by law of its organization and therefore
beyond the power conferred upon it by law.
Types of Ultra Vires Acts
1. Acts done beyond the powers of the
corporation as provided in the law or its AOI;
2. Acts or contracts, which are per se
illegal as being contrary to law; and
3. Acts or contracts entered into behalf
of a corporation by persons who have no
corporate authority.
What is the Doctrine of centralized
management?
- The BOD or BOT shall exercise the
corporate powers, conduct all business,
control all properties of the corporation.
(RCC, Sec. 22)
- Not applicable in case of a close
corporations, the stockholders may
directly manage the business of the
corporation instead, if the AOI so
provides. (RCC, Sec. 96)
What is the business judgment rule?
- The questions of policy of management
are left solely to the honest decision of
officers and directors of a corporation,
and so long as they act in good faith their
orders are not reviewable by the courts.
(Saber v. CA, GR. 132981)
What is the holdover principle?
- Upon failure of a quorum at any annual
meeting, the directors, naturally holds
over and continues to function until
another directorate is chosen and
qualified.
- Unless the law or the charter of a
corporation expressly provides that an
office shall become vacant at the
expiration of the term of office for which
the officer was elected, the GR is to
allow the officer to holdover until a
successor is duly qualified. (Gov. of the
Ph Islands v. El Hogar Filipino, GR. L-
26649)
What are the grounds for disqualification of
directors or trustees?
- A person shall be disqualified from
being a director, trustee or officer of any
corporation if within 5 years prior to the
election or appointment as such, the
person was:
4. Convicted by final judgment;
a. Of an offense punishable by
imprisonment for a period
exceeding 6 years;
b. For violating the RCC;
c. For violating the Securities
Regulation Code.
5. Found administratively liable
for any offense involving
fraudulent acts; and
6. By a foreign court or
equivalent foreign regulatory
authority for similar acts,
violation or misconduct. (RCC,
Sec. 26)
Who is an independent director?
- 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, or could reasonably be
perceived to materially interfere with the
exercise of independent judgment in
carrying but the responsibilities as a
director. (RCC, Sec. 22)
GR on the liability of the Corporate Agents, etc.
- They are not solidarily liable with the
corporation. Obligations incurred by
them , acting as such corporate agents,
are not theirs, but the direct
accountabilities of the corporation they
represent. The fact that they approved
the contract or signed the document
evidencing the contract will not make
them liable.
Personal and Solidary Liability may be incurred
in the ff cases.
1. When the D and T or in appropriate
cases, the officers of the corporation:
 a. Vote or assent to patently
unlawful acts of the corp.
b. Act in bad faith or with gross
negligence in directing the affairs
of the corp.
c. Are guilty of conflict of interest
to the prejudice of the corp., its
stockholders or members, and
other persons.
2. When the director has consented to the
issuance of watered stocks or who,
having knowledge thereof, did not
forthwith file with the corporate
secretary his written objection thereto;
3. When the D, T or O has contractually
agreed or stipulated to hold himself
personally and solidarily liable with the
corporation; and
4. When a D, T or O is made by specific
provisions of law, personally liable for
his corporate actions. (Jurisprudence)
Officers
- There is no nationality requirement for a
treasurer but the treasurer must be a
resident of the PH. (Sec. 24, RCC)
- The corporate secretary must be a
resident and citizen of the PH.
- The same person may hold two or more
positions concurrently. However, the
treasurer cannot be the President at
the same time. The corporate
secretary cannot likewise be the
president. (Sec. 24, RCC)
Meetings
- Unlike stockholders’ or members’
meeting that is required to be held in the
principal office, or if not practicable, the
city or municipality where the principal
office is located, the directors’ meeting
may be held anywhere in or outside
the PH unless the bylaws provide
otherwise. (Sec. 50 and 52, RCC)
- 2. Agreement or stipulation in a contract to
Election and Removal of Directors or Trustees
What are the methods of voting in stock
corporation?
1. Straight Voting – A stockholder may vote
such number of share for as many persons as
there are directors to be elected;
2. Cumulative Voting for One Candidate – A
stockholder may cumulate said shares and
give 1 candidate as many votes as the
number of directors to be elected multiplied
by the number of the shares owned; and
3. Cumulative Voting by distribution – A
stockholder may distribute them on the same
principle among as many candidates as may
be seen fit. (RCC, Sec. 23)
What is an election by plurality?
- Nominees for directors or trustees
receiving the highest number of votes
shall be declared elected. (RCC, Sec. 23)
Duties, Responsibilities, and Liabilities for
Unlawful Acts
What are the 3-fold duties of directors, trustees
and officers? (OLD)
1. Duty of Obedience – perform the duties
enjoined on them by law, the AOI and the
bylaws;
2. Duty of Loyalty – owes loyalty to and
allegiance to the corporation – a loyalty that
is undivided and an allegiance that is
influenced by no consideration other than
the welfare of the corporation; and
3. Duty of Diligence – they shall not willfully
and knowingly vote for or assent to patently
unlawful acts of the corporation or act in bad
faith or gross negligence in directing the
affairs of the corporation. (CC, Art. 1884)
In what instances are the BOD or BOT
personally or solidarily liable?
1. By virtue of specific provision of law;
hold himself personally liable with the
corporation;
3. Consent to the issuance of watered down
stocks, or having knowledge thereof, fails to
file objections with the corporate secretary;
4. Those found guilty of gross negligence or
bad faith in directing the affairs of the
corporation;
 5. Acquire personal or pecuniary interest in
conflict with their duty;
6. Willfully and knowingly vote for and assent
to patently unlawful acts of the corporation.
Note: Only the responsible officer is held
solidarily liable. It is the person actively
engaged in the management of the corporation
who is held liable (Guillermo v. Uson. GR.
198967) Thus, a director is not liable for
misconduct of co-director or other officers
unless:
a. He connives or participates in it;
b. He is negligent in not discovering or
acting to prevent it. (LADIA, The
Corpo Code of the PH annotated with
the Securities Regulation Code and PD
No. 902-A)
What is the status of a contract of self-dealing
directors, trustees and officers?
- A contract between the corporation and
one or more of its directors, trustee or
officers or their spouses and relatives
within the 4th civil degree of
consanguinity or affinity is voidable, at
the option of such corporation, unless the
ff conditions are present:
1. 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. The vote of such board or trustee
was not necessary for the
approval of the contract;
3. 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
4. In case of an officer, the contract
has been previously authorized
by the board of directors. (RCC,
Sec. 134)
What are the requisites for ratification of
contracts of self-dealing directors or trustees?
1. Vote of the stockholders representing at
least 2/3 of the OCS or member in a
meeting called for the purpose;
2. There is full disclosure of the adverse
interest of the directors or trustees
involved; and
3. The contract is fair and reasonable.
(RCC, Sec. 31)
When is there interlocking directorship?
- When two corporations share one or
more directors. (RCC, Sec. 32)
- The status of contracts having
interlocking directorship shall not be
invalidated on that ground alone except,
in cases of fraud or when the contract is
not fair and reasonable under the
circumstances. (RCC, Sec. 32)
What is the Doctrine of Corporate Opportunity?
- This covers cases when a director takes a
business opportunity that belongs to the
corporation:
o Corporation is financially able to
undertake;
o From its nature it is in line with
the corporation’s business;
o It is one in which the corporation
has an interest or a reasonable
expectancy.
STOCKHOLDERS AND MEMBERS
Rights and Obligations of Stockholders
What are the basic rights of a shareholder?
1. Direct or indirect participation in
management;
2. Voting rights;
3. Right to remove directors;
4. Propriety rights;
a. Right to dividends;
b. Appraisal rights;
c. Right to issuance of stock certificates
for fully paid shares;
d. Proportionate participation in the
distribution of assets and liquidation;
e. Right to transfer of stocks in
corporate books;
f. Pre-emptive right.
 5. Right to inspect books and records;
6. Right to be furnished with the most recent
financial statement;
7. Right to recover stocks unlawfully sold for
delinquent payment of subscription;
8. Right to the issuance of new certificates in
lieu of lost, stolen or destroyed certificates;
9. Right to file individual suit, representative
suit, and derivative suits.
What are the obligations of a stockholder?
1. Liability to the corporation to pay unpaid
subscription;
2. Liability to the corporation for interest
on unpaid subscription if so required;
3. Liability to the creditors of the
corporation for unpaid subscription
subject to the Limited Liability Rule;
4. Liability for watered stocks;
5. Liability or dividends unlawfully paid;
6. Administrative, civil and criminal
liability of a stockholder responsible for
violation of the RCC or for acts
indispensable to the violation of the
RCC.
Participation in Management
What are the instances when voting right is not
available?
1. Delinquent stocks;
2. When provided for in the AOI;
3. Fractional shares;
4. Treasury shares;
5. Sequestered shares or escrow shares.
What are the manner of voting of stockholders
or members?
1. Directly, in person;
2. Indirectly
a. By proxy;
b. Remote communication;
c. Trustee through a voting trust
agreement;
d. Executors, administrators,
receivers, or other legal
representatives duly appointed by
the court.
What is a proxy?
- A written authorization given by one
person to another so that the second
person can act for the first such as that
given by the shareholder to someone else
to represent him and vote his shares at a
shareholder’s meeting. (VILLANUEVA-
CASTRO, Commercial Law)
- Revocable unless coupled with interest.
What are the reqs of a valid proxy?
1. Filed before the scheduled meeting with the
corporate secretary;
2. Not valid for a period longer than 5 years at
any one time;
3. Signed by the stockholder or member
concerned;
4. In writing;
5. Only valid for the meeting which it was
intended. (RCC, Sec. 57)
What is a voting trust agreement?
- An agreement in writing whereby one or
more stockholders of a corporation
consent to transfer his or her shares to a
trustee in order to vest the latter voting
or other rights pertaining to shares for a
period not exceeding 5 years and upon
such other terms and conditions
specified in the agreement. (Lee v. CA,
GR. No. 93695)
What are the statutory limitations on VTAs?
1. Cannot be entered into a period exceeding 5
years at any one time, except in a loan
agreement, in which case, said contract shall
automatically expire upon full payment of
the loan;
2. Must not be used for the purposes of fraud;
3. Must be in writing and notarized and specify
the terms and conditions;
4. Certified true copy of the agreement must be
filed with the corporation and with the SEC;
5. Subject to the examination by any
stockholder of the corporation;
6. Unless otherwise renewed, all rights granted
in the agreement shall automatically expire
at the end of the agreed period.
What are the powers and rights of the Voting
Trustee?
1. Possess the right to vote and other rights
pertaining to the shares so transferred and
registered in their names subject to the terms
and conditions of their agreements;
2. May vote in person or by proxy unless
agreement provides otherwise;
 3. May exercise the rights of inspection of all
corporate books and records;
4. The trustee is the legal title holder or owner
of the shares so transferred under the
agreement.
What are the instances when the concurrence or
ratification of majority of the OCS or members
is necessary for the exercise of corporate
powers?
1. To enter into a management contract;
2. To adopt, amend, and repeal the new
bylaws;
3. Voluntary dissolution where no creditors are
affected.
What are the instances when the concurrence or
ratification of 2/3 of the OCS or 2/3 members is
necessary for the exercise of corporate powers?
1. To amend the AOI;
2. Extend or shorted the corporate term;
3. Increase/decrease capital stock;
4. Incur, create or increase bonded
indebtedness;
5. To deny pre-emptive right after
incorporation;
6. To sell, dispose, lease, incumber all or
substantially all of the corporate assets;
7. To invest in another corporation,
business other than the primary purpose
like the secondary purpose;
8. To declare stock dividends;
9. To enter management contract:
a. Interlocking shareholders;
b. Interlocking directors.
10. Approve plan of merger or
consolidation;
11. To adopt plan providing for the
distribution of assets by a nonstock
corporation;
12. Voluntary dissolution where creditors
are affected.
Propriety Rights
How does delinquency of a stockholder affect
his/her right to dividends?
1. Cash dividends due on delinquent stock
shall be first applied to the unpaid
balance on the subscription plus cost and
expenses;
2. Stock dividends shall be withheld until
their unpaid balance Is fully paid.
What are the conditions for the exercise of the
right to inspect corporate books and records?
1. Exercised at reasonable hours on business
days;
2. The d, t, s or m has not improperly used any
information he secured through any previous
examinations;
3. The demand is made in good faith or for
legitimate purpose;
4. Bound by confidentiality rules under
prevailing laws; and
5. Not done by a competitor, d , o, controlling
stockholder or otherwise represents the
interest of the competitor.
When can a stockholder exercise his pre-emptive
right?
1. Original issuance of unissued shares forming
part of the original authorized capital stock;
2. Original issuance of new shares resulting
from the increase of authorized capital
stock;
3. Disposition of treasury shares.
When is pre-emptive right not available?
1. Shares to be issued comply with laws
requiring stock offering or minimum stock
ownership to the public;
2. It does not apply to shares that are being
reoffered by the corporation after they were
initially offered together with all the shares;
3. Shares issued in good faith with the approval
of the stockholders representing 2/3 of the
OCS, in exchange for property needed for
corporate purposes;
4. Shares issued, with the approval of the
stockholders representing 2/3 of the OCS, in
payment of previously contracted debts;
5. Denied in the AOI;
6. Waiver of the right;
What is the right to first refusal?
- The option granted to the corporation
and/or its stockholders to purchase the
shares of a transferring stockholder upon
reasonable terms and conditions.
- The corporation and its stockholders
have no right of first refusal unless such
restriction on transfer is embodied in the
 AOI, bylaws of the corporation, and
stock certificates of the corporation.
How is the right of first refusal distinguished
from pre-emptive right?
1. Pre-emptive right is common law right and
may be exercised by shareholders even
when no provision is granted by law, The
right of first refusal arises only by virtue of
contractual stipulations.
2. Pre-emptive right pertains to unissued shares
that are offered for subscription as well as
treasury shares being disposed of. It is a
right against the corporation. A right of first
refusal pertains to issued shares. It is a right
exercisable against another shareholder;
3. PR may be exercised by mere trustee or
conservator. RFR can only be exercised by
the owner and not mere trustee or
conservator as it is an act of ownership.
Remedial Rights
Intra-corporate Disputes
What is an individual suit?
- May be instituted by a stockholder
against another stockholder for wrongs
committed against him personally, and
to determine their individual rights. An
individual suit may also be instituted
against a corporation, the same having a
separate juridical personality, which may
be sued.
- Shareholders cannot intervene in a suit
involving corporate assets, because they
are in no legal sense the owners of
corporate property, which is owned by
the corporation as distinct legal person.
What is a representative suit?
- An action brought by the stockholder in
behalf of himself and all other
stockholder similarly situated when a
wrong committed against a group of
stockholders.
What is a derivative suit?
- An action filed by stockholders to
enforce a corporate action. It is an
exception to the GR that the
corporation’s power to sue is exercised
only by the board of directors or trustees.
- Individual stockholders may be allowed
to sue on behalf of the corporation
whenever the directors or officers of the
corporation refuse to sue to vindicate the
rights of the corporation or are the ones
to be sued and are in control of the
corporation.
- It is allowed when the directors are or
officers are guilty of breach of trust, and
not mere error of judgment.
- REQs:
o Stockholder/member at the time
the acts or transactions subject to
the action occurred and at the
time the action is filed;
o Exerted all reasonable efforts,
and alleges the same with
particularity in the complaint to
exhaust all the remedies available
under the AOI, bylaws, laws or
rules (Exhaustion of Intra-
corporate Remedies);
o No appraisal right available;
o The corporation must be
impleaded as party to the case.
CAPITAL STRUCTURE
What is Capital?
- Includes properties and assets of the
corporation that are used for its business
or operation.
What is Authorized Capital Stock?
- Amount fixed in the AOI to be
subscribed and paid by the stockholders
of the corporation.
What is Unissued Capital Stock?
- The portion of the authorized capital
stock in a stock corporation that has not
been issued and subscribed. It does not
vote and draws no dividends
What is subscribed capital stock?
- Portion of the authorized capital stock
that is covered by subscription
agreement whether fully paid or not.
What is OCS?
 - Total shares of stock issued under
binding subscription contracts to
subscribers or stockholders, whether
fully paid or partially paid.
What is paid up capital?
- Portion of the authorized capital is
subscribed and paid.
Shares of Stock
What is a subscription contract?
- Any contract for the acquisition of
unissued stock in an existing
corporation, notwithstanding the fact that
the parties refer to it as purchase or some
other contract.
What are the considerations that the law allows
for the issuance of stock?
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually
received by the corporation and necessary or
convenient for its use and lawful purpose at
a fair valuation equal to the par or issued
value of the stock issued;
3. Labor performed for or services actually
rendered to the corporation;
4. Previously incurred indebtedness of the
corporation;
5. Amounts transferred from URE to stated
capital;
6. Outstanding shares exchanged for stocks in
the event of reclassification or conversion;
7. Shares of stock in another corporation;
8. Other generally accepted forms of
consideration.
What are watered stocks?
1. Issued less than their par or issued value
in cash; or
2. Non-cash considerations which is valued
in excess of its fair value.
What are common shares?
-Basic class of shares ordinarily and usually
issued without extraordinary rights or
privileges and entitles the shareholders to a
pro rata division of profits. Has complete
voting rights.
What are preferred shares?
- Those that may be given preference in
the distribution of dividends and in the
distribution of corporate assets in case of
liquidation, or such other preferences.
May be deprived of voting rights.
What are founders’ shares?
- Given to those who helped organized the
corporation. Reward to the founders.
What are redeemable shares?
- Those which may be purchased by the
corporation from the holders of such
shares upon the expiration or a fixed
period, regardless of the existence of
URE in the books of the corporation, and
upon such other terms and conditions
stated in the AOI and the certificate of
stock representing the shares, subject to
rules and regulations issued by the SEC.
They may be issued only when expressly
provided in the AOI.
When may redemption may not be made?
- When the corporation is insolvent or is
such redemption will cause insolvency
or inability of the corporation to meet its
debts as they mature.
What are treasury shares?
- Those which have been issued and fully
paid for, but subsequently reacquired by
the issuing corporation through
purchase, redemption, donation, or some
other lawful means.
Certificate of Stock
What is the nature and function of a certificate
of stock?
- Not necessary to render one a
stockholder in a corporation.
Nevertheless, a certificate of stock is the
paper representative or tangible evidence
of the stock itself and of the various
interest therein.
What are uncertified shares?
- Securities evidences by electronic or
similar records.
What is the doctrine of indivisibility of
subscription contract?
-No certificate of stock may be issued to a
subscriber until the full amount of his subscription
together with interest and expenses.
Disposition and Encumbrance of Shares
Why is a stockholder prohibited from selling a
portion of shares not fully paid?
- Under the doctrine of indivisibility of
subscription contract, a stockholder who
has not paid the full amount of his
subscription cannot transfer part of his
subscription in view of the indivisible
nature of a subscription contract.
What is the rule on sale of all shares not fully
paid?
- The entire subscription, although not
fully paid yet, may be transferred to a
single transferee, who as a result of the
transfer must assume the unpaid balance.
But the consent of the corporation must
be made.
What are the requirements for a valid transfer of
stocks?
1. There must be delivery of the
certificate;
2. It must be endorsed by the owner or
his agent;
3. To be valid against the corporation
or 3rd persons, the transfer must be
recorded in the books of the
corporation. Otherwise, the transfer
shall be binding only as between the
parties.
What are involuntary dealings of shares?
- Pertains to the right of a stockholder to a
grant security interest in his or her shares
in stock corporations.
Why are involuntary dealings not needed to be
recorded in the books of corporation?
- Because 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 3rd persons.
DISSOLUTION AND LIQUIDATION
What is dissolution?
-Termination of the life of a juridical entity.
(Republic vs. Tancinco, GR. 139256) It is the
extinguishment of the corporate franchise and the
termination of corporate existence. (AQUINO,
Corporation Law)
-As distinguished from the actual business
enterprise operations, dissolution legally affects the
nature and capacity of the juridical person of the
corporate being. The mere fact that the corporation
has ceased to do business does not necessarily
constitute a dissolution or diminution of the legal
power and capacity of the corporation.
(VILLANUEVA, Corporation Law)
What are the methods of voluntary corporate
dissolution?
1. Expiration of original term (RCC, Sec. 11);
2. Vote of the BOD or BOT and the
stockholders or members where NO
creditors are affected (RCC, Sec.134);
3. Judgement of SEC after hearing of petition
for voluntary dissolution where creditors are
affected (RCC, Sec. 135);
4. Amending the AOI to shorten the corporate
term (RCC, Sec. 136); or
5. In the case of a corporation sole, by
submitting to the SEC a verified declaration
of dissolution for approval (RCC, Sec. 113)
How may a voluntary dissolution be affected
where NO creditors are affected?
5. A majority vote of the Board and
a call for a stockholder’s or
membership meeting to adopt a
resolution of the same;
6. Notice of corporations’ meeting
should be given by personal
 delivery or registered mail at
least 20 days prior to meeting;
7. The notice of meeting shall also
be published once in a
newspaper published in the
place;
8. The resolution to dissolve must
be approved, adopted by the
affirmative vote of the
stockholders whether voting of
non-voting owning at least
majority of the OCS or
membership;
9. A copy of the resolution shall be
certified by the majority of the
BOD or BOT and countersigned
by the Secretary;
10. The signed and countersigned
copy will be filed with the SEC;
and
11. The SEC will issue the certificate
of dissolution. (RCC, Sec. 134)
How may a voluntary dissolution be affected
where creditors are affected?
1. Notice of meeting to OCS or
membership;
2. Resolution by affirmative vote of at least
2/3 of the OCS/M, with or without voting
rights, in a meeting called for that
purpose;
3. Preparation for a petition of dissolution
setting forth all claims and demands
against the corporation;
4. Such petition shall be signed by majority
of the BOD or BOT or other officers
having management affairs and verified
by the president or secretary or
director;
5. File the petition with the SEC which, if
found to be sufficient in form and
substances, the SEC shall issue an order
fixing a hearing date for any objections
to the dissolution;
6. A copy of the order shall be published at
least once a week for 3 consecutive
weeks in a newspaper of general
circulation or if there is no newspaper,
posting for 3 consecutive weeks in
public place;
7. Objections must be filed no less than 30
days nor more than 60 days after the
entry of order;
8. After the expiration of the time to file
objections, a hearing shall be conducted
upon prior 5-day notice to hear
objections; and
9. Judgment shall be rendered dissolving
the corporation and directing the
disposition of assets, the judgment may
include appointment of a receiver.
(RCC, Sec. 135, ROC, Rule 104)
How is a corporation dissolved by shortening the
corporate term?
- The dissolution may be effected by
amending the AOI to shorten the
corporate term pursuant to the provision
of the RCC of the PH. (RCC, Sec. 136)
When is the corporation deemed dissolved when
the corporate term is shortened?
-The corporation shall be deemed dissolved
without further proceedings, Upon the expiration of
the shortened term as stated in the approved
amended AOI. In the case of expiration of corporate
term, dissolution shall automatically take effect on
the day following the last of the corporate term
stated in the AOI, without need for the issuance by
the SEC of a certificate of dissolution. (RCC, Sec.
136)
How is withdrawal of request for dissolution
where no creditors are affected made?
1. Made in writing;
2. Duly verified by an incorporator,
director, trustee, shareholder or member
and signed;
3. Signed by the same number of
incorporators, directors, trustees,
shareholders, or members necessary to
request for dissolution; and
4. Submitted no later than 15 days from
receipt by the SEC of the request for
dissolution. (RCC, Sec. 137)
How is withdrawal of request for dissolution
where creditors are affected made?
 -A withdrawal of petition for dissolution
shall be in the form of a motion and similar
substance to a withdrawal of request for
dissolution but shall be verified and filed prior to
the publication of the order setting the deadline
for filing objections to the petition. (RCC, Sec.
137)
What are the grounds for involuntary
dissolution?
1. Non-use of the corporate charter;
2. Continuous inoperation of a corporation;
3. Upon a receipt of a lawful court order
dissolving the corporation;
4. Upon finding by final judgment that the
corporation procured its incorporation
through fraud;
5. Upon finding by final judgment that the
corporation;
a. Was created for the purpose of
committing, concealing or aiding the
commission of securities violation,
smuggling, tax evasion, money
laundering or graft and corrupt
practices;
b. Committed or aided in the
commission of such acts and its
stockholders knew of the same;
c. Repeatedly and knowingly tolerated
the commission of graft and corrupt
practices or other fraudulent or
illegal acts by its directors, trustees,
and officers, or employees. (RCC,
Sec. 138)
What is Liquidation?
- Involves the winding up of the affairs of
the corporation, which means the
collection of all assets, the payment of
all its creditors, and the distribution of
the remaining assets, if any, among the
stockholders thereof. (Majority
Stockholders of Ruby Industrial Corp.
v. Lim, GR. 165887)
- It is the process by which all the assets
of the corporation are converted into
liquid assets (cash) in order to facilitate
the payment of obligations to creditors,
and the remaining balance, if any, is to
be distributed to the stockholders or
members. (AQUINO, Corporation Law)
When may the corporation effect its liquidation?
- A corporation shall remain as a body
corporate for 3 years after the effective
date of dissolution and may effect
liquidation within such period through
its BOD or BOT. (RCC, Sec. 139)
For what purpose may the corporation effect its
liquidation?
1. To prosecute and defend suits by or
against it;
2. To settle and close its affairs;
3. To dispose of or convey property; or
4. To distribute assets.
Note: However, the corporation cannot continue
the business for which it was established (RCC,
Sec. 139)
In what instances may liquidation be effected
even after the 3-year period?
-If a trustee has been designated, the trustee
may continue to prosecute a case commenced by the
corporation within the 3 years from its dissolution
until the rendition of a final judgment, even if such
judgment is rendered beyond the 3-year period
allowed by Sec. 122 (now Sec. 139) of the
Corporation Code. However, an already defunct
corporation cannot initiate a suit after the lapse of
the 3-year period.
- If the corporation had already pending
actions at the time that its corporate existence was
terminated (as compared to actions commenced
within the 3-year period), the BOD or BOT in the
absence of a trustee designated may be permitted to
so continue as “trustees” by legal implication to
complete the corporate liquidation even after the
lapse of the 3-year period. (Alabang Development
Corp. v. Alabang Hills Village Association, GR
187456)
-There is no time limit within which the
trustees must complete a liquidation placed in their
hands. It is provided only that the conveyance to the
trustees must be made within the 3-year period.
(Clemente v. CA, GR 82407)

OTHER CORPORATIONS
What is a close corporation?
1. All the corporation’s issued stock of all
classes, excluding treasury shares shall
be held of record by not more than a
specified number of persons, not
exceeding 20 persons;
2. All the issued stock of all classes shall
be subject to one or more specified
restrictions on transfer permitted by this
title; and
3. The corporation shall not list in any
stock exchange or make any public
offering of its stocks of any class.
What are the characteristics of a close
corporation?
1. Stockholders may act as directors
without need of election and therefore
liable as directors;
2. Stockholders who are involved in the
management of the corporation are liable
in the same manner as directors are;
3. Quorum may be greater than mere
majority when provided in AOI;
4. Transfers of stocks to others which
would increase the number of
stockholders to more than the maximum
are invalid;
5. Corporate acts may be binding without a
formal meeting, if the stockholder had
knowledge or ratified the informal action
of others;
6. Pre-emptive right extends to all stock
issues;
7. Deadlocks in board may be settled by the
SEC, on the written petition by any
stockholder; and
8. Stockholder may withdraw and avail his
right of Appraisal.
When are restrictions on the transfer of shares
considered valid?
A, The restrictions must appear in the
AOI, bylaws, certificate of stock, otherwise the
same shall not be binding on any purchaser in good
faith; and
B. Right of first refusal – the
restrictions shall not be more than onerous than
granting the existing stockholders or the corporation
the option to purchase shares the shares of the
transferring stockholder with such reasonable terms
and conditions or period stated. (RCC, Sec. 97)
When may the corporation refuse to register the
transfer in the name of the transferee?
- The corporation may, at its option,
refuse to register the transfer in the name
of the transferee if the latter has or is
conclusively presumed under Sec. 98 to
have notice of:
a. The person’s ineligibility to be a
stockholder of the corporation;
b. That the transfer of stock would
cause the stock of the corporation
to be held by more than the
number of persons permitted
under its AOI; or
c. That the transfer violates a
restriction on transfer of stock.
(RCC, Sec. 98)
Xpns:
a. If stockholders consent to the
transfer; or
b. Of the close corporation has
amended its AOI. (RCC, Sec. 98)
What is the difference between pre-emptive right
in close corporations and that in ordinary
corporations?
-The difference is that pre-emptive right in
close corporations is not subject to any exceptions
other than that provided on the AOI, while pre-
emptive right in ordinary corporations is also
subject to other exceptions provided in Sec. 36.
(RCC, Sec. 38 & 101)
Note: The pre-emptive right under Sec. 38 cannot
be exercised in the ff. instances:
1. When denied in the AOI;
2. When shares are issued in compliance
with laws requiring stock offerings or
minimum stock ownership by the public;
and
3. When shares are issued in good faith
with the approval of shareholders
 representing 2/3 of the OCS, in exchange
for property needed for corporate
purposes or in payment of previously
contracted debt. (RCC, Sec. 38)
When is there a corporate deadlock?
- When the directors or stockholders are
so divided on the management of the
corporation’s business and affairs that
the votes so required for a corporate
action cannot be obtained, with the
consequence that the business and the
affairs of the corporation can no longer
be conducted to the advantage of the
stockholders generally . (RCC, Sec. 103)
Non-stock Corporations
What is a non-stock corporation?
- One where no part of its income is
distributable as dividends to its
members, trustees, or officers. (RCC,
Sec. 86)
What is the rule regarding profits generated by a
non-stock corporation?
-Any profit which a non-stock corporation
may obtain incidental to its operations shall,
whenever necessary or proper, may be used for the
furtherance of the purpose or purposes for which the
corporation was organized. (RCC, Sec. 86)
- The only limitation on a non-stock
corporation is that any profit derived by it from any
authorized activity cannot be distributed as
dividends to its members. (RCC, Sec. 86)
How are the assets of a non-stock corporation
distributed during the process of dissolution?
1. All its creditors shall be paid;
2. Assets held subject to return on
dissolution shall be delivered back to
their givers;
3. Assets held for charitable, religious,
benevolent, educational or similar
purposes, without a condition for their
return of dissolution shall be conveyed
ton one or more organizations engaged
in similar activities as the dissolved
corporation;
4. All other assets shall be distributed to
members as provided for in the AOI or
bylaws; and
5. In any other case, assets may be
distributed in accordance with a plan of
distribution adopted by a majority vote
of the BOT and approved by at least 2/3
of the members called for such purpose.
(RCC, Sec. 93 - 94)
Can a stock corporation be converted to a non-
stock corporation?
-Conversion may be made by mere
amendment of the purpose clause in the AOI,
among others. In effect, the shares subscriptions
constitute the capital contributions of the
shareholders, and they are converted into members
who divest themselves of any right to receive
dividends of any profits of the corporation. (Sec
Opinion dated July 19, 1999)
Can a non-stock corporation be converted to a
stock corporation?
-Conversion, whether by amendment or
other methods, would be inconsistent with the
nature of the non-stock corporation because the
same will have the effect of distributing assets of
the non-stock corporations to its members so that
the latter can become shareholders. This scheme
would effectively defraud persons who may have
contributed donations, gift or grants to the
corporation for the pursuit of its corporate purposes.
(Sec Opinion dated Feb. 24, 1989)
Foreign Corporations
What is a foreign corporation?
-One formed, organized, or existing
under laws other than the PH and whose laws allow
Filipino citizens and corporations to do business in
its own country. (RCC, Sec. 140)
What acts of a foreign corporation are included
in the phrase “doing business” in the PH?
1. Soliciting orders, service contracts,
opening offices, whether called
“liaison” offices or branches;
2. Appointing representatives or
distributors domiciled in the PH or who
 in any calendar year stay in the country
for a period totaling 180 days or more;
3. Participating in the management,
supervision or control of any domestic
business, firm, entity or corporation in
the PH; and
4. Any other act or acts that imply
continuity of commercial dealings or
arrangements, and contemplate to that
extent the performance of acts or works,
or in 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 organization. (Foreign
Investment Act, Sec. 3 (d))
What are the test on whether a foreign
corporation is doing business in the PH?
a. Substance Test – whether the foreign
corporation is maintaining or
continuing in the PH the body or
substance of the business for which it
was organized or whether it has
substantially retired from it and turned
it over another; and
b. Continuity test – whether there is
continuity of commercial dealings and
arrangements, contemplating 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. (Agilent Technologies
Singapore v. Integrated Silicon
Technology Phil. Corp. GR 154618)
What acts of foreign corporation do not
constitute as “doing business” in the PH?
1. Mere investment as a shareholder in a
domestic corporation and/or the exercise
of rights such as investor;
2. Appointing a representative or
distributor in the PH which transacts in
its own name and for its own account;
3. Publication of a general advertisement
through any print or broadcast media;
4. Maintaining a stock of goods in the PH
solely for the purpose of having the same
processed by another entity in the PH;
5. Having a nominee Director or officer to
represent its interest in such corporation;
6. Consignment by the foreign corporation
of equipment with a local company to be
used in the processing of products of
export;
7. Collecting information in the PH;
8. Performing services auxiliary to an
existing isolated contract of sale which
are not a continuing basis.
(IRR Foreign Investment Act, Sec. 1)
What are the principles on the personality of a
foreign corporation to sue?
1. If a foreign corporation does business in
the PH without a license, it cannot sue
before the PH courts;
2. If a foreign corporation not doing
business in the PH it needs no license, to
sue before the PH courts on an isolated
transaction or on a cause of action
entirely independent on any business
transaction;
3. If a foreign corporation does business in
the PH without a license, a PH 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 PH courts;
4. If a foreign corporation does business in
the PH with the required license, it can
sue before the PH courts on any
transaction; (Agilent Technologies
Singapore v. Integrated Silicon
Technology Phil. Corp. GR 154618)
What is an isolated transaction?
-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.
(Lorenzo Shipping Corp. v. Chubb and Sons,
Inc. . GR 154618)
One Person Corporations

What is a One Person Corporation (OPC)?
- A corporation with a single stockholder.
(RCC, Sec. 116)
Who may from an OPC?
- Only a natural person, trust, or an estate
may form an OPC. (RCC, Sec. 166)
What is the rule regarding the bylaws of an
OPC?
- Not required to submit and file corporate
bylaws. (RCC, Sec. 119)
What are the rules regarding the officers of the
OPC?
1. Within 15 days from the issuance of its
certificate of incorporation, the OPC
shall appoint a treasurer, corporate
secretary, and other officers as it may
deem necessary;
2. The OPC shall notify the SEC thereof
within 5 days from appointment of the
officers;
3. The single stockholder may not be
appointed as the corporate secretary; and
4. A single stockholder who is likewise the
self-appointed treasurer of the
corporation shall:
a. Give a bond to the SEC in such a
sum as may be required;
b. Undertake in writing to faithfully
administer the OPC’s funds to be
received as treasurer, and to
disburse and invest the same
according to the AOI as approved
by the SEC;
c. Renew the bond every 2 years or
as often as may be required.
(RCC, Sec. 122)
Who are nominees and alternate nominees?
- Are those designated by the stockholder
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. (RCC, Sec. 124)
How may the OPC take action on any matter?
- When action is needed on any matter, it
shall be sufficient to prepare a written
resolution, signed and dated by the
single stockholder, and recorded in the
minutes book of the OPC. The date of
recording in the minutes book shall be
deemed to be the date of the meeting for
all purposes under this code. (RCC, Sec.
128)
What is the obligation of a single stockholder
claiming limited liability?
- He has the burden of affirmatively
showing that the corporation was
adequately financed. (RCC, Sec. 130)
When is a single stockholder solidarily liable
with the OPC?
- 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.
The principle of piercing the corporate
veil applies with equal force to an OPC.
(RCC, Sec. 130)
In what instance may an ordinary corporation
be converted into an OPC?
- When a single stockholder acquires all
the stock of an ordinary stock
corporation, the latter may apply for
conversion into OPC, subject to the
submission of such documents as the
SEC may require. (RCC, Sec. 131)
In what instance may an OPC be converted into
an ordinary corporation?
- After due notice to the SEC of such fact
and of the circumstances leading to the
conversion, and after compliance with
all other requirements for stock
corporation under this Code and
appliable rules.
- In case of death of a single stockholder,
the legal heirs, within 60 days from the
transfer of shares by the nominee or
alternate nominee, shall notify the SEC
 of their decision to either wind up and
dissolve the OPC or convert it into an
ordinary stock corporation. (RCC, Sec.
132)
approving the articles of merger or consolidation.
(RCC, Sec. 78)
What is the limitation on mergers and
acquisitions under the PH Competition Act?

MERGERS AND CONSOLIDATION -Merger or acquisition agreements that

substantially prevent, restrict, or lessen competition
What is the procedure for merger and in the relevant market or in the market of goods or
consolidation? services as may be determined by the PH
Competition Commission shall be prohibited. (PH
1. The BOD or BOT of each corporation Competition Act, Sec. 20)
shall approve a plan of merger or
consolidation; What are the effects of merger or consolidation?
2. The plan of consolidation or merger
1. The constituent corporations shall
shall be approved by majority vote of
become a single corporation;
each of the concerned corporations at
2. The separate existence of the constituent
separate meetings;
corporation shall cease, except that of
3. The plan of merger or consolidation
the surviving or the consolidated
shall be approved by 2/3 of the OCS or
corporation;
members for non-stock corporation;
3. The surviving or the consolidated
4. An articles of merger or consolidation
corporation shall possess all the rights,
shall be executed by each of the
privileges, immunities and powers and
constituent corporations, signed by the
shall be subject to all the duties and
president or vp and certified by the
liabilities of a corporation organized
secretary or assistant secretary of each
under the RCC;
corporation;
4. All real or personal property, all
5. The articles of merger or consolidation
receivables due on whatever account and
shall be submitted to the SEC for
every other interest of, belonging to, or
approval. A favorable recommendation
due to each constituent, shall be
from the appropriate government agency
transferred to and vested in such
in certain cases shall be obtained;
surviving or consolidated corporation
6. If the SEC is satisfied that the merger
without further act or deed;
and consolidation consistent with the
5. The surviving or consolidated
RCC and existing laws, it shall issue a
corporation shall be responsible for all
certificate approving the articles and
the liabilities and obligations of each
plan of merger or consolidation; and
constituent corporation; and
7. If, upon investigation, the SEC has
6. Any pending claim, action or proceeding
reason to believe that the proposed
brought by or against any constituent
merger or consolidation is contrary to or
corporation may be prosecuted by or
inconsistent with the provision of this
against the surviving or consolidated
Code or existing laws, it shall set a
corporation. (RCC, Sec. 79)
hearing to give the corporations
concerned the opportunity to be heard.
(RCC, Sec. 75-78)

When is merger or consolidation deemed

effective?

-The merger or consolidation shall only be

effective upon issuance by the SEC of a certificate